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https://www.courtlistener.com/api/rest/v3/opinions/8494413/ | MEMORANDUM DECISION ON COMPLAINT
LEIF M. CLARK, Bankruptcy Judge.
Factual Background
The Debtor (“Ronnie Pace” or “Pace”) filed for chapter 7 on August 15, 2007. His wholly-owned company, Chaparral Resources, Inc. (“Chaparral”) had previously filed for chapter 11 in November, 2006. That case was later dismissed. Pursuant to a Default Judgment entered by this court on December 13, 2007, the assets of Chaparral are subject to the administration of the chapter 7 trustee for the benefit of creditors in Pace’s bankruptcy case. On July 21, 2009, Randolph Osherow (the chapter 7 trustee) (the “Plaintiff’) filed an adversary proceeding against Nelson Hensley (“Hensley”) and Consolidated Fund Management, LLC. (“CFM”) (together, the “Defendants”) to recover certain property (the “Austin condo” or “condo”) transferred by Chaparral to CFM. Hensley is the owner of CFM and wholly controls that company’s operations. The Plaintiff seeks to avoid the transfer of the condo to CFM and recover the condo, or, in the alternative, its value, for the benefit of Pace’s bankruptcy estate. The Plaintiff has alleged facts in support of both an actually fraudulent transfer under the Texas Uniform Fraudulent Transfer Act (“TUFTA”) and a constructively fraudulent transfer under the TUFTA and section 548(a)(2) of the Bankruptcy Code. The Plaintiff also seeks damages for breach of fiduciary duty, alleging that Hensley violated Rule 1.08 of the Texas Disciplinary Rules of Professional Conduct for attorneys by entering into this transaction with Pace in the first place. Finally, the Plaintiff seeks attorneys’ fees and exemplary damages. The Defendants deny that the transfer is avoidable or that Hensley is personally liable to the Plaintiff as a result of the transfer. They maintain that the buyer, CFM, paid fair and adequate consideration and reasonably equivalent value for the condo in good faith. They also contend that they have provided proof of payment and that Pace and Chaparral consented to the transfer at issue in writing. Furthermore, assert the Defendants, CFM made improvements to the unit and payments thereon, including taxes, assessments and maintenance fees. The Defendants state that if the transfer is avoided, CFM should recover all monies paid for the condo and expended on taxes, maintenance, assessments and improvements as well as attorneys’ fees.
The trial of this matter was held on February 18 and 23, 2011. The following constitutes this court’s findings of fact and conclusions and law. Pace founded Chaparral in 1977 and has always been the 100% shareholder and president of the company. Chaparral was a 50% owner of an entity called DFIC. In 2000, Chaparral and Brandon bought out the third owner of DFIC. Simultaneously with this buy-out, Chaparral and Brandon sold 100% of DFIC’s stock to DFIC Holdings, an ESOP established for the benefit of the employees of DFIC and Brandon Construction Company. Brandon and Chaparral each retained a 15% interest in the stock of the ESOP (DFIC Holdings). This stock was subject to a pledge, as security, to the bought-out former owner of DFIC. Chaparral and Brandon each took a $1.4 million note from DFIC Holdings in exchange for this stock transfer. In July, 2004, DFIC Holdings stopped making payments on the note to Chaparral and Pace was effectively pushed out of the business. In *2612005 the bought-out owner of the former DFIC initiated a lawsuit against Pace and Chaparral in connection with Chaparral’s and/or Brandon’s failure to make payments to her under the buy-out agreement. On the same day that this suit was filed against Pace and Chaparral, Pace and Chaparral filed a suit against Brandon and the bought-out owner of DFIC. The suit against Pace and Chaparral ultimately resulted in a judgment being entered in May, 2007, against Pace and Chaparral for close to $1,000,000. This judgment has never been paid. In April, 2005, while the litigation against Chaparral and Pace was pending, Brandon abandoned the DFIC property. A receiver was appointed to take control of the property. Shortly thereafter, Pace re-entered the property and continued DFIC’s operations under the name DFIC, Inc. The receiver had leased the DFIC property to DFIC Holdings, which in turn leased the property to Pace’s newly-formed company, DFIC, Inc. DFIC, Inc. ceased operating in the Spring of 2006 when the company ran out of work and Pace defaulted on the lease. The $1.4 million note to Chaparral from DFIC Holdings thus became uncollectible.
Durrins Ltd. owned seven dry cleaning operations called Durrins. Pace owned 100% of the stock of Durrins, Ltd. Sometime in the Fall of 2006 Pace defaulted on a note to Durrins and Whatley, the owner of the property upon which Durrins operated, brought suit against Pace and Chaparral to collect on that note.
Pace and Hensley are close friends. Hensley is the managing member of CFM and controls all of that company’s operations. Hensley represented Pace, individually, from 1983 through 1985 and again in 2005, 2006 and perhaps 2007. Hensley also represented Chaparral, the company through which Pace ran most of his other business operations, beginning in 2005. In July, 2005, Pace, faced with financial difficulties concerning both Durrins and DFIC, Inc., began to borrow money from Hensley and/or CFM to allow Pace to continue his various business operations. Hensley and Pace claimed that they began discussing transferring ownership of the Austin condo from Chaparral to CFM in November, 2005, with Hensley testifying that he told Pace he was not going to loan Pace any more money for Pace’s business operations unless Hensley got something in return. However, it was not until March 10, 2006, that Pace actually arranged for Chaparral to transfer the Austin condo by special warranty deed to CFM. {See Ex. 25.) Hensley stated that the special warranty deed had been prepared by his office. Other than this deed, no evidence of a sale from Chaparral to CFM was presented at the hearing. Hensley maintained that, in total, CFM paid around $122,500 for the condo by way of a series of separate loans or advances to Chaparral or other Pace-related entities beginning as early as October, 2005. (See Ex. 5.) However, all the evidence of this purported “consideration” was ex post, and no contemporaneous documentation of the terms of a sale were offered. To the contrary, Hensley and Pace both maintained they arrived at the “price” in November, 2005, based on the Travis County tax appraisal value on the condo of just over $121,000. However, the 2005 Travis County tax appraisal for the condo was only $97,236. (See Ex. 26.) The county did not value the condo at $121,000 (plus) until the Spring of 2006, after November, 2005 — the time that both Hensley and Pace claimed they made their deal. The testimony regarding the purported agreed purchase price was thus not credible. Pace never received a lump sum payment of the purported $122,500 purchase price. Pace and Hensley maintained that the “purchase price” was paid in several separate transactions over the course *262of several months, without interest, and without a stated maturity date. This entire description of the reason for the transfer simply did not hang together and the court finds that it is not the correct explanation for the transfer.
Hensley proposed that the purpose of the various loan transactions between Hensley/CFM and Pace/Chaparral was summarized in Exhibit 5. Some of the transactions purportedly related directly to the condo transfer while others constituted loans from Hensley/CFM to Pace (and his various companies) to allow Pace to continue his business operations. The transfers that purportedly related to the condo included the following: On October 7, 2005, Hensley/CFM executed a check for $15,000 made out to Chaparral. (See Ex. 9.) Hensley and Pace both said that this check was a loan that Pace used to pay the security deposit for Pace/DFIC’s lease of certain property from the receiver. (See Ex. 105.) On November 22, 2005, Hensley/CFM executed a check for $10,000 made out to Chaparral. Exhibit 103 is a ledger entry identifying the $10,000 transfer as a loan to Chaparral. Pace testified, however, that this check went directly to the general manager of Durrins. The next transaction took place on February 15, 2006. This transaction was for $15,000. The money did not come from CFM and did not go to Chaparral; rather it came from Hensley’s general cash management account (which Hensley stated was co-mingled with CFM funds) and went directly to DFIC, Inc. to pay that company’s operating expenses. (See Ex. 12.) The next transaction was a March 6, 2006, transfer of $20,000 from Hensley’s general cash management account directly to Durrins. (See Ex. 15.) Then, on March 10, 2006, Hensley transferred $50,000 from Hensley’s general cash management account to Durrins. (See Ex. 16.) Hensley stated that this transfer was used by Dur-rins to pay several months of rent owed by Durrins. The final transaction was an April 27, 2006, transfer of $12,500 from CFM to Ronnie Pace. The memo line on this check describes the transfer as a loan. (See Ex. 23.) Hensley testified that this money constituted the final payment on the condo. He stated that these funds were also used to pay certain obligations of Dur-rins. At the time Hensley/CFM made the transfers described above, Pace and Hensley knew and intended that the transferred funds would be used by Pace to fund the operations of Durrins and DFIC.
The above-described transactions add up to a total of $122,500. While all of the transfers were directed to (and used to pay the operating expenses of) entities other than Pace or Chaparral (as Pace testified), Hensley viewed Pace and Chaparral as the ultimate beneficiaries of the transfers. There is some confusion surrounding a July 19, 2008, payment of $42,800 from CFM to Managed Mortgage Investment Fund. At the hearing Pace maintained that this transaction did not relate to the condo, and was used to pay off a loan to Durrins. In his deposition, however, Pace stated that this transaction was part of the purchase price for the condo.
Other than the oral testimony of Hensley and Pace, no other corroborating evidence was offered to tie these various transactions to the condo transfer. The purported “price” for the condo transfer appears to have been set after the fact by Hensley and Pace after litigation was threatened. No contemporaneous writings in any way tying the loans to the condo transfer were offered — no letters, no memos, no handwritten notes, no emails. The lack of corroboration is strong evidence that undercuts the credibility of the self-serving, after-the-fact testimony of Pace and Hensley.
*263Hensley further testified that by November, 2005, Chaparral owed Hensley legal fees. In prior litigation brought against Pace, Hensley had testified that part of the consideration for the condo consisted of a $10,000-$15,000 credit against attorneys’ fees owed. Hensley did not present any documentation to support a finding that part of the consideration for the condo consisted of.a credit against attorneys’ fees owed by Chaparral. Hensley also did not present any evidence that Chaparral owed Hensley any attorneys’ fees at the time of the transfer of the condo, and the court finds that in fact no fees were owed.
On the statement of financial affairs filed in Chaparral’s bankruptcy case, the condo was listed as having been sold to Hensley in order to compensate Hensley for outstanding attorneys’ fees owed by Pace or Chaparral. Pace maintained at trial that this statement resulted from an error in filling out the SOFA on the part of Chaparral’s bankruptcy attorney, Barbara Rogers; Pace stated that Chaparral’s SOFA should have listed the condo as sold for consideration. He maintained that he had signed blank schedules and statements which were later filled in by Ms. Rogers, but Ms. Rogers’ time entries reflect that Pace reviewed all changes and additions to the schedules and statements before they were filed. Additionally, Pace’s testimony is undercut by the deposition testimony of Ms. Rogers, who laid out the following sequence of events: Ms. Rogers first prepared Chaparral’s SOFA on January 2, 2007. She filed an amended SOFA in February, 2007. Pace approved all of the information contained therein, including the provision that listed the condo as having been transferred as an offset against attorneys’ fees, and signed the SOFA as prepared by Ms. Rogers. Pace testified that these schedules and statements were true and correct at the subsequent 341 meeting of creditors. At Pace’s Rule 2004 examination in March, 2007, Ms. Rogers learned for the first time that the condo might not after all have been transferred as payment for past due attorneys’ fees; Pace stated that the condo had actually been transferred to CFM as repayment of certain loans. After attempting to get clarification from Pace regarding the reason for the transfer of the condo, and after receiving a series of checks from Hensley purporting to show the payments made as consideration for the condo (none of which were actually made out to Chaparral), Ms. Rogers prepared a disclosure statement (and an amended disclosure statement in July, 2007) reflecting that the transfer of the condo had been for attorneys’ fees owed to and funds loaned by Hensley. Ms. Rogers never saw a bill reflecting any attorneys’ fees owed by Chaparral. (See generally, Rogers Dep., pp. 80-87.) The court cannot conceive of any reason why Ms. Rogers would put information into Chaparral’s SOFA that did not reflect the information she had gained directly from Pace. Accordingly, the court will credit her deposition testimony and time entries over the unsupported testimony of Pace. The fact that an entirely different (though equally unsupported) explanation for the transfer of the condo was offered in the Chaparral bankruptcy documents further undercut the credibility of Pace’s explanations about the transfer of the condo.
After the transfer of the condo to CFM in March, 2006, Hensley did not notify the property management company that ownership of the condo had been transferred to CFM (although CFM was listed as the owner on a listing agreement with the property management company executed in late 2007). Pace continued to serve as the contact person for the management company and continued receiving the rental payments (less the HOA dues) from the *264management company. Chaparral continued to pay the maintenance costs and utilities for the condo after the March, 2006, transfer until the property was vandalized in 2007. (See Ex. 79.). Hensley testified that as compensation for collecting the rent, Hensley let Pace keep the rental payments. Hensley also said that CFM paid the taxes on the condo for 2005, 2006, 2007 and 2008, that CFM paid for various repairs and replacement of appliances and carpet, that CFM paid part of a special assessment, and that CFM paid the HOA dues on the condo for 18 months. These payments by CFM totaled $13,846.91. Nonetheless, it was not until February 25, 2010, after this adversary proceeding had already been filed, that CFM notified the management company of its ownership of the condo and requested that the management company send all future correspondence to CFM. (See Ex. 28.). Until then, to the rest of the world (and to the property management company), the condo was still owned by Chaparral.
Hensley represented both Pace and Chaparral at the time of the transfer of the condo from Chaparral to CFM. However, Hensley never told Pace to seek other counsel in connection with this transaction. Aside from signing the deed itself, Pace never signed any document consenting in writing to the sale of the condo to his attorney. Neither Pace nor Hensley was able to produce such a document. In November, 2006, Chaparral filed for chapter 11 in the Southern District of Texas. Hensley was retained as special counsel for Chaparral to pursue a fraudulent transfer action on behalf of Chaparral in connection with the above-mentioned DFIC litigation. In connection with this retention Hensley stated that he did not represent any adverse interest of the debt- or. He did not disclose CFM’s ownership of the condo. Hensley stated that he was not a creditor of Chaparral at that time because he had waived any claim he might have had against Chaparral. Hensley did not file a fee application in connection with his retention as special counsel in Chaparral’s bankruptcy case.
Conflicting testimony was presented regarding the financial status of Pace and Chaparral at the time of the condo transfer. The schedules filed in Pace’s bankruptcy case in November, 2006, showed that, when Pace filed for chapter 7 protection, he had assets of $163,904.91 and liabilities of $1,483,780.68. (See Ex. 58.) Chaparral’s schedules, as amended in February, 2007, showed that at the time of Chaparral’s chapter 11 filing Chaparral had assets of $1,694,303 and liabilities of $1,730,263.47. (See Exs. 38 & 44.) The accounts receivable held by DFIC Holdings, Pace and Durrins were deemed to be uncollectible, and were deducted from Chaparral’s total assets. Based on these schedules, the total combined assets of Chaparral and Pace approximately 9 months after the transfer of the condo amounted to $1,858,207.91. The total liabilities of Pace and Chaparral at that time amounted to $3,214,044.15. Although Pace initially testified that his financial condition and that of Chaparral did not change from the date of the transfer of the condo until Pace filed for bankruptcy (he testified that his balance sheet did not change during this time), Pace testified on cross-examination that, in fact, the value of the DFIC entities and Durrins substantially declined during the 9 month period from March, 2006, until November, 2006. He stated that at the time of the transfer his assets totaled approximately $4.5 million, but that after he abandoned DFIC later in March, the $1.2 million note from DFIC Holdings became worth nothing. Furthermore, the accounts receivable held by DFIC also became uncollectible at that time. Pace testified that Durrins also began to lose mon*265ey after the transfer of the condo, and that by the time Pace filed for bankruptcy Dur-rins was worth nothing.
In total, Pace stated that he believed his assets declined in value by approximately $3 million during the time after the transfer of the condo until his bankruptcy filing. Although Pace testified that these losses were unexpected (he continued borrowing money to keep DFIC and Durrins operational), the Plaintiff maintained that the DFIC accounts receivable were clearly un-collectible at the time of the transfer, and thus Pace’s estimated value of his assets at that time was over-stated. The Plaintiff also argued that DFIC and Durrins had been losing money before the transfer, and were unable to pay their debts at the time of the transfer, thus evidencing their dire financial condition. The Plaintiff maintained that Chaparral also did not have sufficient funds to maintain the operations of DFIC and Durrins at the time of the transfer. Although Chaparral did have $300,000 in a money market account, Wells Fargo had a lien on that account. In short, Chaparral had to borrow from CFM and Hensley to fund the dying operations of DFIC and Durrins. The court finds that the valuation of both Durrins and DFIC (as well as the receivables owed to DFIC Holdings) offered by Pace was substantially and unjustifiably inflated, and that in fact both Pace and Chaparral were insolvent at the time of the transfer (or were rendered insolvent by the transfer).
Discussion
1. Fraudulent Conveyance under the TUFTA
The Plaintiff maintains that the facts presented at the hearing and summarized above illustrate that the March, 2006, transfer of the condo from Chaparral to CFM constituted both an actually fraudulent transfer and a constructively fraudulent transfer under the TUFTA.1 “Section 544 of the Bankruptcy Code allows the trustee to step into the shoes of a creditor for the purpose of asserting causes of action under state fraudulent conveyance laws and confers on the trustee the status of a hypothetical creditor or bona fide purchaser as of the commencement of the case.”2 Anderson v. Mega Sys., L.L.C. (In re Mega Sys., L.L.C.), 2007 WL 1643182, at *9, 2007 Bankr.LEXIS 1957, at *24 (Bankr.E.D. Tex. June 4, 2007) (citation omitted); see also ASARCO LLC v. Americas Mining Corp., 404 B.R. 150, 156 (S.D.Tex.2009) (“Trustees and debtors in possession use § 544(b) as a conduit to assert state-law-based fraudulent-transfer claims in bankruptcy”); Stalnaker v. DLC, Ltd. (In re DLC, Ltd.), 295 B.R. 593, 601 (8th Cir. BAP 2003) (“Section 544(b) of the Bankruptcy Code gives the bankruptcy trustee whatever avoiding powers an unsecured creditor with an allowable claim might have under applicable state or federal law.”). “To prevail under § 544(b), *266the trustee must first establish that at the time of the transaction there was, in fact, a creditor in existence who was holding an unsecured claim that is allowable under 11 U.S.C. § 502.” Lyon v. Eiseman (In re Forbes), 372 B.R. 321, 335 (6th Cir. BAP 2007). Neither party disputes that Pace had unsecured creditors with allowable claims at the time of the transfer of the condo, including, most notably, Linda Lashley (the bought-out former owner of DFIC). The applicable state law in this case is the TUFTA — specifically, sections 24.005 and 24.006 of the Texas Business and Commerce Code.
Under the TUFTA, fraudulent transfers are divided into two types: actual fraudulent transfers, § 24.005(a)(1), and constructive fraudulent transfers, § 24.005(a)(2) and § 24.006. Section 24.006 differs from section 24.005(a)(2) in that it is available only to creditors whose claims arose before the transfer took place, while section 24.005(a)(2) is available to both present and future creditors. However, Linda Lashley, the actual creditor here needed to give the Trustee standing to bring this TUFTA action, see 11 U.S.C. § 544(b), was a present creditor, so the Trustee was permitted to sue under either section.
Regarding the Plaintiffs claim of actual fraud, section 24.005(a)(1) of the Texas Business & Commerce Code addresses liability for actually fraudulent transfers. That section provides:
(a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or within a reasonable time after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1)with actual intent to hinder, delay, or defraud any creditor of the debtor; ...
Tex. Bus. & Com.Code, § 24.005. Under this section of the TUFTA, the creditor’s claim need not have arisen before the transfer; to maintain an action under section 24.005(a) “a creditor’s claim must have arisen before or within a reasonable time after the transfer.” Williams v. Performance Diesel, 2002 WL 596414, at *2, 2002 Tex.App. LEXIS 2735, at *7 (Tex.App.Houston [14th Dist.] Apr. 18, 2002) (emphasis added).
Due to the difficulty of proving, with direct evidence, actual intent to defraud, the TUFTA allows a plaintiff to plead badges of fraud, which provide circumstantial evidence of such actual intent. The Fifth Circuit discussed this statute in Soza v. Hill (In re Soza), 542 F.3d 1060 (5th Cir.2008), noting that section 24.005(b) of the TUFTA provides that,
in determining actual intent under [§ 24.005(a)(1) ], consideration may be given, among other factors, to whether:
(1) the transfer or obligation was to an insider;
(2) the debtor retained possession or control of the property transferred after the transfer;
(3) the transfer or obligation was concealed;
(4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit;
(5) the transfer was of substantially all the debtor’s assets;
(6) the debtor absconded;
(7) the debtor removed or concealed assets;
(8) the value of the consideration received by the debtor was not reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred;
(9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred;
*267(10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and
(11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor.
In re Soza, 542 F.Bd at 1066 n. 5. “The intent that is required [under section 24.005(a)(1) ] is not the same intent that is necessary to support an action for fraud. Rather, the intent required under TUFTA is simply the intent to hinder, delay or defraud a creditor by putting assets beyond that creditor’s reach.” Ingalls v. SMTC Corp. (In re SMTC Mfg. of Tex.), 421 B.R. 251, 299 (Bankr.W.D.Tex.2009) (internal citation omitted.)
State law governs the burden of proof on the Plaintiffs fraudulent transfer claims under section 544(b). Savage & Assocs. v. Mandl (In re Teligent Inc.), 380 B.R. 324, 332 (Bankr.S.D.N.Y.2008). Under section 24.005, “[t]he Trustee bears the burden of proof to show, by a preponderance of evidence, that the transfers in question were made by the Debtor with the actual intent to hinder, delay or defraud any creditor of the Debtor.” In-galls, 421 B.R. at 299. An issue arose at the trial regarding Hensley’s intent to defraud. Hensley’s intent, however, is irrelevant to the question of whether the transfer is avoidable under section 24.005(a)(1). See SEC, et al. v. Resource Development Int’l LLQ et al., 487 F.3d 295, 301 (5th Cir.2007) (“ ‘[T]he transferees’ knowing participation is irrelevant under the statute’ for purposes of establishing the premise of (as opposed to liability for) a fraudulent transfer.”). Section 24.005 “requires only a finding of fraudulent intent on the part of the ‘debtor.’ ” Id.
After considering the factors listed above in light of the facts presented at trial the court finds that the March 10, 2006, transfer of the condo from Chaparral to CFM constituted a transfer made with the actual intent to hinder, delay or defraud Pace’s/Chaparral’s creditors. While the transfer was not strictly to an insider as that term is defined by the Bankruptcy Code,3 the transfer was to a close, longtime friend and attorney of Pace. Additionally, the evidence showed that Pace retained substantial control of the property after the transfer to CFM. Pace collected the rent and was the only contact person for the management company until February, 2010. Hensley asserted formal control over the condo then, but by that time this litigation was already on file. Furthermore, Chaparral continued to pay maintenance fees and utilities for the condo until sometime in 2007, when the property was vandalized. At the time of the transfer Pace and Chaparral were also involved in a significant lawsuit that had been brought by the bought-out former owner of DFIC. Additionally, as discussed in more detail below in connection with the Plaintiffs constructive fraudulent transfer claim, Pace and Chaparral did not receive reasonably equivalent value for the condo. And finally, while there could be a question regarding whether Pace was actually insolvent at the time of the transfer, there is no question that he became insolvent shortly thereafter.4
*268In further support of its actual fraud claim, the Plaintiff asserted that this court had already concluded that the transfer of the condo amounted to a sham transaction. The Plaintiff cited this court’s finding in another adversary proceeding in this case (the “Whatley case”) wherein the court found that, “[although the legal title to the property [the condo] was transferred to Consolidated Fund Management, LLC, beneficial ownership, to all intents and purposes, remained with Pace, who continued to enjoy the benefit of rents, continued to pay the obligations associated with maintenance and utilities, and the like, and, in all respects, acted like the owner of the property, save one respect: his name wasn’t on the deed.” (Tr., p. 6, Chester B. Whatley & Alice Faye Whatley v. Ronnie Jhue Pace, No. 08-05011).
This court cannot, however, give preclusive effect to this ruling under a theory of res judicata or collateral estop-pel for the simple reason that Hensley and CFM were not parties (or in privity with a party) to that litigation. “Collateral estop-pel applies when, in the initial litigation, (1) the issue at stake in the pending litigation is the same, (2) the issue was actually litigated, and (3) the determination of the issue in the initial litigation was a necessary part of the judgment.” Haney Specialty & Supply, Inc. v. Anson Flowline Equip., Inc., 434 F.3d 320, 323 (5th Cir.2005). “Collateral estoppel bars the reliti-gation of an issue of ultimate fact by the party against whom the issue has been determined by a valid and final judgment.” Hibernia Nat’l Bank v. United States, 740 F.2d 382, 387 (5th Cir.1984). While mutuality of parties is not required, collateral estoppel can only be applied against parties who have had a prior full and fair opportunity to litigate their claims. Hardy v. Johns-Manville Sales Corp., 681 F.2d 334, 338 (5th Cir.1982) (explaining Parklane Hosiery Co. v. Shore, 439 U.S. 322, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979)). This requirement is satisfied if the party being estopped was in privity with a party to the prior litigation. See Dow Agrosci-ences, LLC v. Bates, No. 5:01-CV-331-C, 2003 WL 22660741, at *23-24, 2003 U.S. Dist. LEXIS 20389, at *61-62 (N.D.Tex. Oct. 14, 2003). (“Literal identity of the parties is not required as part of the res judicata and collateral estoppel analysis so long as the party against whom enforcement is sought was in privity with a party involved in the initial decision.”) Here, the Defendants were not parties to the prior suit wherein the nature of Pace’s ownership of the condo was addressed. The Fifth Circuit has stated that
[cjomplete identity of parties in the two suits is not required. A preclusion defense, subject to certain conditions, may be invoked by a non-party against a party to the prior suit, and, in limited instances, against a non-party by a party to the prior suit. See, e.g., Parklane Hosiery v. Shore, 439 U.S. 322, 99 S.Ct. 645, 58 L.Ed.2d 552 (1979) ... The imposition of a preclusive bar against a non-party to the original adjudication is limited for obvious reasons: a non-party has had no day in court. Nonetheless, there is a set of exceptions which permit use of a preclusive bar against a non-party.
Terrell v. De Conna, 877 F.2d 1267, 1270 (5th Cir.1989). The court went on to list the three exceptions to the mutuality requirement:
The general federal rule regarding the use of issue or claim preclusion against a non-party states that, [f]irst, a nonparty who has succeeded to a party’s interest in property is bound by any prior judgments against that party.... Second, a nonparty who controlled the original suit *269will be bound by the resulting judgment. ... Third, federal courts will bind a nonparty whose interests were represented adequately by a party in the original suit.
Id.
Here, none of these exceptions apply. First, while CFM may have succeeded to Pace’s interest in the condo, the transfer occurred prior to the judgment in the Whatley case. The transfer occurred on March 10, 2006 and the Whatley case did not even begin until January, 2008. Second, it was never shown or even suggested that the Defendants controlled the litigation in the Whatley case. Third, “[ujnder the rubric of adequate representation, federal courts have consistently held that a non-party is bound if he authorized a party in the prior suit to represent his interests, or if he was represented as a member of a class or association in the original litigation.” Meza v. General Battery Corp., 908 F.2d 1262, 1266-67 (5th Cir.1990). The Fifth Circuit has also found adequate representation between a party and a non-party “where a party to the original suit is ‘so closely aligned to the non-party’s interests as to be his virtual representative.’ ” Id. (quoting Aerojet-General Corp. v. Askew, 511 F.2d 710, 719 (5th Cir. 1975)). In Gummow v. Splined Tools Corp., the court stated that “[i]n order to establish virtual representation for purposes of res judicata or collateral estoppel, there must be an express or implied relationship in which the parties to the first suit are accountable to non-parties involved in a subsequent action raising identical issues.” No. 3-03-CV-1428-L, 2005 WL 1356438, at *3, 2005 U.S. Dist. LEXIS 10947, at *11 (N.D.Tex. June 7, 2005); see also Marine Office of America Corp. v. Vulcan MV, 921 F.Supp. 368, 373 (E.D.La.1996) (application of res judicata or collateral estoppel using the theory of virtual representation “requires more than just a ‘parallel interest’ to show virtual representation”); Meza, 908 F.2d at 1264 (finding no virtual representation where party in prior action had no contractual duty or statutory obligation to represent nonparty). None of the above examples of “adequate representation” are present here. Accordingly, the court did not give any preclusive effect to its findings in the Whatley case regarding Pace’s ownership of the condo.
Nonetheless, for the reasons noted above, the court concludes that the transfer did constitute an actual fraudulent transfer under section 24.005(a)(1) of the TUFTA. The evidence at trial confirmed the observation made in the Whatley adversary. Pace arranged for Chaparral to transfer the condo at a time when Pace and his companies were in serious financial straits, and were involved in litigation in which serious damages were being sought. A sufficient number of the badges of fraud are presented by the evidence — Pace retaining actual control of the condo, Pace continuing to receive the economic benefits from the condo, Pace transferring the condo at a time when he was involved in litigation, Pace using the alleged “proceeds” not for Chaparral or even for Pace but for third party companies in a fashion that tended to disguise his actual intentions, Chaparral had significant indebtedness (and so did Pace), and there was no adequate showing that any consideration was actually given for the condo transfer. If Hensley is considered an insider (and the nature of their relationship strongly supports that conclusion), then yet another badge is present. These factual findings support the conclusion that Pace and Chaparral acted with actual intent to hinder, delay or defraud creditors under section 24.005(a)(1).
The Plaintiff also argued that the transfer of the condo constituted a con*270structively fraudulent transfer under section 24.006(a) of the TUFTA. Section 24.006(a) 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.
Tex. Bus. & CormCode, § 24.006(a). To maintain an action under section 24.006 of the TUFTA, as opposed to section 24.005(a), “a creditor’s claim must have arisen before the transfer in question was made.” Williams, 2002 WL 596414, at *2, 2002 Tex.App. LEXIS 2735, at *7. As already noted, that condition has been satisfied in this case.
While the parties did not seriously dispute that $122,500 may have been a reasonable price to pay for the condo at the time of the transfer, the question here is whether Pace/Chaparral actually received that “reasonably equivalent value” by virtue of the numerous transfers to other Pace-related entities. As articulated by the district court for the Southern District of Texas,
‘Reasonably equivalent value’ includes without limitation, a transfer or obligation that is within the range of values for which the transferor would have sold the assets at an arm’s length transaction.’ ... Value is determined as of the date of the transfer in question. In determining value, a court should examine all aspects of a transaction and both direct and indirect burdens to the debt- or. The determination is made from the creditor’s point of view; the issue is whether from the creditor’s standpoint, the estate lost value. Courts examine all the circumstances surrounding a transaction, looking to whether there is a reasonable and fair proportion between what the debtor surrendered and what the debtor received in return ... ‘the proper focus is on the net effect of the transfers on the debtor’s estate, the funds available to the unsecured creditors.’
Smith v. Am. Founders Fin. Corp., 2006 WL 2844251, at *9-10, 2006 U.S. Dist. LEXIS 74865, at *25-26 (S.D.Tex. Sept. 29, 2006) (internal citations omitted). The Plaintiff bore the burden of proving the elements of section 24.006 (i.e. that the transfer was not for “reasonably equivalent value” and that the debtor was already insolvent or became insolvent as a result of the transfer). See Tow v. Pajooh (In re CRCGP LLC), 2008 WL 4107490, at *9-10, 2008 Bankr.LEXIS 4236, at *27 (Bankr.S.D.Tex. Aug. 28, 2008) (under section 24.006 “[i]t is [the trustee’s] burden to show that [debtor] was insolvent at the time of the transfers or was made insolvent as a result of the transfers”); Ingalls, 421 B.R. at 300 (“To prevail specifically on his § 24.005(a)(2) and § 24.006(a) TUFTA claims, the Trustee must demonstrate that the Debtor did not receive ‘reasonably equivalent value’ in exchange for the transferred assets”).
The court has already found that the evidence failed to connect the transfer of the condo with the various loans and advances made to Pace and his various businesses. On that basis alone, the court is justified in concluding that no reasonably equivalent value was given to either Chaparral or to Pace for the transfer of the condo, satisfying that element of section 24.006(a). Yet even if those transfers were somehow to be linked to the transfer of the condo, the court would still conclude that no reasonably equivalent value was *271received by the transferor. Instead the majority of loans and advances went to entities other than the transferor.
The Fifth Circuit case SEC v. Resource Development International, LLC, 487 F.3d 295 (5th Cir.2007), is instructive on the issue of determining reasonably equivalent value when the consideration for an alleged fraudulent transfer goes to an entity other than the transferor. In that case, after the target of an SEC investigation had his assets frozen, he entered into an agreement with a close friend and longtime associate whereby the friend arranged for the friend’s company to transfer funds to the target’s attorneys (to cover legal fees) in exchange for immediate reimbursement. Id. at 298. Immediately after the friend paid the target’s attorneys, the friend’s company received a wire transfer from a company that later turned out to be part of the target’s Ponzi scheme operation. Id. at 298-99. A receiver was eventually appointed for the company that made the wire transfer to the friend, and the receiver filed a fraudulent transfer suit against the friend and the friend’s company, alleging joint and several liability. Id. at 299. In examining “reasonably equivalent value” under section 24.006 of the TUFTA, the court noted that “[t]he primary consideration in analyzing the exchange of value for any transfer is the degree to which the transferor’s net worth is preserved.” Id. at 301 (internal quotations and citation omitted). The defendants argued that the transferor company “had received value in exchange for its $60,000 transfer to [the friend’s company] because the Defendants made a payment of the same amount to [the target’s] lawyers for legal fees.” Id. The court stated,
‘[consideration having no utility from a creditor’s viewpoint does not satisfy the statutory definition.’ Here, [the trans-feror company’s] net worth was diminished by the $60,000 payment to [the friend’s company] and its defrauded creditors received no benefit from funding the legal defense of one of the major organizers of this fraudulent scheme.
Id. (internal citations omitted). The court concluded that the transferor company had not received “reasonably equivalent value” for the wire transfer to the friend’s company, ultimately affirming the lower court’s finding that the transfer had been both actually and constructively fraudulent under the TUFTA. Id.
In short, “[a] payment made solely for the benefit of a third party, such as a payment to satisfy a third party’s debt, does not furnish reasonably-equivalent value to the debtor.” In re Whaley, 229 B.R. 767, 775 (Bankr.D.Minn.1999) (citing In re Bargfrede, 117 F.3d 1078, 1080 (8th Cir.1997)); see also Smith v. Am. Founders Fin., Corp., 365 B.R. 647, 666 (S.D.Tex.2007) (“Generally, a transfer- or receives less than reasonably equivalent value when it transfers property in exchange for consideration that passes to a third party.”); In re Art Unlimited, 356 B.R. 700, 2006 WL 3512133 (Bankr. E.D.Wis.2006) (holding that debtor did not receive reasonably equivalent value in exchange for the sale of its assets where the proceeds went to pay the debts of its principal rather than the debtor’s trade creditors); In re Newtowne, 157 B.R. 374, 379 (Bankr.S.D.Ohio 1993) (debtor’s payment of affiliated company’s debt, significantly diminishing debtor’s net worth, could be avoided as a fraudulent transfer). Courts have recognized that reasonably equivalent value may be found in transfers involving third parties if the debtor received some indirect benefit from the transfer. Smith, 365 B.R. at 666-67. But such benefits must be “fairly concrete.” Id. In Smith the court stated that “[w]hen the consideration for a transfer passes to the parent corporation of a debtor-subsid*272iary that is making the transfer, as in this case, the benefit to the debtor may be presumed to be nominal, absent proof of specific benefit to the debtor itself.” Id. at 667. The court went on to state,
The touchstone is whether the transaction conferred realizable commercial value on the debtor reasonably equivalent to the commercial value of the assets transferred. Thus, when the debtor is a going concern and its realizable going concern value after the transaction is equal to or exceeds its going concern value before the transaction, reasonably equivalent value has been received.
Id. Finally, the court listed the three common scenarios where a debtor might be found to have received “reasonably equivalent value” by discharging the debts of a third party:
The first is when the debtor’s payment of a third party’s debt results in a discharge of the debtor’s own debt to the third party. But if no corresponding obligation of the transferor is discharged, courts have not hesitated to avoid transfers made to satisfy a third party’s debt. The second scenario is when the debtor and the third party are so ‘related or situated that they share an identity of interests because what benefits one will ... benefit the other to some degree.’ Finally, when a debtor ‘enjoys the benefits of the goods or services it bought for its principal, the transfer of money for those goods or services may not be avoided.’
Id. Here, only the second scenario could possibly apply. Hensley forcefully argued that the payments made to DFIC and Durrins were made on behalf of Pace, but the evidence presented at the trial clearly showed that Pace was not the 100% owner of any of the DFIC entities. Accordingly, the transfers to those entities necessarily did not provide “reasonably equivalent value” to Pace or Chaparral. Even giving Hensley the benefit of the doubt regarding the October 7, 2005, check for $15,000 made out to Chaparral (that both Hensley and Pace testified ultimately went to DFIC), the other $15,000 transfer (on February 15, 2006) that went directly to DFIC cannot be said to have had any utility from the viewpoint of Pace’s creditors. See Resource Dev. Int’l, 487 F.3d at 299. None of the evidence presented at the trial showed that Pace or Chaparral in any way benefitted from passing on the funds received from Hensley to DFIC. See Smith, 365 B.R. at 667. To the contrary, the evidence showed that Pace abandoned DFIC only weeks after the transfer of the condo because the company had no work.
Pace did own 100% of Durrins, Ltd. at the time of the transfer. But these transfers cannot be said to have benefitted either Pace or Chaparral because Durrins, at the time of the transfer of the condo in March, 2006, appears to have been insolvent. Durrins was unable to pay its operating expenses at the time of the transfer and had been relying on money borrowed from Hensley since the Fall of 2005. Transfers to a debtor’s wholly-owned but insolvent company do not furnish “reasonably equivalent value.” See In re First City Bancoiyoration, 1995 WL 710912, at *11 n. 9, 1995 Bankr.LEXIS 1683, at *35 n. 9 (Bankr.N.D.Tex. May 11, 1995) (“While a transfer to a wholly-owned solvent subsidiary is often for reasonably equivalent value, because the value of the parent’s stock interest in the subsidiary may be correspondingly increased, that is not the case when the subsidiary is hopelessly insolvent, because the value of those shares is zero both before and after the transfer.”). In sum, the transfer of the condo in exchange for funds used to pay the obligations of Durrins and DFIC did not preserve Pace’s net worth or provide *273any benefit to the debtor and thus was not for “reasonably equivalent value.”
The second prong of a constructive fraudulent transfer claim requires that the Plaintiff establish the debtor’s insolvency at the time of the transfer. Tow v. Pajooh (In re CRCGP LLC), 2008 WL 4107490, at *9-10, 2008 Bankr.LEXIS 4236, at *27 (Bankr.S.D.Tex. Aug. 28, 2008). Section 101(32) of the Bankruptcy Code defines the term “insolvent” as:
(A) with reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation, exclusive of—
(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity’s creditors; and
(ii) property that may be exempted from property of the estate under section 522 ...
11 U.S.C. § 101(32). The TUFTA defines “insolvency” as follows:
(a) A debtor is insolvent if the sum of the debtor’s debts is greater than all of the debtor’s assets at a fair valuation.
(b) A debtor who is generally not paying the debtor’s debts as they become due is presumed to be insolvent.
(d) Assets under this section do not include property that has been transferred, concealed, or removed with intent to hinder, delay, or defraud creditors or that has been transferred in a manner making the transfer voidable under this chapter.
(e) Debts under this section do not include an obligation to the extent it is secured by a valid lien on property of the debtor not included as an asset. Tex. Bus. & Com.Code § 24.003. Thus, “[u]nder both Texas law and the Bankruptcy Code, a debtor is insolvent if the sum of its liabilities is greater than the sum of its assets at a fair valuation.” Indiana Bell Telephone Co., Inc. v. Love-lady (In re Lovelady), 2007 WL 4754174, at *1 (W.D.Tex. Mar. 19, 2007).
Here, the Plaintiff established by a preponderance of the evidence that Pace was insolvent at the time of the transfer of the condo. Under the TUFTA, a debtor will be presumed insolvent if he is not paying his debts as they become due. See Tex. Bus. & Com.Code § 24.003(b). The evidence showed that Pace was unable to pay his business debts as they came due, necessitating borrowing tens of thousands of dollars from Hensley beginning as early as October, 2005. Hensley did not present any evidence to rebut this presumption of insolvency. Furthermore, some courts have found that a debtor’s insolvency at a particular time may be established through the process of retrojection, by “ ‘showing that the debtor was insolvent a reasonable time ... after the transfer and that the debtor’s financial condition did not materially change during the intervening period.’ ” Weaver v. Kellogg, 216 B.R. 563, 576 (S.D.Tex.1997) (citation omitted). See also In re Sullivan, 161 B.R. 776, 784 (Bankr.N.D.Tex.1993) (accepting evidence six months before and six months after the transaction in question in order to show insolvency at the time of the transaction). While Pace gave conflicting testimony regarding changes in his financial condition between the time of the transfer and the filing of his bankruptcy schedules (showing his insolvency), the fact remains that, at the time of the transfer, Pace was unable to pay his debts as they came due. Furthermore, the evidence was strong that both Pace and Chaparral were balance sheet insolvent at the time of the transfer (or were rendered insolvent by the transfer).
*274The elements for constructive fraud under section 24.006(a) are thus met.
Finally, constructive fraud can also be shown here under section 24.005(a)(2) of the TUFTA.5 Section 24.005(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 within a reasonable time after the transfer was made ..., if the debtor made the transfer ...:
(2) without receiving a reasonably equivalent value in exchange for the transfer ..., and the debtor:
(A) was engaged or was about to engage in a business or a transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or
(B) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.
Tex. Bus. & Com. Code, § 24.005(a)(2). The court has already determined, as discussed above, that Pace did not receive reasonably equivalent value for the transfer of the condo. Thus, the remaining question under section 24.005(a)(2) is whether Pace “was engaged or was about to engage in a business or a transaction for which the remaining assets of [Pace] were unreasonably small in relation to the business or transaction,” or whether Pace “intended to incur, or believed or reasonably should have believed that [he] would incur, debts beyond [his] ability to pay as they became due.”
The evidence presented at the trial satisfies the second prong of section 24.005(a)(2). The court finds that, at the time of the transfer, Pace believed, or at least reasonably should have believed, that he would incur debts beyond his ability to pay as they came due. First, Pace had been pouring money into his struggling businesses since at least October, 2005. While Pace testified that he did this to prevent the businesses from failing, at the time of the transfer in March, 2006, it was abundantly clear that at least DFIC already was failing. Second, the court has already found that Hensley failed to rebut the presumption of Pace’s insolvency at the time of the transfer under section 24.003(b) of the TUFTA. In light of Pace’s evidenced intention to continue sinking money into his failing businesses, and Pace’s presumed insolvency at the time of the transfer, the court concludes that, at the time of the transfer of the condo, Pace believed, or reasonably should have believed, that he would not be able to pay his debts as they became due. See In re Drywall, 2008 WL 2754526, at *28, 2008 Bankr.LEXIS 4060, at *87 (Bankr. S.D.Tex. July 10, 2008) (finding that “[b]e-cause the Trustee has shown that [the debtor] was insolvent at the time of the transfers ... [the debtor] should have reasonably believed that it could not pay its debts as they became due.”); see also SEC v. Res. Dev. Int’l, LLC, 487 F.3d at 301 (concluding, based on findings that the debtor had not received reasonably equivalent value and was insolvent at the time of the transfer, that the transfer “qualifie[d] as fraudulent under § 24.005(a)(2)”).
2. Good Faith Defense under Section 24..009(a) of the TUFTA
Having concluded that the transfer of the condo constitutes a voidable *275fraudulent transfer under section 24.005(a)(1) of the TUFTA, the court must address the good faith defense that is available to a transferee under section 24.009.6 The Defendants bore the burden of establishing this defense. Smith v. Suarez (In re IFS Financial Carp.), 417 B.R. 419, 441 (Bankr.S.D.Tex.2009); see also SEC v. Cook, 2001 WL 256172, at *3-4, 2001 U.S. Dist. LEXIS 2601, at *10 (N.D.Tex. Mar. 8, 2001) (section 24.009(a) requires that the transferee establish both good faith and reasonably equivalent value). Section 24.009 of the TUFTA states,
(a) A transfer or obligation is not voidable under Section 24.005(a)(1) of this code against a person who took in good faith and for a reasonably equivalent value or against any subsequent transferee or obligee.
Tex. Bus. & Com.Code § 24.009(a). The court has already found that Pace/Chaparral did not receive reasonably equivalent value for the transfer of the condo. “The ‘good faith’ prong of this defense must be analyzed under an objective, rather than a subjective, standard. The relevant inquiry is what the transferee ‘objectively knew or should have known instead of examining the transferee’s actual knowledge from a subjective standpoint.’ ” Quilling v. Stark, 2007 WL 415851, at *3-4, 2007 U.S. Dist. LEXIS 8695, at *11 (S.D.Tex. Feb. 7, 2007) (citation omitted). Additionally, “[o]ne lacks the good faith that is essential to the [TUFTA] defense to avoidability if possessed of enough knowledge of the actual facts to induce a reasonable person to inquire further about the transaction.” SEC v. Cook, 2001 WL 256172, at *4, 2001 U.S. Dist. LEXIS 2601, at *11. As recently articulated by the district court for the Northern District of Texas,
A ‘transferee who takes property with knowledge of such facts as would excite the suspicions of a person of ordinary prudence and put him on inquiry of the fraudulent nature of an alleged transfer does not take the property in good faith and is not a bona fide purchaser.’ ... Further, ‘notice of fraudulent intent can be either actual or constructive.’ Texas courts hold that ‘actual notice results from personal information or knowledge,’ whereas constructive notice results from notice that ‘the law imputes to a person not having personal information or knowledge.’
GE Capital Commer., Inc. v. Wright & Wright, Inc., 2011 WL 124287, at *5-6, 2011 U.S. Dist. LEXIS 3962, at *16-17 (N.D.Tex. Jan. 13, 2011). Finally, “[t]he Fifth Circuit has implied that knowledge of the debtor’s insolvency at the time the transfer was received may be sufficient to preclude a finding of ‘good faith.’ ” Smith, 417 B.R. at 442 (citing Swaggart Ministries v. Hayes (In re Hannover), 310 F.3d 796, 799-801 (5th Cir.2002)). Hensley was Pace’s closest friend and his long-time attorney. He prepared the deed for the transfer. He knew that, at that point in time, no actual consideration had even been settled on — and in all likelihood had not even been contemplated. Hensley knew just about everything there was to know about Pace’s financial condition and business plans during the relevant time frame. From an objective standpoint, the court concludes that Hensley knew, or at *276the very least should have known, of the fraudulent nature of this transfer.
3. Recovery of Fraudulent Transfer under Section 550 of the Bankruptcy Code
Having established that the transfer of the condo is voidable under section 544 of the Bankruptcy Code, the court must now determine whether the Plaintiff is entitled to recover the property at issue (or its value) from CFM, Hensley or both. “Section 550 [of the Bankruptcy Code] prescribes the rights and liabilities of a transferee of an avoided transfer, and authorizes the trustee to recover the property or value of the property transferred. As such, § 550 stands as a recovery statute rather than a primary avoidance basis for action, and provides an avenue of recovery for the trustee who prevails under an avoidance section of the Code.” Southmark Corp. v. Schulte, Roth & Zabel, L.L.P., 242 B.R. 330, 337 (N.D.Tex.1999). Section 550 of the Bankruptcy Code provides that,
to the extent that a transfer is avoided under section 544, 545, 547, 548, 549, 553(b), or 724(a) of this title, the trustee may recover, for the benefit of the estate, the property transferred, or, if the court so orders, the value of such property, from — (1) the initial transferee of such transfer or the entity for whose benefit such transfer was made; or (2) any immediate or mediate transferee of such initial transferee.
11 U.S.C. § 550(a). The Plaintiffs power to recover property under section 550(a) is limited by section 550(b),
which prevents recovery from immediate or mediate transferees of the initial transferee under § 550(a)(2) who ‘take[ ] for value ..., in good faith, and without knowledge of the voidability of the transfer avoided.’ 11 U.S.C. § 550(b)(1). No such good faith defense is available to the initial transferee or the ‘entity for whose benefit such transfer was made’ under § 550(a)(1); the trustee may always recover from the initial transferee regardless of good faith, value, or lack of knowledge of the voidability of the transfer.
Rupp v. Markgraf 95 F.3d 936 (10th Cir.1996); see also Cullen Ctr. Bank & Trust v. Hensley (In re Criswell), 102 F.3d 1411, 1419 (5th Cir.1997) (noting that initial transferees “cannot assert protection under the good faith transferee for value clause which is reserved for subsequent transferees only under § 550(b)”). Here, CFM is clearly an initial transferee, so the Plaintiff may recover the condo (or its value) from CFM pursuant to section 550(a). The court has discretion in determining whether to award the Plaintiff the property itself or the value of the property. In re Mega Sys., LLC, 2007 WL 1643182, at *9, 2007 Bankr.LEXIS 1957, at *25 (Bankr.E.D. Tex. June 4, 2007). “The factors which the Court should consider in determining whether to order turnover of the property rather than payment of the value include whether the value of the property (1) is contested; (2) is not readily determinable; or (3) is not diminished by conversion or depreciation.” Id.
A larger question arises over whether to hold Hensley jointly and severally liable with CFM as either an “initial transferee” (under an alter-ego theory of liability) or as “the entity for whose benefit such transfer was made” under section 550. In Schechter v. 5841 Bldg. Corp. (In re Hansen), the bankruptcy court for the Northern District of Illinois addressed the question of whether the president and majority shareholder of a corporation could be considered an “initial transferee” of transfers made to the corporation by virtue of his control over the corporation. 341 B.R. 638, 641 (Bankr.N.D.Ill.2006). *277The court first found that the corporation to whom the debtor had actually made the payments at issue was the “initial transferee” because it “was the first to receive the payments and had dominion over them— the right to use the funds as it pleased.” Id. The court then discussed whether the president/shareholder could also be considered an initial transferee by virtue of his ownership and management of the company:
One could [argue that the president/shareholder was the initial transferee based on his ownership and management], but the argument would go nowhere. To go somewhere, [the plaintiff] would have to adduce evidence that [the corporation] was actually [the president’s] alter ego, making [the president] the “initial transferee” of the payments. Several courts, including this one, have acknowledged or assumed the viability of such a theory. See, e.g., Peterson v. Hofmann (In re Delta Phones, Inc.), 2005 Bankr.LEXIS 2550, Nos. 04 B 823, 05 A 1205, 2005 WL 3542667, at *7 (Bankr.N.D.Ill.Dec. 23, 2005) (permitting trustee to amend complaint to allege alter ego claim against members of limited liability company); Cuthill v. Kime (In re Evergreen Sec., Ltd.), 319 B.R. 245, 255-56 (Bankr.M.D.Fla.2003) (assuming viability of theory but finding a failure of proof); Carolyn’s Kitchen v. Cybergenics Corp. (In re Carolyn’s Kitchen), 209 B.R. 204, 209 (Bankr. N.D.Tex.1997) (same).No evidence in the record suggests that [the corporation] was [the president’s] alter ego, and [the plaintiff] points to none. [The plaintiff] notes that [the president] was president and majority shareholder of [the corporation], but that is not remotely enough. A corporation is an entity distinct from its shareholders, directors, and officers. In re Rehabilitation of Centaur Ins. Co., 158 Ill.2d 166, 172, 632 N.E.2d 1015, 1017, 198 Ill.Dec. 404 (1994). To ignore a corporation’s existence — a drastic step — there must be both (1) such a unity of interest and ownership that the separate personalities of person and corporation no longer exist, and (2) circumstances under which adherence to the fiction of corporate separateness would promote injustice or inequity. International Fin. Servs. Corp. v. Chromas Techs. Canada, Inc., 356 F.3d 731, 736 (7th Cir.2004). No evidence here raises an inference of either one. As far as the record is concerned, [the corporation] and [the president] were separate entities.
Id. at 643-44. See also In re Klein, 1991 WL 242169, at *37-38, 1991 Bankr.LEXIS 1672, at *108-109 (Bankr.N.D. Ill. June 20, 1991) (concluding that certain transfers made to an entity that was controlled by the defendants, such that the defendants and the entity were essentially one and the same, could be recovered from the defendants as “initial transferees” under section 550).
In Texas, the corporate veil may be pierced to hold an individual shareholder liable in three broad situations: where “(1) the corporation is the alter ego of its owners and/or shareholders; (2) the corporation is used for illegal purposes; and (3) the corporation is used as a sham to perpetrate a fraud.” Rimade Ltd. v. Hubbard Enters., 388 F.3d 138, 143 (5th Cir.2004).7 Here, the facts presented at the hearing showed that Hensley solely controlled the operation and management of CFM. Hensley also commingled CFM funds in his general cash management ae-*278count. This evidence is probably insufficient to pierce the corporate veil under an alter-ego theory of liability. In examining whether a corporation is merely the alter-ego of its shareholder, courts
look[ ] to the total dealings between the corporation and the individual, including the degree to which corporate formalities have been maintained, whether corporate and individual assets have been kept separately, the financial interests, ownership, and control the individual maintains over the corporation, and whether the corporation has been used for personal purposes.
In re JNS Aviation, 876 B.R. at 528. The parties simply did not present enough evidence regarding how Hensley used and managed CFM for the court to make an alter-ego determination here. Nonetheless, the Plaintiff did establish that Hensley used CFM to perpetrate a fraud. The court in JNS Aviation, discussing Fifth Circuit precedent, addressed this third prong of corporate veil piercing as being essentially equitable in nature:
‘for the first time, the focus of veil-piercing analysis is on some inequitable result for the claimant, because of abuses of the corporate form.’ [ ] ‘This category allows a corporate disregard in a much broader range of cases than those strictly speaking of fraud ... ’ Neither intentional fraud nor intent to defraud need be shown to satisfy this strand. The sham strand is the catchall and broadest form of piercing. Looking to Castleberry, the Fifth Circuit stated as follows:
The [Castleberry v. Branscum, 721 S.W.2d 270 (Tex.1987) ] court emphasized that this standard for corporate disregard is whether honoring legal independence would result in ‘inequity’ or ‘injustice’; the purpose ‘is to prevent use of the corporate entity as a cloak for fraud or illegality or to work an injustice, and that purpose should not be thwarted by adherence to any particular theory of liability.’
In re JNS Aviation, 876 B.R. at 528-29 (quoting Gibraltar Savings v. LDBrink-man Corp., 860 F.2d 1275, 1289 (5th Cir.1988)) (internal citations omitted).
The court’s previous findings and conclusion that Hensley did not act in good faith in connection with the transfer of the condo underscores the conclusion here that Hensley used CFM to help Pace carry out a fraudulent transfer. That evidence is sufficient to justify piercing the corporate veil and to thus recover the condo from both Hensley and CFM under the theory of joint and several liability. See Resource Dev. Int’l, LLC, 487 F.3d at 303 (affirming district court’s conclusion that defendant shareholder had “utilized his control over defendant corporation” to perpetuate the debtor’s fraudulent conduct where defendant had agreed with debtor to pay debt- or’s legal fees in exchange for a wire transfer to defendant’s corporation, and holding defendant and defendant’s corporation jointly and severally liable under section 550).8
*279As a final note, Hensley and CFM are precluded from taking advantage of the provisions of section 550(e). Section 550(e) states that “[a] good faith transferee from whom the trustee may recover under subsection (a) of this section has a lien on the property recovered to secure the lesser of — (A) the costs, to such transferee, of any improvement made after the transfer, less the amount of any profit realized by or accruing to such transferee from such property[.]” 11 U.S.C. § 550(e). The court has already found that Hensley did not act in good faith. Thus, the protections of section 550(e) are not available to him. See Meoli v. Huntington Nat’l Bank (In re Teleservices Group, Inc.), 444 B.R. 767, 812-813 (Bankr.W.D.Mich.2011) (“A bad faith recipient is never entitled to the compensatory lien that Section 550(e) otherwise provides to all transferees. Put simply ... a recipient of an actually fraudulent transfer who himself is aware of the fraud (i.e. in bad faith) is no less reprehensible than the fraudulent debtor himself. Nor is such transferee any more deserving of the Code’s protections whether offered under Section 550 or otherwise.”).
4. Breach of Fiduciary Duty — Rule 1.08 of the Texas Disciplinary Rules of Professional Conduct
The Plaintiff also contended that Hensley was liable to the estate for breach of fiduciary duty, growing out of his violation of the disciplinary rules of professional conduct for lawyers, by entering into a business transaction without his client’s having the benefit of independent counsel to advise him, and without a written consent from the client.
Hensley argued that the Plaintiffs breach of fiduciary duty claim was barred by state statute of limitations for breach of fiduciary duty claims. In Texas, breach of fiduciary duty claims must be brought within 4 years after the cause of action accrues. Tex. Civ. Prac. & Rem. Code § 16.004. “ ‘[A] cause of action accrues when a wrongful act causes some legal injury.’ ” USPPS, Ltd. v. Avery Dennison Corp., 2010 WL 2802512, at *9-10, 2010 U.S. Dist. LEXIS 84450, at *35 (W.D.Tex. Mar. 18, 2010) (quoting S.V. v. R.V., 933 S.W.2d 1, 4 (Tex.1996)). Section 108 of the Bankruptcy Code describes the applicability of state statutes of limitation to actions brought by the trustee on behalf of the debtor. “By its express language, § 108(a) only applies to causes of action that the debtor owned prepetition.” In re Topcor, Inc., 132 B.R. 119, 126 (Bankr. N.D.Tex.1991); see also In re Princeton-New York Investors, Inc., 219 B.R. 55, 58 (D.N.J.1998) (same). Section 108 provides:
(a) If applicable nonbankruptcy law ... fixes a period within which the debtor may commence an action, and such period has not expired before the date of the filing of the petition, the trustee may commence such action only before the later of—
(1) the end of such period ...; or
(2) two years after the order for relief.
*28011 U.S.C. sec. 108(a). The court will assume the cause of action for breach of fiduciary duty accrued on March 10, 2006, when Pace transferred the property to Hensley/CFM.9 Pace filed for bankruptcy on August 15, 2007, well within the four year statute of limitations. The Plaintiff filed its original complaint on July 21, 2009, and its second amended complaint (which included, for the first time, the breach of fiduciary duty claim) on August 27, 2010. The second amended complaint was filed both after the state statute of limitations had expired and after two years after the order for relief. So this claim is time-barred unless it relates back to the date of the original complaint (which falls within the time period prescribed by section 108).
For the Plaintiff to establish that its second amended complaint relates back to the original complaint, the Plaintiff must satisfy the elements of Rule 15(c)(1)(A)-(B) of the Federal Rules of Civil Procedure. That rule states, “[a]n amendment to a pleading relates back to the date of the original pleading when: (A) the law that provides the applicable statute of limitations allows relation back; [or] (B) the amendment asserts a claim or defense that arose out of the conduct, transaction, or occurrence set out — or attempted to be set out — in the original pleading.” Fed. R.Civ.P. 15. See also Sanders-Burns v. City of Plano, 594 F.3d 366, 373 (5th Cir.2010). Furthermore, “ ‘[t]he fact that an amendment changes the legal theory on which the action initially was brought is of no consequence if the factual situation upon which the action depends remains the same and has been brought to defendant’s attention by the original pleading.’ ” Federal Deposit Ins. Corp. v. Bennett, 898 F.2d 477, 480 (5th Cir.1990) (citation omitted). The underlying transaction as set forth in the Plaintiffs’ original complaint is the same underlying transaction that forms the basis of the Plaintiffs breach of fiduciary duty claim. The facts necessary to the Plaintiffs breach of fiduciary claim were laid out in the Plaintiffs original complaint. Therefore, the Plaintiffs breach of fiduciary duty claim relates back to the original timely-filed complaint and is not time-barred.
Regarding the merits of the Plaintiffs breach of fiduciary duty claim, the Plaintiff argued that Hensley breached his fiduciary duty to Pace and Chaparral by entering into a business transaction with Pace/Chaparral in violation of Rule 1.08 of the Texas Disciplinary Rules of Professional Conduct. Under Texas law, a fiduciary relationship exists between an attorney and client. Willis v. Maverick, 760 S.W.2d 642, 645 (Tex.1988). Furthermore, while the violation of a disciplinary rule of professional conduct does not itself create a private cause of action, “Texas courts have used the Rules as standards for conduct in malpractice and breach of fiduciary duty cases.” Frazin v. Haynes & Boone, LLP (In re Frazin), 2008 WL 5214036, at *57, 2008 Bankr.LEXIS 2373, at *198 (Bankr.N.D.Tex. Sept. 23, 2008); see also Sealed Party v. Sealed Party, *2812006 WL 1207732, at *8, 2006 U.S. Dist. LEXIS 28392, at *31 (S.D.Tex. May 4, 2006) (stating that Texas Disciplinary Rules “may be considered evidence and significantly inform the analysis of the scope of fiduciary duties between attorneys and their clients”).
Rule 1.08 states that,
(a) A lawyer shall not enter into a business transaction with a client unless: (1) the transaction and terms on which the lawyer acquires the interest are fair and reasonable to the client and are fully disclosed in a manner which can be reasonably understood by the client; (2) the client is given a reasonable opportunity to seek the advice of independent counsel in the transaction; and (3) the client consents in writing thereto.
Tex. Disciplinary R. Profl Conduct 1.08. Courts “review all business dealings between a lawyer and a client using the strict scrutiny standard.” MacFarlane v. Nelson, 2005 WL 2240949, at *8, 2005 Tex.App. LEXIS 7681, at *27-28 (Tex.App.Austin [3d Dist.] Sept. 15, 2005, pet. denied.). It is undisputed that Hensley was Pace's and Chaparral’s attorney at the time of the transaction and that Hensley controlled the purchaser of Pace’s condo (CFM). That CFM, rather than Hensley, was the named party to the transaction and the direct recipient of the condo does not preclude a finding that Hensley nonetheless violated Rule 1.08. See Rosas v. Comm’n for Lawyers Discipline, 335 S.W.3d 311 (Tex.App.-San Antonio 2010) (finding attorney who had engaged in transaction with client whereby client transferred property to the attorney’s company had violated Rule 1.08).
The Plaintiff argued that Hensley violated all three prongs of Rule 1.08. First, it is clear that the terms of the alleged agreement Pace and Hensley purportedly reached in November, 2005, were far from clear. Both parties presented conflicting testimony regarding whether the transfer of the condo was in exchange for forgiveness of attorneys fees owed, for funds loaned, or both. Regarding the second prong of Rule 1.08, the Texas rule, unlike the Model Rule,10 does not require that the attorney advise the client in writing of the desirability of seeking the advice of independent counsel. The Texas rule merely requires that the client be given a reasonable opportunity to seek such independent advice. See Tex. Disciplinary R. Profl Conduct 1.08. Based on the evidence presented at the trial, the court is unable to find that Pace was not given such an opportunity. If their testimony is to be believed, Pace and Hensley first began discussing this transaction in November, 2005, but the transfer did not actually take place until several months later. Pace was represented by other attorneys during that time and could have sought independent counsel if he had wanted to.
Finally, the evidence showed that Pace did not sign any writing consenting to the transaction with his attorney. Hensley and Pace both maintained that signing the deed was sufficient to establish consent for purposes of Rule 1.08. The court disagrees. If signing the transaction papers was sufficient to satisfy the consent requirement of Rule 1.08, that requirement would lose all meaning. Other courts have also required that the writing consenting to a transaction with one’s attorney be separate from the transaction papers *282themselves. See, e.g., Tai v. Charfoos (In re Charfoos), 183 B.R. 131, 136-37 (Bankr. E.D.Mich.1994) (applying Michigan’s identical Rule 1.8); In re Estate of Brown, 930 A.2d 249, 254 (D.C.2007) (applying nearly identical Rule 1.8 and stating that ‘“the client’s signature on documents evidencing the business transaction cannot be considered “written consent’ under the rule where the client has not been informed of the implications ... of the transaction”) (quoting In re Taylor, 741 N.E.2d 1239, 1242 (Ind.2001)). See also Johnson v. Williams, 2006 WL 1653656, at *7, 2006 Tex.App. LEXIS 5180, at *20-21 (Tex. App. — Houston [1st Dist.] June 15, 2006) (interpreting Rule 1.08 as “stating that an attorney must obtain written consent prior to entering a business transaction with a client”).
In short, the Plaintiff presented sufficient facts to establish that Hensley violated Rule 1.08. Such violation must still constitute a breach of fiduciary duty, however, in order to be actionable. “Under Texas law, the elements of a breach of fiduciary duty claim are: (1) the plaintiff and defendant had a fiduciary relationship; (2) the defendant breached its fiduciary duty to the plaintiff; and (3) the defendant’s breach resulted in injury to the plaintiff or benefit to the defendant.” Rimkus Consulting Group, Inc. v. Cammarata, 688 F.Supp.2d 598, 669 (S.D.Tex. 2010) (citing Navigant Consulting, Inc. v. Wilkinson, 508 F.3d 277, 283 (5th Cir.2007)); Lundy v. Masson, 260 S.W.3d 482, 501 (Tex.App. — Houston [14th Dist.] 2008, pet. denied). The first two elements have been satisfied here. Regarding harm to Pace, however, in breach of fiduciary duty cases “the client carries the burden to establish that the attorney’s breach caused him damage.” MacFarlane v. Nelson, 2005 WL 2240949, at *9, 2005 Tex.App. LEXIS 7681, at *30. Here, the Plaintiff, having stepped into the shoes of Pace, and having properly asserted a claim for breach of fiduciary duties owed to Pace, has not established (and indeed did not argue the existence of) any harm to Pace other than the loss of the condo. Because the court has already concluded that the transfer of the condo may be avoided under section 544 of the Bankruptcy Code, and that the condo (or its value) may be recovered from CFM and Hensley under section 550, the court will not award further damages for Hensley’s breach of his fiduciary duty to Pace. However, the court will conclude that the loss of the condo counts as damages for breach of fiduciary duty, forming an independent basis for recovery on the part of the Plaintiff.
5. Exemplary Damages and Attorneys’ Fees
“There is no specific Bankruptcy Code provision allowing a court to grant exemplary damages against the transferor or transferee of a fraudulent transfer.” Anderson v. Mega Sys., L.L.C. (In re Mega Sys., L.L.C.), 2007 WL 1643182, at *9-10, 2007 Bankr.LEXIS 1957, at *26 (Bankr.E.D. Tex. June 4, 2007) (citing Smith v. Lounsbury (In re Amberjack Interests, Inc.), 326 B.R. 379, 392 (Bankr.S.D.Tex.2005)). Nonetheless, “[a] bankruptcy court may rely on state law to award exemplary damages where the Code does not specifically allow such measures. Texas law provides for an award of exemplary damages only on a showing of fraud or malice by clear and convincing evidence.” Id. at *10, 2007 Bankr .LEXIS 1957, at *27 (citing Tex. Civ. Prac. & Rem.Code § 41.003(a)-(b)).11 *283Here, the Plaintiffs claims only required proof by a preponderance of the evidence. See Ingalls, 421 B.R. at 279 (citing Walker v. Anderson, 232 S.W.3d 899, 913 (Tex.App.-Dallas 2007, no pet.)). Additionally, a court “is always free to decline to award exemplary damages, as such an award is within the discretion of the fact-finder.” Anderson, 2007 WL 1643182, at *10, 2007 Bankr.LEXIS 1957, at *27 (citing Tex. Civ. Prac. & Rem.Code § 41.010(b)).
The court declines to award exemplary damages in this case. While the Plaintiffs evidence was sufficient to establish, by a preponderance of the evidence, that the transfer of the condo constituted a fraudulent transfer under the TUFTA, the evidence did not establish, by dear and convincing evidence, that Hensley acted fraudulently, or with gross negligence or malice.
Regarding the Plaintiffs request for attorneys’ fees and costs, “[s]ection 24.013 [of the TUFTA] allows this Court to award ‘costs and reasonable attorney’s fees as are equitable and just.’ ” West v. Seiffert (In re Houston Drywall, Inc.), 2008 WL 275452, at *29-30, 2008 Bankr.LEXIS 4060, at *92-93 (Bankr. S.D.Tex. July 10, 2008) (citing Tex. Bus. & Com.Code § 24.013 (Vernon 2006) and Walker v. Anderson, 232 S.W.3d 899, 919 (Tex.App. — Dallas 2007, no pet.)); see also Suarez v. Smith (In re IFS Fin. Corp.), 2010 WL 1992579, at *3, 2010 U.S. Dist. LEXIS 48670, at *8 (S.D.Tex.May 18, 2010) ([Section 24.013] “of TUFTA gives the trial court the sound discretion to award attorney’s fees based on the evidence ... ”). In West, the bankruptcy court for the Southern District of Texas awarded attorneys’ fees to the trustee under section 24.013 after finding that the defendants had “defrauded the creditors of [the debtor’s] bankruptcy estate by surreptitiously taking assignments of [certain] receivables for no consideration.” 2008 WL 2754526, at *30, 2008 Bankr.LEXIS 4060, at *93. The court found that “[g]iv-en this egregious conduct ... it [was] equitable and just to award attorney’s fees and costs to the Trustee for his prosecution of this adversary proceeding.” No such egregious conduct exists here. Hensley did provide consideration for the transfer (albeit not “reasonably equivalent” consideration). Additionally, neither party tried to conceal the transfer from Pace’s creditors. Nonetheless, courts also appear to award reasonable attorneys’ fees to the prevailing party in fraudulent transfer actions under the TUFTA regardless of whether the conduct at issue was egregious. See, e.g., Tow v. Pajooh (In re CRCGP LLC), 2008 WL 4107490, at *21-22, 2008 Bankr.LEXIS 4236, at *61-62 (Bankr.S.D.Tex. Aug. 28, 2008); Quilling v. 3D Mktg., LLC, 2007 WL 1058217, at *3-4, 2007 U.S. Dist. LEXIS 24914, at *11 (N.D.Tex.Feb. 8, 2007) (“As the prevailing party in the case [under the TUFTA], the Receiver is entitled to recover ‘costs and reasonable attorney’s fees as are equitable and just.’ An application for attorney’s fees shall be filed within 14 days after entry of a final judgment ... ”) (citing Tex. Bus. & Com.Code § 24.013). The Plaintiff is directed to submit a fee request in accordance with the local rules.
Finally, regarding the Plaintiffs request for pre-judgment interest, courts within the Fifth Circuit have held that prejudgment interest is available on a recovery under section 544:
Federal law governs the allowance of prejudgment interest when a cause of action arises from a federal statute. In re Texas Gen. Petroleum Corp., 52 F.3d *2841330, 1339 (5th Cir.1995) (citing Carpenters Dist. Council v. Dillard Dep’t Stores, Inc., 15 F.3d 1275, 1288 (5th Cir.1994)). The Fifth Circuit applies a two-step analysis to determine whether an award of prejudgment interest is within a court’s discretion: (1) whether the federal act that creates the cause of action precludes such an award; and (2) whether such an award furthers the congressional policies of the federal act. Id. Applying this analysis to Bankruptcy Code § 548, the Fifth Circuit has held that ‘[t]he Bankruptcy Code and particularly § 548 are silent with regard to prejudgment interest.... Furthermore, an award of prejudgment interest furthers the congressional policies of the Bankruptcy Code.... The purpose of [Section 548] is to make the estate whole. Prejudgment interest compensates the estate for the time it was without use of the transferred funds.’ Id. at 1339-40. [Plaintiff] brings its fraudulent transfer claim under § 544 of the Bankruptcy Code, and the Court finds that this analysis applies to this section, as well.
ASARCO LLC v. Ams. Mining Corp., 404 B.R. 150, 163 (S.D.Tex.2009). Thus, the Plaintiff is entitled to recover prejudgment interest on its section 544 claims. Regarding the proper rate of prejudgment interest, “[a]bsent a federal statute on the matter, state law is an appropriate source of guidance on the proper prejudgment interest rate.” Anderson, 2007 WL 1643182, at *10-11, 2007 Bankr.LEXIS 1957, at *28 (citation omitted). “Texas state law utilizes the same rate for both pre- and post-judgment interest, generally utilizing the prime rate as published by the Board of Governors of the Federal Reserve System on the fifteenth day of the month preceding the month of the judgment.” Anderson, 2007 WL 1643182, at *11, 2007 Bankr.LEXIS 1957, at *29 (citing Tex. Fin.Code §§ 304.003 and 304.103 (Vernon 2006)).
. Because the court addresses the Plaintiff's allegations that the transfer of the condo was a sham in the court’s discussion of the Plaintiff's fraudulent conveyance claims, the court will not separately address the Plaintiff’s request for a declaratory judgment. Additionally, the court recognizes that the Plaintiff also brought a constructive fraudulent conveyance claim under section 548(a)(1)(B) of the Bankruptcy Code. But because the court finds the transfer avoidable under state law, the court need not address section 548.
. Section 544 of the Bankruptcy Code provides:
The trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim that is allowable under section 502 of this title or that is not allowable only under section 502(e) of this title.
11 U.S.C. § 544(b)(1).
. See 11 U.S.C. § 101(31).
. As previously noted by the bankruptcy court for the Western District of Texas: "The presence of many badges of fraud ‘will always make out a strong case of fraud.’ Proof of four to five badges of fraud has been found sufficient in several reported cases." Ingalls v. SMTC Corp. (In re SMTC Mfg. of Tex.), 421 B.R. 251, 299-300 (Bankr.W.D.Tex.2009) (citing Texas fraudulent transfer cases; internal citations omitted).
. Although the Plaintiff did not specifically plead or address this section of the TUFTA in its papers or at the hearing, the court will nonetheless address this section as it is applicable to the facts of this case.
. Because the court has found that the transfer at issue is voidable under section 544, the good faith defense that is available under section 548(c) of the Bankruptcy Code, by its own terms, does not apply. But the good faith defense of section 24.009(a) of the TUF-TA is essentially identical to section 548(c) with the exception that section 24.009(a) does not protect constructive fraudulent transfers. See United States v. Evans, 513 F.Supp.2d 825, 836 (W.D.Tex.2007) ("By its terms, the section 24.009(a) defense only applies to section 24.005(a)(1) TUFTA claims, not section 24.006(a) claims.”).
. Texas corporate veil piercing law is equally applicable in the context of limited liability companies. Nick Corp. v. JNS Aviation, Inc. (In re JNS Aviation, Inc.), 376 B.R. 500, 526 (Bankr.N.D.Tex.2007).
. The Plaintiff also argued that Hensley should be held personally liable as the person "for whose benefit the transfer was made.” In light of the court’s conclusion that he can be held liable as an "initial transferee” under a veil piercing theory of liability, the court need not reach this issue. Nonetheless, the court notes that the Hensley could also be held personally liable under this theory. See Schechter v. 5841 Bldg. Corp. (In re Hansen), 341 B.R. 638, 645 (Bankr.N.D.Ill.2006) (stating that “shareholders, officers, and directors are not liable for transfers to their corporation unless they actually received distributions of the transferred property (in which case they would be subsequent transferees under section 550(a)(2)), or a showing can be made to pierce the corporate veil,” and further not*279ing that "[m]ost cases in which shareholders or officers have been found responsible under section 550(a)(1) as beneficiaries of corporate transfers have involved some veil-piercing aspect") (emphasis added). See also Tavormina v. Weiss (In re Behr Contracting, Inc.), 79 B.R. 84, 87 (Bankr.S.D.Fla.1987) (finding sole shareholder of corporate transferee liable as transfer beneficiary where corporation had "no assets or liabilities” and so was a mere shell); Jacoway v. Anderson (In re Ozark Rest. Equip. Co.), 74 B.R. 139, 145 (Bankr. W.D.Ark.) (finding liability where corporate transferees "were utilized as the defendants’ mere instrumentalities”), aff'd in part, 77 B.R. 686 (W.D.Ark. 1987), aff'd in part, rev’d in part, 850 F.2d 342 (8th Cir.1988).
. The Plaintiff argued that, under the discovery rale, the action did not accrue until the trustee was appointed. Courts have applied the discovery rule to toll statutes of limitation in bankruptcy cases until a trustee is appointed, see Seitz v. Detweiler, Hershey & Assocs., P.C. (In re CitX Corp.), 2004 WL 2850046, at *3-4, 2004 U.S. Dist. LEXIS 24903, at *11-12 (E.D.Pa. Dec. 8, 2004) (applying discovery rule to toll the statute of limitations on professional malpractice claim until trustee was appointed). The court need not rely on the discovery rule here, however, because the court concludes that the Plaintiff’s second amended complaint relates back to the original, timely-filed complaint under Rule 15(c) of the Federal Rules of Civil Procedure.
. See Rule 1.8 of the Model Rules of Professional Responsibility at http://www. americanbar.org'groups/professionaL responsibility/publications/model_rules_of_ professionaLconduct/rule_ 1 _8_current_ clients_specific_rules. html.
. Section 41.003 of the Civil Practice and Remedies Code also applies to breach of fiduciary duty claims brought under Texas law. See Joe N. Pratt Ins. v. Doane, 2010 WL 697285, 2010 U.S. Dist. LEXIS 14986 (S.D.Tex. Feb. 19, 2010) (finding that, under *283section 41.003, plaintiff had to establish that damages for breach of fiduciary duty resulted from fraud, malice or gross negligence to be entitled to an award of exemplary damages). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494414/ | MEMORANDUM DECISION ON PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT
MARGARET DEE McGARITY, Bankruptcy Judge.
The plaintiff, Baytherm Insulation, Inc., brought this adversary proceeding objecting to the dischargeability of certain obligations incurred by the defendant, Jeff Carlson. After the defendant filed his answer, the plaintiff moved for summary judgment asserting it was entitled to a nondischargeable judgment pursuant to 11 U.S.C. § 523(a)(4).
This Court has jurisdiction under 28 U.S.C. § 1334 and this is a core proceeding under 28 U.S.C. § 157(b)(2)(I). This decision constitutes the Court’s findings of fact and conclusions of law under Fed. R. Bankr.P. 7052. For the reasons stated herein, the plaintiffs motion for summary judgment is granted.
BACKGROUND
The debtor owned and operated a sole proprietorship business known as Carlson Homes and, at all times relevant to this proceeding, acted as a prime contractor on *394two construction projects. In the spring and fall of 2008, the debtor requested that Baytherm Insulation, Inc., as subcontractor, supply labor and insulation materials for improvement of properties in Collins and Kaukauna, Wisconsin. The debtor received payment in full from the owners of both properties but never paid Baytherm.
On or about April 15, 2009, Baytherm filed an Amended Summons and Amended Complaint in the Calumet County Circuit Court, alleging, among other things, theft by contractor in violation of section 779.02(5), Wis. Stats. The parties later entered into a Stipulation for Dismissal of the suit which read as follows:
IT IS STIPULATED and agreed by the Plaintiff, by its attorney, and the Defendant that the Complaint filed in this action should be dismissed not on the merits, without prejudice, without fees or costs, and subject to Plaintiffs right to reopen and take judgment on the following terms and conditions:
1.Defendant shall pay the aggregate sum of $6,019.94 to Plaintiff as follows:
a. Six (6) monthly installments in the amount of $150.00, due on the first day of each month, commencing July 1, 2009, ending December 1, 2009;
b. Sixteen (16) monthly installments in the amount of $800.00 due on the first day of each month, commencing January 1, 2010, ending April 1, 2011;
c. A balloon payment in the amount of $319.94 due on May 1, 2011;
d. All payments shall be made by check payable to Baytherm Insulation, Inc. and delivered to Thomas
S. Wroblewski, S.C., 180 Main Street, Menasha, Wisconsin 54952 on or before the due date.
2. If Defendant fails to make any payment required by Paragraph 1 above, Plaintiff shall have the right to reopen this matter, without further notice to Defendant of any kind, Defendant specifically waiving the same, and to take judgment by affidavit against the Defendant for treble the amount of damages caused by Defendant’s theft by contractor, to wit: $14,268.00, plus all reasonable actual attorney fees and costs incurred by Plaintiff, less any amounts paid pursuant to Paragraph 1.
3. If Plaintiff reopens this matter and moves for judgment according to Paragraph 2 above, Defendant specifically waives any right to object to or contest Plaintiffs right to recover the amounts demanded in the Complaint, including but not limited to any such objection in the form of an answer or affirmative defense to the allegations of the Complaint, except Defendant may object to the sole issue of whether Plaintiff gave due credit to Defendant for amounts paid pursuant to paragraph 1, above.
(Stipulation and Order for Dismissal, Calumet County Circuit Court Case No. 09 CV 135, signed June 25 & 29, 2009). The stipulation was approved by the judge and the Order for Dismissal was entered on July 6, 2009.
After making one payment of $150.00 on July 1, 2009, the debtor failed to comply with the remaining terms of the stipulation and order, and a money judgment was entered upon the submission of an affidavit from plaintiffs counsel. The state court judge found Baytherm was entitled to judgment against the debtor according to the demands of the complaint and entered judgment “in the sum of $16,221.98, plus any future disbursements, costs, and attorneys’ fees which may be incurred during collection of its Judgment.” (Money Judg*395ment, Calumet County Circuit Court Case No. 09 CV 135, entered September 3, 2009).
The debtor filed a chapter 13 petition on November 17, 2010, and converted to chapter 7 on July 26, 2011.
ARGUMENTS
The plaintiff urges this Court to follow its previous rulings in In re Dinkins, 327 B.R. 918 (Bankr.E.D.Wis.2005), and In re Ecker, 400 B.R. 669 (Bankr.E.D.Wis.2009), wherein no wrongful intent was deemed necessary for a finding of nondischarge-ability when the defendant has violated the state theft by contractor statute. Funds received by the debtor from the owners of property which the plaintiff improved constituted trust funds in the hands of the debtor and the latter was responsible for maintaining such funds in trust for the plaintiff pursuant to section 779.02(5), Wis. Stats. The debtor breached his fiduciary obligations, the state court entered a money judgment against him, and the resulting debts are nondischargeable under 11 U.S.C. § 523(a)(4).
The defendant did not file a response to the plaintiffs brief. In his answer, he denied the obligation was nondischargeable.
DISCUSSION
Summary judgment is required “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). To determine if there is a genuine issue of material fact, all facts are construed in the light most favorable to the non-moving party. Heft v. Moore, 351 F.3d 278, 282 (7th Cir.2003). Additionally, all reasonable inferences are drawn in favor of that party. Id. However, the non-movant must set forth “specific facts showing that there is a genuine issue for trial” which requires more than “just speculation or conclusory statements.” Id. at 283 (citations omitted).
Section 523(a)(4) of the Bankruptcy Code excepts from discharge any debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.” The elements required to establish a nondischargeable debt for defalcation under this section are: (1) the existence of a trust; (2) the debtor is a fiduciary of that trust; and (3) fraud or defalcation by the debtor while acting as a fiduciary of the trust. In re Ecker, 400 B.R. at 671 (citations omitted). The bankruptcy court must look to state law to determine whether the requisite trust relationship exists. Id.
The “theft by contractor” provisions of sections 779.02(5) and 779.16, Wis. Stats., create a trust fund for sums paid by a property owner to a general contractor for the benefit of subcontractors and material suppliers. Kraemer Bros., Inc. v. Pulaski State Bank, 138 Wis.2d 395, 399-400, 406 N.W.2d 379, 381 (1987). Wisconsin’s theft by contractor statute establishes the type of express statutory trust contemplated by section 523(a)(4) of the Bankruptcy Code. See Matter of Thomas, 729 F.2d 502 (7th Cir.1984) (applying Wis. Stat. § 779.16, theft by contractor statute for public improvements, which provides the same trust fund requirement for general contractors for private improvements).
Section 779.02(5) provides, in relevant part:
Theft by Contractors. [A]ll moneys paid to any prime contractor or subcontractor by any owner for improvements, constitute a trust fund only in the hands of the prime contractor or subcontractor to the amount of all claims due or to become due or owing from the prime contractor or subcontractor for labor, *396services, materials, plans, and specifications used for the improvements, until all the claims have been paid.... The use of any such moneys by any prime contractor or subcontractor for any other purpose until all claims ... have been paid in full or proportionally in cases of a deficiency, is theft by the prime contractor or subcontractor of moneys so misappropriated and is punishable under s. 943.20.
Wis. Stat. § 779.02(5).
The bankruptcy courts in Wisconsin have developed different treatments for the third element of section 523(a)(4), whether the debtor committed fraud or defalcation while acting as a fiduciary of the trust. This Court has traditionally applied a per se approach to violations of the state theft by contractor statute, without regard to any precise lack of care exercised by the debtor. See In re Dinkins, 327 B.R. at 923 (holding “[n]o wrongful intent is required for a finding of non-dischargeability. It is only necessary for the plaintiff to prove that funds received from the owner should have been paid to a beneficiary of the statutory trust, and [that] the debtor failed to do so.”); In re Ecker, 400 B.R. at 673 (same). Likewise, the Seventh Circuit in Matter of Thomas, 729 F.2d 502, 505-06 (7th Cir.1984), interpreting a similar statute relating to public works,1 held that the general contractor satisfied its burden of establishing nondis-chargeability by showing the it paid the debtor subcontractors $17,894.54 to complete the work and that “the defalcation by defendants occurred when they used this trust fund for their own purposes.” In that case, the defendants’ “own purposes” included their home mortgages and other unrelated business debts. While it is possible that the other business debts were innocently paid, the case was remanded to determine only if any of the payments were applied to the plaintiffs project. Apparently, no other proof or evidence of wrongful conduct was necessary.
Judge Martin has disagreed with the per se approach and concluded “that something akin to ‘reckless’ may be the appropriate standard,” and in his case, found that “more than mere negligence” was the correct standard. In re Koch, 197 B.R. 654, 658 (Bankr.W.D.Wis.1996) (applying standard for defalcation set by Meyer v. Rigdon, 36 F.3d 1375, 1382-85 (7th Cir.1994)). Judge Pepper agreed with his reasoning in Ganther Constr., Inc. v. Ward (In re Ward), 417 B.R. 582, 592 (Bankr. E.D.Wis.2009), and Levine v. Ward (In re Ward), 425 B.R. 507, 526 (Bankr.E.D.Wis. 2010).
Judge Utschig was faced with the issue when the debtor argued he was merely a negligent member of the prime contractor limited liability company that failed to pay a supplier, and he exercised no control over the company’s finances or checking account and was not personally involved in *397any misappropriation of trust funds. In re Rieck, 439 B.R. 698 (Bankr.W.D.Wis.2010). The court determined material facts in dispute regarding whether or not the debt- or knowingly or recklessly breached his fiduciary duty, and this precluded summary judgment. Notably, the court stated, “[I]f the defendant was responsible for the company’s accounts, was aware of the trust fund requirements, or was more than simply an innocent bystander ‘peripherally involved’ in what happened to the plaintiffs’ funds, the plaintiffs may be able to demonstrate more than mere negligence on his part.” Id. at 703. The Rieck court thus applied a relatively low culpability standard while recognizing that innocent or unintentional defalcations may be discharged by a corporate officer.
Judge Kelley recently explored the degree of fault necessary to constitute defalcation in In re Mueller, 10-23917, 2011 WL 2360122 (Bankr.E.D.Wis. June 8, 2011). She noted that courts have progressed from earlier strict interpretations of defalcation that included innocent mistakes to more recently requiring a higher threshold of wrongful conduct. In light of the case law, Judge Kelley concluded that
[A] creditor seeking to succeed on a claim of defalcation under section 523(a)(4) must establish something more than mere negligence: the creditor must set forth facts establishing a willful, knowing, or reckless breach of duty. Knowledge of the theft by contractor law on its own does not constitute proof of defalcation. The court should consider whether other factors exist, such as whether the debtor acted in his own self-interest or merely showed what in hindsight amounted to poor judgment.
Id. at *3.
After the debtor in this case defaulted on the parties’ agreed payment schedule, the originally-stipulated award of $6,019.94 was trebled to $16,221.98, plus any future disbursements, costs, and attorney’s fees which may be incurred during collection. As defined in the Bankruptcy Code, “‘debt’ means liability on a claim.” 11 U.S.C. § 101(12). The plaintiffs judgment unarguably is a claim in the bankruptcy case; it is a final and unappealed judgment. Since the full amount of a judgment is a valid claim, the $16,221.98 award cannot be modified, and the only issue before this Court is whether it is nondis-chargeable. See In re Back Bay Restorations, Inc., 118 B.R. 166, 169-70 (Bankr. D.Mass.1990) (bankruptcy courts bound by prior judgments of amount of resulting damages).
It is well established that collateral estoppel or issue preclusion applies in bankruptcy proceedings. Grogan v. Garner, 498 U.S. 279, 285, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). As a matter of full faith and credit a federal court must apply the forum state’s law of issue preclusion when it determines the preclusive effect of a state court judgment. 28 U.S.C. § 1738; Stephan v. Rocky Mountain Chocolate Factory, Inc., 136 F.3d 1134, 1136 (7th Cir.1998). Additionally, the forum state’s law of issue preclusion applies in determining the dischargeability of debt. Bukowski v. Patel, 266 B.R. 838, 842 (E.D.Wis. 2001) (citing Matter of Bulic, 997 F.2d 299, 304 n. 6 (7th Cir.1993)). Accordingly, whether issue preclusion applies must be determined according to Wisconsin law.
Under Wisconsin law issue preclusion is a doctrine designed to limit relit-igation of issues that were contested in a previous action between the same or different parties. Mrozek v. Intra Fin. Corp., 2005 WI 73, ¶ 17, 281 Wis.2d 448, 699 N.W.2d 54; Michelle T. by Sumpter v. Crozier, 173 Wis.2d 681, 687, 495 N.W.2d 327, 329 (1993) (citing Lawlor v. Nat’l Screen Serv. Corp., 349 U.S. 322, 75 S.Ct. *398865, 99 L.Ed. 1122 (1955)). Accordingly, when an issue is actually litigated and determined by a valid final judgment and the determination is essential to the judgment, it is conclusive in a subsequent action whether on the same or a different claim. Landess v. Schmidt, 115 Wis.2d 186, 197, 340 N.W.2d 213, 219 (Ct.App. 1983) (citing Restatement (Second) of Judgments § 27 (1982)).
Thus, a threshold prerequisite for application of the doctrine is that, in order to be precluded from “relitigating” an issue, a party must have “actually litigated” it previously. By contrast, a determination is not conclusive “as to issues which might have been but were not litigated and determined in the prior action.” City of Sheboygan v. Nytsch, 2006 WI App 191, ¶ 12, 296 Wis.2d 73, 722 N.W.2d 626 (citing Restatement (Second) of Judgments at § 27 cmt. e). As explained in Nytsch:
An issue is not actually litigated if the defendant might have interposed it as an affirmative defense but failed to do so; nor is it actually litigated if it is raised by a material allegation of a party’s pleading but is admitted (explicitly or by virtue of a failure to deny) in a responsive pleading; nor is it actually litigated if it is raised in an allegation by one party and is admitted by the other before evidence on the issue is adduced at trial; nor is it actually litigated if it is the subject of a stipulation between the parties.
Id. (quoting Restatement (Second) of Judgments at § 27 cmt. e; emphasis added).
Since it appears that Wisconsin courts would not treat the admission in the parties’ stipulation that the plaintiff could obtain a judgment “for treble the amount of damages caused by Defendant’s theft by contract” as having actually litigated the debtor’s criminal intent to defraud,2 this Court will not apply the doctrine of issue preclusion to the debtor’s intent. Cf. Klingman v. Levinson, 831 F.2d 1292, 1296 n. 3 (7th Cir.1987) (noting “a debtor may stipulate to the underlying facts that the bankruptcy court must examine to determine whether a debt is dis-chargeable”). In this case, the defendant entered into a stipulation in the state case that the damages sprang from the “Defendant’s theft by contractor,” thus implicating the statute and its corresponding fiduciary duty and breach thereof, but it does not admit any wrongful intent, recklessness, mistake, or negligence.
The issue in this case boils down to whether damages resulting from a violation of the Wisconsin theft by contractor statute, which establishes liability for nonpayment from the statutory trust fund for any reason, is sufficient for a finding of nondischargeability under 11 U.S.C. § 523(a)(4). Under Wisconsin law, the trust fund is established by statute, and liability is established solely by nonpayment. See Kraemer Bros., 138 Wis.2d at 400-02, 406 N.W.2d 379 (liability established when funds could be traced to the owner; no other standard of wrongdoing applied). If violation of the statute constitutes defalcation, issue preclusion would apply, and the matter can be decided on summary judgment. If more than mere negligence would be required to constitute *399defalcation, as other Wisconsin bankruptcy cases have opined, a trial is necessary to more fully develop the defendant’s culpability.
For the most part, Wisconsin bankruptcy courts that have held defalcation requires more than mere negligence, relying on the standards established by the Seventh Circuit in Meyer v. Rigdon, 36 F.3d 1375 (7th Cir.1994). However, that case was decided under 11 U.S.C. § 523(a)(ll)3, not (a)(4). The case goes into considerable detail in the legislative history of subsection (a)(ll), and Congress’ intention in enacting this subsection, especially since the actions addressed would already be excepted from discharge under subsection (a)(4). The court concluded that subsection (a)(ll) was narrower than (a)(4), and Congress intended to negate the application of collateral estoppel (issue preclusion) when defalcation was with respect to a depository institution, even when the matter is determined by default and not litigated. Id. at 1379. The court explained: “If the debt results from a final judgment arising from the debtor’s fraud or ‘defalcation’ while acting in fiduciary capacity of a depository institution, the debt is per se nondischargeable in bankruptcy. No additional evidence need or may be submitted to the bankruptcy court — the debtor is estopped from challenging the nondis-chargeability of his debt.” Id. at 1381-82. The court then stated that “The existence of a fiduciary relationship is a question of federal law under section 523(a)(ll)” and went on to review federal banking definitions to determine that the defendant was subject to fiduciary duties. Id. at 1382. To determine if the former bank president debtor breached these duties, the court discussed the split among circuits as to whether something more than negligence or inadvertence would be required for non-dischargeability under subsection (a)(ll). The court decided that it did, id. at 1384-85, and then analyzed the underlying judgment to see if wrongful intent or recklessness was pled in the complaint. It was, so the court determined the debt was per se not subject to discharge. Faithful to the Congressional intent, the underlying default judgment was not subject to the application of issue preclusion and bankruptcy court review.
Nowhere in the opinion did the court state it was changing the developed law with respect to theft by contractor cases under 11 U.S.C. § 523(a)(4). Due to the paucity of cases under subsection (a)(ll), most of the cases cited were decided under subsection (a)(4). However, the court repeatedly limited its holding to cases under (a)(ll).4 There may be a good *400reason to do so, since the court held issue preclusion would not apply to breaches involving depository institutions. Issue preclusion would still apply to default judgments, stipulations, and consent decrees under subsection 528(a)(4). Id. at 1379.
When an adversary proceeding alleging nondischargeability under 11 U.S.C. § 523(a)(4) is brought, the law regarding creation of fiduciary relationships often arises under state law, and state law would be applied to determine if there was a breach. Here, the applicable law creates a trust and states that once the owner pays for work, the “use of any such moneys by any prime contractor or subcontractor for any other purpose ... is theft by the prime contractor or subcontractor of moneys so misappropriated.” Wis. Stat. § 779.02(5). Presumably, use of the words “theft” and “misapproriated” was not an accident of the Wisconsin legislature. Theft is synonymous with “larceny,” which is also not subject to discharge under subsection 523(a)(4).5 Wisconsin case law does not require any showing other than receipt of moneys from the owner by the prime (or superior) contractor and failure to pay over those traceable funds to the appropriate supplier of goods and services who contributed to the project. See Kraemer Bros., 138 Wis.2d 395, 406 N.W.2d 379; W.H. Major & Sons, Inc. v. Krueger, 124 Wis.2d 284, 369 N.W.2d 400 (Ct.App.1985) In essence, wrongdoing is imputed by statute by characterizing the failure as “theft,” and by referring to the funds not transmitted to the supplier as “misapproriated.” The Seventh Circuit, applying an analogous Wisconsin statute that also characterized failure to pay subcontractors as “theft,” remanded a case only for a determination of payments, not for a determination of knowledge or intent, as would be consistent with Wisconsin law. See Thomas, 729 F.2d 502. Meyer v. Rig-don did not establish a federal standard for defalcation for proceedings under 11 U.S.C. § 523(a)(4), nor did it reverse Thomas with respect to’Wisconsin theft by contractor cases under subsection 523(a)(4).
Here, the underlying judgment arose under Wisconsin’s theft by contractor statute, and while the stipulation did not admit intentional or wrongful conduct, Paragraph 2 admitted that the damages provided for were “caused by Defendant’s theft by contractor.” Consequently, the defendant has *401admitted violation of the statute. See Klingman v. Levinson, 114 F.3d at 627 (holding stipulation waived defense of issue preclusion). The provisions of the statute meet all the elements for nondischargeability under 11 U.S.C. § 523(a)(4), the damages have been determined, and the defendant’s debt to the plaintiff is not subject to discharge.
The plaintiffs motion for summary judgment is granted. A separate order consistent with this opinion will be entered.
. Wis. Stat. § 779.16, Theft by Contractors, provides, in relevant part, the following:
All moneys, bonds or warrants paid or to become due to any prime contractor or subcontractor for public improvements are a trust fund only in the hands of the prime contractor or subcontractor to the amount of all claims due or to become due or owing from the prime contractor or subcontractor for labor, services, materials, plans, and specifications performed, furnished, or procured for the improvements, until all the claims have been paid, and shall not be a trust fund in the hands of any other person. The use of any such moneys by any prime contractor or subcontractor for any other purpose until all claims, except those which are the subject of a bona fide dispute and then only to the extent of the amount actually in dispute, have been paid in full or proportionally in cases of a deficiency, is theft by the prime contractor or subcontractor of moneys so misappropriated and is punishable under s. 943.20.
. Treble damages are available under section 895.446, Wis. Stat., for theft by contractor, provided the elements of both the criminal and civil statutes, sections 779.02(5) and 943.20, Wis. Stats., are proven by the civil preponderance burden of proof. See Tri-Tech Corp. of America v. Americomp Servs., Inc., 2002 WI 88 ¶ 24, 254 Wis.2d 418, 646 N.W.2d 822.
. Section 523(a)(l 1) provides:
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 — ...
(11) provided in any final judgment, un-reviewable order, or consent order or decree entered in any court of the United States or of any State, issued by a Federal depository institutions regulatory agency, or contained in any settlement agreement entered into by the debtor, arising from any act of fraud or defalcation while acting in a fiduciary capacity committed with respect to any depository institution or insured credit union[.]
11 U.S.C. § 523(a)(ll).
. "[M]ere negligent breach of a fiduciary duty is not a 'defalcation' under section 523(a)(l 1).” Meyer, 36 F.3d at 1385. "[W]e cannot say that Congress intended for a debt arising from a mere negligent breach of fiduciary duty to be excepted from discharge under section 523(a)(ll).” Id. “Since a knowing breach of fiduciary duty is more culpable than a mere negligent breach of duty, we conclude that the FDIC's complaint does allege a 'defalcation' as that term is used in section 523(a)(l 1).” Id.
. Black’s Law Dictionary (9th ed. 2009) provides the following definition:
theft, n. (bef. 12c) 1. The felonious taking and removing of another's personal property with the intent of depriving the true owner of it; larceny. 2. Broadly, any act or instance of stealing, including larceny, burglary, embezzlement, and false pretenses. Many modern penal codes have consolidated such property offenses under the name "theft.” — Also termed (in Latin) crimen fur-ti. See LARCENY. Cf. ROBBERY. "[T]he distinctions between larceny, embezzlement and false pretenses serve no useful purpose in the criminal law but are useless handicaps from the standpoint of the administration of criminal justice. One solution has been to combine all three in one section of the code under the name of 'larceny.' This has one disadvantage, however, because it frequently becomes necessary to add a modifier to make clear whether the reference is to common-law larceny or to statutory larceny. To avoid this difficulty some states have employed another word to designate a statutory offense made up of a combination of larceny, embezzlement, and false pretenses. And the word used for this purpose is 'theft.' 'Theft' is not the name of any common-law offense. At times it has been employed as a synonym of 'larceny,' but for the most part has been regarded as broader in its general scope. Under such a statute it is not necessary for the indictment charging theft to specify whether the offense is larceny, embezzlement or false pretenses.” Rollin M. Perkins & Ronald N. Boyce, Criminal Law 389-90 (3d ed. 1982). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494415/ | MEMORANDUM OPINION AND ORDER ON PLAINTIFF’S MOTION FOR PARTIAL SUMMARY JUDGMENT AND DEFENDANT’S MOTION FOR PARTIAL SUMMARY JUDGMENT
SIDNEY B. BROOKS, Bankruptcy Judge.
THIS MATTER comes before the Court for consideration of:
A. The Motion for Partial Summary Judgment and Memorandum in Support Thereof filed by the plaintiff, David S. Wadsworth, Chapter 7 Trustee (“Plaintiff’ or “Trustee”) on April 29, 2011,1 and the Response and Memorandum in Opposition to Plaintiffs Motion For Partial Summary Judgment filed by the defendant, Word of Life Christian Center (“Defendant”) on May 20, 2011.2
B. The Defendant’s Motion For Partial Summary Judgment, filed on April 29, 2011,3 and Plaintiffs Response To Defendant’s Motion For Partial Summary Judgment filed on May 20, 2011.4
The Court having reviewed the pending pleadings and the within case file, makes the following findings of fact, conclusions of law and enters the following Order.
*684I. Jurisdiction
The Court has subject matter jurisdiction over this adversary proceeding under 28 U.S.C. § 1334(b) and (e). This proceeding is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (E), and (H).
II. Background
There are no genuine issues of material fact. The Debtors, Lisa and Scott McGough (“Debtors”), filed for Chapter 7 bankruptcy relief on December 31, 2009. In 2008, the Debtors’ gross earned income was $6,800 and they received $22,036 in social security benefits.5 Throughout 2008, the Debtors made 25 donations to the Defendant, Word of Life Christian Center, totaling $3,478.6
In 2009, the Debtors’ gross earned income was $7,487 and they received $23,164 in social security benefits. Throughout 2009, the Debtors made 7 donations totaling $1,280 to Defendant.7
The Trustee filed a motion for summary judgment pursuant to Fed.R.Civ.P. 56 seeking to avoid the charitable contributions under 11 U.S.C. § 548. The Defendant’s motion for summary judgment claims § 548(a)(2), amended by the Religious Liberty and Charitable Donation Protection Act of 1997 (“RLCDPA”), provides a defense against the Trustee’s avoidance power:
(2) A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case in which—
(A) the amount of that contribution does not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the contribution is made.
III. Summary Judgment Standard
Federal Rule of Civil Procedure 56 provides that the court “shall grant summary judgment if the movant shows 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.”8 A party asserting that a fact cannot be genuinely disputed must support that assertion by “citing to particular parts of the record, including depositions, documents, ... affidavits or declarations, stipulations ..., admissions, interrogatory answer, or other materials.”9 When applying this standard, the court must examine the factual record and reasonable inferences therefrom in the light most favorable to the party opposing summary judgment.10 The movant bears the initial burden of establishing that summary judgment is appropriate.11
IV. Issues
A. For purposes of § 548(a)(2), are social security payments included in gross annual income (“GAI”)?
*685B. For purposes of § 548(a)(2), is the 15% threshold applicable to transfers individually or transfers made in the annual aggregate?
C. If the transfers exceed 15%, is the entire transferred amount voidable or just the transferred amount that exceeds 15%?
V. Discussion
A. GAI
The Court must first look to the plain language of the statute to interpret whether Congress’s intent was clear.12 Here, the plain language of § 548(a)(2) is ambiguous as to whether GAI should include social security benefits. Furthermore, the Bankruptcy Code does not define the term “gross annual income,” and there is no reported case defining “gross annual income” within the meaning of § 548(a)(2).13 However, the Bankruptcy Code does exclude social security benefits when calculating current monthly income (“CMI”).14 Also, the Internal Revenue Code (“IRC”) addresses whether social security benefits are included in GAI.15 The IRC only includes social security benefits in GAI if the debtor’s modified adjusted gross income for the taxable year plus one-half of social security benefits received during the taxable year exceeds the base amount. In Wagner, the Seventh Circuit of Appeals adopted the IRC’s definition of GAI.16 In addition to the Seventh Circuit of Appeals, the Bankruptcy Court in the Central District of California has adopted the IRC’s definition of GAI.17
Conversely, Defendant argues that social security benefits should be included in GAI. In support of their contention the defendant cites In re Koenegstein. In Koenegstein, the court held that social security benefits may be included if a strict adherence to the IRC would create a result “absurdly irreconcilable” with the Bankruptcy Code.18 However, Koenegstein is not directly applicable to the case at hand as it involved the definition of gross income in regard to Chapter 12 farmers. Also, the defendant has not shown how applying the IRC would create a result “absurdly irreconcilable” with the Bankruptcy Code. Defendant also relies on In re Olguin, which held that social security benefits are included in a debtor’s CMI if social security funds were redirected to the debtor from a third party.19 Olguin does not support the defendant’s position for two reasons; (1) Olguin involved CMI not GAI, and (2) Olguin’s holding does not support the defendant’s position; the Debtors are not a third party redirecting funds to their children.
When comparing the IRC’s GAI base standard of $32,000 to the Debtors’ financial situation it is clear that the Debtors’ social security payments should not count as gross income.20_
Modified Halved Social
Year GAI_Security_Total
2008 $6.800 $11,018_$17,818
2009 $7,487 $11,582$19.069
*686B. Transfers
Universal Church v. Geltzer held that transfers should be examined on an aggregate basis.21 The court found support for its holding in § 102(7), and the House Report on the Religious Liberty and Charitable Donation Protection Act of 1997 (RLCDPA). Section 102(7) provides, “the singular includes the plural.”22 Meaning, the singular form of the word “transfer” used in § 548(a)(2) should actually be read in the plural as “transfers.” The RLCDPA House Report states that the safe harbor “is intended to apply to transfers that a debtor makes on an aggregate basis during the one-year [now two-year] reachback period preceding the filing of the debtor’s bankruptcy case.”23
Alternatively, Defendant relies solely on the Zohdi opinion to argue that the 15% cap only applies to each individual transfer.24 The problem with reliance on this case is that the Zohdi court was not ruling on this issue. The text in support of the defendant’s position is merely dicta.
C. Voidable Amount
There is only one court to publish an opinion directly addressing this issue. In Zohdi, the court held that a plain reading of the statute requires the entire transfer amount of the charitable donation to be voided.25 The Zohdi court reasoned that Congress would have included more precise language if it had intended for just the amount over the 15% to be voidable.26
On the other hand, the RLCDPA was created to reverse the trend among the courts allowing avoidance actions to recover funds contributed by Debtors to churches.27 The House Report states, “the safe harbor protects annual aggregate contributions wp to 15 percent of the debtor’s gross annual income.”28 The term “up to” indicates an intent by Congress to bifurcate the avoidance amount beyond the 15% threshold.
Zohdi is distinguishable from the current case for several reasons. First, Zoh-di involved a large single transaction which is unlike the case at hand. Second, the Zohdi Court interpreted § 548(a)(2) as not requiring an aggregate analysis. Meaning, a debtor could deplete their entire estate by simply donating several times but below the 15% threshold. This result is not what Congress could have intended.
It is equally as doubtful that Congress would protect a debtor’s right to donate 15% of their GAI to a charitable organization, but allow a trustee to avoid all donations if one cent over the 15% threshold is donated. From the church’s perspective, voiding entire transfers above 15% of' a debtor’s GAI would place an undue burden upon churches. If the entire donation amount is voided churches would be obligated to investigate a donor’s financial background in order to use funds within two years of receipt. The voidable amount if bifurcated:
*687Donation Voidable
Year Amount 15% Cap_Amount
2008 $3,478 $1,020_$2,458
2009 $1,280 $1,123.05_$156.95
Total $4,758_$2,614,95
VI. Conclusions of Law
For purposes of § 548(a)(2), social security payments are not included in GAI. Also for purposes of § (548)(a)(2)(A), the 15% threshold applies to transfers made in the annual aggregate. If the transfers exceed 15%, then only the transferred amount that exceeds 15% is avoided. Here, the Debtors’ contributions exceeded their 15% GAI in both 2008 and 2009. The Trustee is entitled to an avoidance of $2,614.95.
VII. Order
Based on the foregoing,
IT IS THEREFORE ORDERED that the Plaintiffs Motion For Partial Summary Judgment is:
A. GRANTED to the extent that it seeks summary judgment on the avoidance of Debtors’ charitable contributions that exceed 15% of Debtors’ GAI totaling $2,614.95 pursuant to 11 U.S.C. § 548. It is
B. DENIED to the extent that it seeks summary judgment in the avoidance of Debtors’ charitable contributions that do not exceed 15% of Debtors’ GAI totaling $2,143.05 pursuant to 11 U.S.C. § 548.
IT IS FURTHER ORDERED that Defendant’s Motion For Partial Summary Judgment is:
A. GRANTED to the extent that it seeks summary judgment to retain charitable contributions that do not exceed 15% of Debtors’ GAI totaling $2,143.05.
B. DENIED to the extent that it seeks summary judgment to retain charitable contributions that exceed 15% of Debtors’ GAI totaling $2,614.95.
IT IS FURTHER ORDERED that the trial scheduled for September 15, 2011 at 9:00 a.m. in Courtroom E is VACATED.
. Docket # 14.
. Docket # 19.
. Docket # 15.
. Docket #18.
. Statement of Financial Affairs (filed 12/31/09).
. Defendant’s Motion for Partial Summary Judgment, Exhibit 2.
. Id. at Exhibit 4.
. FED. R. CIV. P. 56(a); FED. R. BANKR. P. 7056.
. FED. R. CIV. P. 56(c)(1)(A).
. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp. 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Wright v. Southwestern Bell Tel. Co., 925 F.2d 1288 (10th Cir.1991).
. Whitesel v. Sengenberger, 222 F.3d 861, 867 (10th Cir.2000); Anderson v.Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
. Am. Tobacco Co. v. Patterson, 456 U.S. 63, 68, 102 S.Ct. 1534, 71 L.Ed.2d 748 (1982).
. In re Lewis, 401 B.R. 431, 438 (Bankr. C.D.Cal.2009).
. 11 U.S.C. § 101(10)(a).
. 26 U.S.C. § 86.
. In re Wagner, 808 F.2d 542, 549 (7th Cir.1986).
. In re Lewis, at 441.
. 130 B.R. 281, 284 (Bankr.S.D.Ill.1991).
. 429 B.R. 346, 349-50 (Bankr.D.Colo. 2010).
.26 U.S.C. § 86(c)(1)(b).
. Universal Church v. Geltzer, 463 F.3d 218 (2d Cir.2006).
. 11 U.S.C. § 102(7).
. Religious Liberty and Charitable Donation Protection Act of 1997, H.R.Rep. No. 105-556, at 9 (1998).
. In re Zohdi 234 B.R. 371, 377 (Bankr. M.D.La.1999).
. Id. at 373.
. Id. at 375.
. Norton Bankruptcy Law and Practice, p. 891, (West 2010).
. Pub. L. 105-183, June 19, 1998. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494417/ | OPINION
ARTHUR I. HARRIS, Bankruptcy Judge.
After reviewing the record and the parties’ briefs, the Panel determines that the bankruptcy court did not err in granting summary judgment against the trustee and in favor of BAC Home Loans Servicing, LP. We therefore affirm for the reasons stated in the bankruptcy court’s well-written opinion entered on March 23, 2011, Rhiel v. BAC Home Loans Servicing, LP, (In re Foster), 448 B.R. 914 (Bankr.S.D.Ohio 2011), and for the reasons stated in the Bankruptcy Appellate Panel’s opinion entered on June 24, 2011, Rogan v. Fifth Third Mortgage Co., (In re Rowe), 452 B.R. 591 (6th Cir. BAP 2011) (analyzing a similar issue under Kentucky law). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494419/ | MEMORANDUM OPINION ON DEBTOR’S MOTION TO DISMISS FOR FAILURE TO STATE A CLAIM UPON WHICH RELIEF CAN BE GRANTED
JACK B. SCHMETTERER, Bankruptcy Judge.
BACKGROUND
Richard Rudolph McGuire (“Debtor”) filed for Chapter 7 bankruptcy protection on July 8, 2010. Upon filing, Eugene Crane was appointed as Chapter 7 Trustee (“Plaintiff’). On October 22, 2010, Plaintiff filed an adversary proceeding, Crane v. McGuire et al, 10 A 02167 seeking to avoid a fraudulent transfer of real property under 11 U.S.C. § 548. The challenged transfer was of real property worth $572,000 deeded to Debtor’s three children in return for a payment of only $5,023. On March 14, 2011, judgment was entered in that proceeding avoiding the transfer. (Docket No. 30).
This new Adversary was filed on May 9, 2011 seeking to prevent Debtor’s discharge under 11 U.S.C. §§ 727(a)(2)(A) and 727(a)(4)(A) & (D).Debtor filed his pending Motion to Dismiss for Failure to State a Claim Upon Which Relief Can be Granted under Fed. R. Civ. P. 12(b)(6), made applicable in bankruptcy by Fed. R. Bankr.P. Rule 7012(b). Debtor’s Motion, although filed after Plaintiff filed his Amended Complaint, states no separate basis for dismissal of the Amended Complaint under § 727(a)(4)(A) & (D). In his prayer for relief, Debtor asks for dismissal of “the adversary complaint in its entirety with prejudice, or in the alternative partially dismiss the adversary with prejudice.” Debtor claims that because of a ruling made in the earlier Adversary No. 10 A 02167, Plaintiff is collaterally estopped in part. That argument raises the issue of whether issue preclusion blocks Plaintiffs objection to discharge under 11 U.S.C. § 727(a)(2)(A).
Debtor’s argument is that there was a specific finding on the issue of intent in the prior Adversary and that such finding is binding as to the issue of intent in this Adversary.
JURISDICTION
Jurisdiction lies under 28 U.S.C. § 1334, and is referred here pursuant to Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(I).
DISCUSSION
1. Prior Litigation
Debtor’s Motion argues that Plaintiff is collaterally estopped from objecting to his discharge under § 727(a)(2)(A) because Plaintiff litigated and lost on the issue of Debtor’s actual fraud in the previous Adversary before this court.
Under 11 U.S.C. § 548(a), the bankruptcy trustee can seek to avoid transfers made by the debtor within one year before the date of filing of the bankruptcy petition on the ground of actual fraud or on the ground of constructive fraud. Subsection (a)(1)(A) of § 548 sets out the ground of actual fraud and subsection (a)(1)(B) sets out the grounds for constructive fraud. Lovell v. Mixon, 719 F.2d 1373, 1376 (8th Cir.1983).
*350Section 727(a)(2)(A) of the Bankruptcy Code prevents a discharge where “the debtor, -with intent to hinder, delay, or defraud a creditor ... has transferred, removed, destroyed, mutilated, or concealed ... property of the debtor, within one year before the date of filing of the petition.” Denial of discharge under § 727(a)(2)(A) can only be made upon a finding of actual intent to hinder, delay, or defraud. Lovell, 719 F.2d at 1376.
The Findings of Fact and Conclusions of Law accompanying the Judgment Order of March 14, 2011 in the prior Adversary No. 10 A 02167 found that Plaintiff “did not establish that the transfer should be avoided pursuant to 11 U.S.C. § 548(a)(1)(A).” (Docket No. 32). That provision permits a trustee to avoid any transfer if the debtor “made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity” to whom the debt was owed. 11 U.S.C. § 548(a)(1)(A). That burden was not met in the prior Adversary. Instead, Plaintiff met his burden of proof in that Adversary under 11 U.S.C. § 548(a)(l)(B)(i) and (ii)(I) of the Code by showing that the transfer of real property owned by Debtor to his three children was made for less than a reasonably equivalent value and Debtor was insolvent or rendered insolvent as a result of such transfer. Thus, the transfer was avoided in that proceeding on grounds of constructive fraud.
2. Collateral Estoppel Does Not Prevent Plaintiff from Objecting to Discharge
Collateral estoppel prevents re-litigation of an issue where: (1) the issue sought to be precluded was the same as that involved in the prior action; (2) the issue was actually litigated; (3) determination of the issue was essential to the final judgment; and (4) the party against whom estoppel is invoked was represented in the prior action. Klingman v. Levinson, 831 F.2d 1292, 1295 (7th Cir.1987). There is no dispute that Plaintiff was represented in the prior action. Similarly, the issue of Debtor’s intent in transferring the property to his children was litigated in the prior Adversary. Nevertheless, Debtor’s Motion to Dismiss fails to show that collateral estoppel applies in this case because other elements are not shown.
First, in its Amended Complaint in this case, Plaintiff argues that Debtor’s failure to list the real property involved in the prior Adversary on his schedules constitutes fraud in fact because such failure is an act of concealment intended to defraud a creditor. According to Plaintiff, “[i]nten-tional omission of a substantial asset and debt from the Debtor’s schedules constitutes fraud in fact.” Amended Compl. ¶ 7. Plaintiff does not plead in this Adversary that Debtor’s transfer of the real property in question was fraudulent. Rather, Plaintiff pleads that failure to schedule the property was fraudulent. The Plaintiffs Amended Complaint also alleges fraud in several other dealings by Debtor, including the transfer of real property that was the subject of the prior Adversary. But, Plaintiff specifically alleges that Debtor failed to schedule his interest in other real property and failed to schedule his obligations under a loan agreement with Chase Bank. Amended Compl. ¶4. Plaintiff asserts that these failings were fraudulent attempts to conceal property from creditors — acts that prevent entry of discharge under § 727(a)(2)(A).
Second, although Plaintiffs Amended Complaint herein does mention the issue regarding the fraudulent conveyance to Debtor’s children, in the previous, adversary Plaintiff established that the conveyance was constructively fraudulent under § 548(a)(l)(B)(i) and (ii)(I). Findings *351of Fact and Conclusions of Law ¶ 3 (Docket No. 32). Constructive fraud is not a basis to deny a discharge in bankruptcy under § 727(a)(2)(A). Lovell, 719 F.2d at 1376-77 (construing former § 548(a)(2), now § 548(a)(l)(B)(i)-(iii)). Rather, Plaintiff must show actual fraud to prevail under § 727(a)(2)(A). Id. at 1376. As Judgment in the previous Adversary rested on constructive fraud, there was no need in that case to determine whether Debtor acted with actual fraudulent intent. Therefore, the determination that actual fraud was lacking was not “essential” to the final judgment in that case.
Accordingly, collateral estoppel does not prevent Plaintiffs from litigating in this Adversary on the basis of actual fraud under § 727(a)(2)(A).
Conclusion
Debtor’s Motion to Dismiss will therefore be denied by separate order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494420/ | MEMORANDUM DECISION ON UNITED STATES TRUSTEE’S MOTION FOR CORRECTION OF CLERICAL ERROR UNDER RULE 9024 OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE
MARGARET DEE McGARITY, Bankruptcy Judge.
The United States Trustee filed a motion for correction of a clerical error in the order denying the debtor’s discharge in the above-titled adversary proceeding. The debtor opposed the motion on the ground the error was not correctable under Fed.R.Civ.P. 60(a). Both parties submitted briefs in support of their respective positions.
This is a core proceeding under 28 U.S.C. § 157(b)(2), and the Court has jurisdiction under 28 U.S.C. § 1384. This decision constitutes the Court’s findings of facts and conclusions of law pursuant to Fed. R. Bankr.P. 7052. For the reasons stated below, the motion for correction is granted.
BACKGROUND
The relevant facts are not in dispute. Patricia McClellan filed a chapter 13 petition on October 16, 2005, and her plan was confirmed on March 6, 2006. Unbeknownst to the trustee and unsecured creditors (presumably the mortgage holder signed off), the debtor had sold her homestead in July 2006, while her chapter 13 case was pending. She and her husband received approximately $81,000 from the sale. Those proceeds were never turned over to the chapter 13 trustee, and within three months the debtor and her nonfiling spouse, Patrick McClellan, had spent the entire amount. The debtor subsequently converted to chapter 7 on November 2, 2006. The trustee reported no assets for distribution on March 23, 2007.
The United States Trustee filed an adversary proceeding, seeking a denial of the debtor’s discharge under 11 U.S.C. § 727(a)(2), due to her postpetition dissipation of estate assets. The debtor requested and was granted an extension of time to file an answer to the complaint. After the debtor failed to answer the complaint, the United States Trustee moved for a default judgment. The Court held a preliminary pretrial and entered the order denying the debtor’s discharge on August 13, 2007.
The McClellans then filed a joint chapter 7 petition on April 27, 2011, Case No. 11-26543-pp. Some of the debts listed on the 2011 schedules had also been listed in the 2005 case. When the issue was raised with debtor’s counsel, he informed the United States Trustee that the judgment order in the adversary proceeding denied the debtor’s discharge pursuant to 11 *373U.S.C. § 727(a)(8)1, not 11 U.S.C. § 727(a)(2), as alleged in the complaint. This adversary proceeding was reopened on July 5, 2011, to address the motion for correction.
ARGUMENTS
The United States Trustee argues the order denying the debtor’s discharge under section 727(a)(8) is correctable as a clerical error. Federal Rule of Civil Procedure 60(a), made applicable by Federal Rule of Bankruptcy Procedure 9024, provides that “[t]he court may correct a clerical mistake or a mistake arising from oversight or omission whenever one is found in a judgment, order or other part of the record. The court may do so on motion or on its own, with or without notice.” Fed. R.Civ.P. 60(a). The bankruptcy court is entitled to modify an order under Rule 60(a) if the error was mechanical in nature rather than the result of a deliberate choice and the modification reflects the intent of the bankruptcy court at the time of the hearing. 11 C. Wright & Miller, Federal Practice and Procedure § 2854 at 441 (2d ed. 1995, Supp. 2011).
The movant is not asking the Court to revisit its legal analysis, nor is it asking that the Court correct an error of substantive judgment. The error in this instance is mechanical or typographical. The Court clearly intended to deny the debtor’s discharge pursuant to section 727(a)(2): The complaint stated the basis for denial of discharge was under section 727(a)(2), the adversary proceeding cover sheet listed the cause of action as denial of discharge under section 727(a)(2), and the notice of the basis for denial pursuant to section 727(a)(2) was provided to all interested parties. Additionally, at the time she filed her 2005 case, the debtor was eligible for a chapter 7 discharge2, so section 727(a)(8) did not apply to her.
The debtor argues Fed.R.Civ.P. 60(a) cannot be used to change the judgment because the United States Trustee committed a legal error, not a clerical error, when drafting the order denying discharge. See Blue Cross & Blue Shield Ass’n v. American Express Co., 467 F.3d 634, 637 (7th Cir.2006) (Rule 60(a) allows court to correct records to show what was done, rather than change them to reflect what should have been done). Nearly four years elapsed between the entry of the order and the United States Trustee’s motion for correction. Presumably the Court signed the order as submitted because that was the relief the United States Trustee sought at that time. After the order and judgment denying discharge were entered all the parties behaved as if it were entered legitimately. Errors that affect the substantive rights of the parties are beyond the scope of Rule 60(a); the debtor’s' substantive right of obtaining a discharge of certain debts in her current case is affected by the error.
*374DISCUSSION
Federal Rule of Civil Procedure 60(a) provides the following:
(a) Corrections Based on Clerical Mistakes; Oversights and Omissions. The court may correct a clerical mistake or a mistake arising from oversight or omission whenever one is found in a judgment, order, or other part of the record. The court may do so on motion or on its own, with or without notice. But after an appeal has been docketed in the appellate court and while it is pending, such a mistake may be corrected only with the appellate court’s leave.
Fed.R.Civ.P. 60(a). Generally, a correction of clerical mistakes pursuant to a motion for relief from judgment involves a mistake mechanical in nature which is apparent on the record and which does not involve a legal decision or judgment by an attorney. Doebele v. Sprint Corp., 168 F.Supp.2d 1247, 1251 (D.Kan.2001). In other words, a court may correct what is erroneous because the thing spoken, written, or recorded is not what the court intended to speak, write, or record, but a court may not change something that was deliberately done, even though it was later discovered to be wrong. MacArthur v. San Juan County, 405 F.Supp.2d 1302, 1308 (D.Utah 2005).
The courts have emphasized the distinction between a party demonstrating a right to have had a particular matter reflected in an order, which that party seeks to have corrected, and the situation in which the particular correction sought is of a matter that was within the court’s discretion at the time. See, e.g., Wheeling Downs Race Track & Gaming Center v. Kovach, 226 F.R.D. 259 (N.D.W.Va.2004) (naming of incorrect party as prevailing party in judgment order was clerical error, and thus could be corrected where findings of fact and conclusions of law were clear as to outcome); United States v. 706.98 Acres of Land, 158 F.Supp. 272 (D.C.Ark.1958) (correction allowed where all the papers in the condemnation of land case reflected that it was located in Range 27, but the judgment reflected Range 26); In re Bestway Prods., 151 B.R. 530 (Bankr.E.D.Cal.1993) (where chapter 7 discharge named individual debtor instead of corporation of which individual was officer as discharged party, mistake was apparent because individual was not debtor and because corporation may not be discharged under chapter 7); In re Village by the Sea, Inc., 98 B.R. 93 (Bankr.S.D.Fla.1989) (court’s mistake in metes and bounds description of easement contained in exhibit to order fell within provisions of Rule 60(a) and could be corrected at any time since mistake resulted in granting relief court did not intend).
As succinctly stated by one leading treatise:
The factor which most strongly suggests that a “clerical mistake” or an “error” of oversight of the type contemplated for correction under Rule 60(a) is involved, as distinguished from the errors of a more substantial nature which are to be corrected by motion under Rules 59(e) and 60(b), is that a clear right appears to have had the judgment, order, or other part of the record reflect, under the circumstances at the time, what is now sought to be reflected therein by correction under the Rule. There is no difficulty in applying Rule 60(a) to a change sought by a party where it is apparent, either from the record itself or from what the court remembers, that he seeks merely a correction to reflect that to which he was entitled; that is, a correction which presents the court with a problem no more difficult than the ministerial task *375of reflecting in its records what should have been reflected therein.
Jean F. Rydstrom, Construction of Rule 60(a) of Federal Rides of Civil Procedure, 13 A.L.R. Fed. 794 § 5 (1972, SuppL 2010) (citations omitted).
In this case, the debtor could not have been denied a discharge under section 727(a)(8) because she had not been granted a discharge within six years of the petition date, and these grounds were never pled; yet, that is what the judgment said. It is apparent from the entirety of the records in both the debtor’s main case and adversary proceeding that the debtor’s discharge was—in fact, if not in number— denied pursuant to section 727(a)(2).
The Court is further guided in its decision by what is not considered to be a clerical error. For example, when a court has to look outside the record for the answer, it is required to conclude that no “correction” of form under Rule 60(a) is involved, but rather the change is of a substantial nature. In In re Frigitemp Corp., 781 F.2d 324 (2d Cir.1986), the appellate court determined that an omission granting prejudgment interest from a pri- or order was not a mere clerical error that could be corrected at any time under Rule 60(a). There was no clear indication in the record that when the bankruptcy court ruled on preference claims it had decided to grant prejudgment interest. Additionally, there was no provision for prejudgment interest in the court’s prejudgment orders, and even when the bankruptcy court granted the trustee’s Rule 60(a) motion, the court did not state that it had intended to make an award of prejudgment interest in any of its orders directing entry of judgment.
The debtor in this case is correct when she argues that making a change under Rule 60(a) should not adversely affect the rights of others. A good example of this principle may be found in Albion-Idaho Land Co. v. Adams, 58 F.Supp. 579 (D.C.Idaho 1945). In that case, 15 years after a judgment had been entered awarding water rights to particular parcels of land, the petitioner discovered that counsel had made a serious error in preparing the decree as to the rights of the petitioner’s predecessor in title. The petitioner’s motion to correct the judgment under Rule 60(a) was denied for several reasons, one of which was the effect the correction might have upon others: The rights of over 400 other parties who had purchased land and water over the intervening years would have been injured if the decree were corrected. In this case, failing to correct the error would adversely affect the rights of others, i.e., those creditors whose debts should not be subject to discharge in the present case because of the denial of discharge in the 2005 case. See 11 U.S.C. § 523(a)(10).
That’s not to say the debtor will not be affected by the correction. Although most clerical errors are inconsequential, as is evidently clear in this case, not all are. For purposes of relief from judgment, “[t]he defining element is not that the error was trivial, but that the parties knew that it was by pure inadvertence, rather than a mistaken exercise of judgment, that an error had crept into the judgment.” Lowe v. McGraw-Hill Cos., 361 F.3d 335, 341 (7th Cir.2004). Clearly, “[ajdvantage to a party in allowing a mistake to stand as part of a judgment or order is exactly what Rule 60(a) seeks to prevent, and efforts to avoid correction by calling the mistake a matter of substance or a substantial error, rather than one of form, will not succeed where the record itself reflects an error of form in presenting what the court decided or intended to do.” Jean F. Rydstrom, Construction of *376Rule 60(a) of Federal Rules of Civil Procedure, 13 A.L.R. Fed. 794 § 1(c) (1972, Suppl.2010).
The record in this case is clear. This Court intended to deny the debtor a discharge under section 727(a)(2) on account of her own wrongdoing, not because of a mistake in timing the filing of the petition. The fact that the order cited section 727(a)(8) instead of section 727(a)(2) is a clerical error correctable by Fed.R.Civ.P. 60(a). She cannot be allowed to exploit a keystroke mistake to gain rights the Court clearly intended that she not have. The United States Trustee’s motion for correction is thereby granted. A separate order consistent with this decision will be entered.
. At the time of the debtor's 2005 case, section 727(a)(8) provided, in relevant part:
(a) The court shall grant the debtor a discharge, unless — ...
(8) the debtor has been granted a discharge under this section ... in a case commenced within six years before the date of the filing of the petition[.]
11 U.S.C. § 727(a)(8) (2004).
. The debtor and her nonfiling spouse had filed four previous chapter 13 cases before the 2005 case: Case Nos. 98-20617, 00-26573, 01-29023, and 03-32525. Her husband also filed Case No. 08-33902, a chapter 13 case that was dismissed on June 16, 2009. After converting to chapter 7 in Case No. 98-20617, they received a discharge on June 22, 1999. Because the 2005 case was filed prior to the enactment of BAPCPA, she was eligible for a chapter 7 discharge because she filed her petition more than six years after filing the case in which she received the previous chapter 7 discharge. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494422/ | HOFFMAN, Bankruptcy Judge.
The State of New Hampshire Department of Health and Human Services (“DHHS” or the “State”)1 appeals from the bankruptcy court’s April 22, 2011 order granting the amended motion of the debtor, Robert S. McGrahan, to modify his confirmed chapter 13 plan pursuant to Bankruptcy Code § 1329.2 In the modified plan, the debtor sought to reduce the amount of DHHS’s claim for unpaid child support obligations to account for certain federal income tax refunds of the debtor seized by DHHS after plan confirmation. The bankruptcy court interpreted the modified plan, which provided for full payment of DHHS’s claim through plan payments, as prohibiting DHHS from engaging in any further intercepts of the debtor’s income tax refunds. For the reasons set forth below, we REVERSE the bankruptcy court’s decision and REMAND for entry of an order consistent with this opinion.
BACKGROUND
The debtor filed a chapter 13 petition on September 17, 2009. In his first amended chapter 13 plan (the “First Amended Plan”), he listed DHHS as a creditor holding a $13,000.00 claim for unpaid child support. As required by § 1322(a)(2), the First Amended Plan provided that DHHS’s claim would be “paid in full through the plan.” It also included the following provision:
The Internal Revenue Service [sic] is seizing Income Tax Refunds to pay Child Support Arrears. The Proof of Claim of NH DHHS Dept, of Child Services will be decreased annually to reflect the amounts seized.3
The bankruptcy court confirmed the First Amended Plan on January 22, 2010. Thereafter, the debtor through his counsel filed a priority proof of claim on DHHS’s behalf in the amount of $13,862.39.4 No objection was filed, and the bankruptcy court allowed DHHS’s claim.
After confirmation, DHHS intercepted two of the debtor’s federal income tax refunds totaling $4,257.13, and applied the seized funds to its prepetition child support claim. DHHS did not amend its proof of claim to reflect the amounts seized. Consequently, the chapter 13 trustee continued to make plan payments to DHHS based on its allowed claim without adjusting for the amounts DHHS received from the intercepted tax refunds.
In October 2010, the debtor moved to modify the First Amended Plan in order to increase DHHS’s arrearage claim from $13,000.00 (as set forth in the First Amended Plan) to $13,862.39 (the amount of DHHS’s allowed claim) and to remove *872the above-quoted plan provision regarding DHHS’s seizure of his tax refunds, stating that the provision was “overly burdensome” to him and to the court. No objections were filed and, after a hearing, the bankruptcy court granted the motion and approved the modified plan (the “Modified Plan”).
DHHS moved for reconsideration of the court’s order approving the debtor’s motion to modify, arguing that the debtor’s motion should not have been granted because the proposed modification deprived DHHS of its right to seize tax refunds, a right that was protected by § 362(b)(2)(F)5 and, as such, the modification did not comply with § 1325(a) nor was it authorized under § 1329(a). By order dated December 1, 2010 (“December 1st Order”), the bankruptcy court denied the motion to reconsider, stating that:
The motion to reconsider is denied on the basis that it is moot due to the fact that there is no provision in the modified plan or the order approving modified plan that prohibits the state from taking any act[i]on to pursue collection of domestic support obligations under state or federal law pursuant to the findings set forth on the record this date.
On December 15, 2010, the debtor filed an amended motion to modify his plan (the “Amended Motion to Modify”) and a proposed modified plan (the “Second Modified Plan”) seeking to reduce the amount of DHHS’s prepetition claim to $9,605.26 to account for the previously seized tax refunds6 and to add the following provision to the plan:
The Claim of NH DHHS Dept, of Child Support Services was filed in the amount of $13,862.39; however, since the inception of this Chapter 13 Bankruptcy the Creditor has intercepted the Debtor’s Federal Income Tax Refunds. The total amount of seized by the Creditor is $4,257.13; therefore the Claim of NH DHHS Dept, of Child Support Services, being paid through the Debtor’s Chapter 13 Plan of Reorganization, has been reduced to $9,605.26.
In a response to the Amended Motion to Modify, DHHS requested, among other things, that the bankruptcy court either: (1) expressly rule that the Second Modified Plan did not prohibit DHHS from exercising its right to intercept tax refunds as authorized by § 362(b)(2)(F); or (2) order the debtor to amend the Second Modified Plan to “expressly provide for the tax refund intercepts.” DHHS did not object to the reduction of its claim. After a hearing, the bankruptcy court took the matter under advisement.
On April 22, 2011, the bankruptcy court entered an order granting the Amended Motion to Modify. The court concluded that while § 362(b)(2)(F) permitted a support creditor to intercept tax refunds before plan confirmation, once a plan that provides for full payment of the support creditor’s claim is confirmed, the support creditor may no longer intercept refunds. The bankruptcy court determined that because the Second Modified Plan provided *873for full payment of DHHS’s claim as required by § 1322(a)(2), and because nothing in §§ 1322 or 1325 requires a chapter 13 plan to include a provision permitting a support creditor to intercept tax refunds as described in § 362(b)(2)(F), DHHS was not permitted to engage in any further tax refund intercepts.
This appeal followed. Although DHHS sought a stay pending appeal from both the bankruptcy court and the Panel, those requests were denied.
JURISDICTION
Before addressing the merits of an appeal, the Panel must determine that it has jurisdiction, even if the issue is not raised by the litigants. See Boylan v. George E. Bumpus, Jr. Constr. Co. (In re George E. Bumpus, Jr. Constr. Co.), 226 B.R. 724 (1st Cir. BAP 1998). The Panel has jurisdiction to hear appeals from: (1) final judgments, orders and decrees; or (2) with leave of court, from certain interlocutory orders. 28 U.S.C. § 158(a); Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (1st Cir. BAP 1998). A decision is considered final if it “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment,” id. at 646 (citations omitted), whereas an interlocutory order “only decides some intervening matter pertaining to the cause, and ... requires further steps to be taken in order to enable the court to adjudicate the cause on the merits.” Id. (quoting In re American Colonial Broad. Corp., 758 F.2d 794, 801 (1st Cir.1985)). Generally, a bankruptcy court order granting a motion to modify a confirmed chapter 13 plan pursuant to § 1329 is a final order. See Storey v. Pees (In re Storey), 392 B.R. 266 (6th Cir. BAP 2008). Thus, we have jurisdiction to hear and determine this appeal.
STANDARD OF REVIEW
Appellate courts apply the clearly erroneous standard to reviewing findings of fact. Conclusions of law are reviewed de novo. See Lessard v. Wilton-Lyndeborough Coop. School Dist., 592 F.3d 267, 269 (1st Cir.2010). Because plan modification under § 1329 is discretionary, our review is limited to a determination of whether the bankruptcy court abused its discretion in confirming the Second Modified Plan. See Barbosa v. Solomon, 235 F.3d 31, 41 (1st Cir.2000) (citation omitted).
DISCUSSION
I. Section 1329(a) — Plan Modification
Section 1329(a) provides that a debtor may modify a plan at any time after confirmation of the plan but before completion of plan payments in order to effectuate a change in: (1) the amount paid to creditors; (2) the time for such payments; (3) the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim other than under the plan; or (4) in limited circumstances, the amounts to be paid by the debtor to purchase health insurance for the debtor and dependents. See 11 U.S.C. § 1329(a). Any such modification must comply with the provisions of § 1322(a) (setting forth requirements for plan contents) and § 1325(a) (setting forth requirements for plan confirmation) to be approved. 11 U.S.C. § 1329(b).
In this case, the debtor’s Amended Motion to Modify to reduce the DHHS’s claim would satisfy either clause (1) or (3) of § 1329(a). Thus, the issue is not whether the bankruptcy court erred in approving the Amended Motion to Modify. Rather, it is whether the court erred in determining that the effect of the modification was to prohibit the DHHS from engaging in *874further tax refund seizures. To resolve this issue requires an examination of the interplay between § 362(b)(2)(F) and § 1327 of the Bankruptcy Code.
II. The Interplay Between § 362(b)(2)(F) and § 1327
Upon the filing of a bankruptcy petition, the Bankruptcy Code imposes an automatic stay of any act to collect a debt that arose before the commencement of the case. 11 U.S.C. § 362(a)(6). Prior to BAPCPA, an exception to the automatic stay permitted creditors who were owed prepetition domestic support obligations to pursue collection but only against assets that were not property of the bankruptcy estate. See 11 U.S.C. § 362(b)(2)(B). BAPCPA added § 362(b)(2)(F), which expressly excepts from the automatic stay the interception of a debtor’s tax refunds for the payment of a support obligation, even where the tax refund is property of the estate. See 11 U.S.C. § 362(b)(2)(F).7 DHHS’s intercepting the debtor’s tax refunds to satisfy his prepetition domestic support obligations falls squarely within the § 362(b)(2)(F) exception to the automatic stay.
The bankruptcy court concluded that although such seizures are not prohibited by the automatic stay, they nevertheless could violate a confirmed plan. In so holding, the bankruptcy court focused on the binding effect of a confirmed plan under § 1327(a).
A. The Binding Effect of the Second Modified Plan
Section 1327(a), which addresses the effects of plan confirmation, provides in relevant part:
The provisions of a confirmed plan bind the debtor and each creditor, whether or not the claim of such creditor is provided for by the plan, and whether or not such creditor has objected to, has accepted, or has rejected the plan.
11 U.S.C. § 1327(a). Under this provision, once a bankruptcy plan is confirmed, the debtor and each creditor are bound by its terms. See id. As the First Circuit has explained, “confirmation of a Chapter 13 plan customarily is res judicata as to all issues that were or could have been decided during the confirmation process.” Carvalho v. Federal Nat’l Mortg. Ass’n (In re Carvalho), 335 F.3d 45, 49 (1st Cir.2003). “There must be finality to a confirmation order so that all parties may rely upon it without concern that actions that they may later take could be upset because of a later change or revocation of the order.” 4-1327 Alan N. Resnick & Henry J. Sommer, Collier Bankruptcy Manual, ¶ 1327.02[1] (3d ed. rev.). The United States Supreme Court has emphasized that plan confirmation orders are final and binding regardless of pre-confirmation rights held by creditors. See United Student Aid Funds, Inc. v. Espinosa, — U.S. -, 130 S.Ct. 1367, 176 L.Ed.2d 158 (2010).
The binding effect of confirmation has led courts to conclude that once a plan is confirmed, a creditor’s rights and interests are defined within the boundaries of the plan, and proceedings that are inconsistent with the confirmed plan are improper, even if they fall within an exception to the automatic stay.8 As one commentator has stated:
*875Because creditors are limited to those rights that they are afforded by the plan, they may not take actions to collect debts that are inconsistent with the method of payment provided for in the plan. They may not exercise prepetition rights they may have had to collect a debt by setoff, foreclosure or otherwise. The automatic stay of section 362(a) usually remains in effect as to collection efforts on virtually all prepetition debts until the case is closed or dismissed or until a discharge order is entered. Even actions that would he permitted by an exception to the automatic stay can he barred by the terms of a confirmed plan.
4-1327 Collier Bankruptcy Manual, at ¶ 1327.02[l][b] (emphasis added). Thus, it is clear that all creditors are bound by a confirmation order and that even actions that would be permitted by an exception to the automatic stay (such as the interception of tax refunds to pay domestic support obligations as authorized by § 362(b)(2)(f)) may be prohibited under a confirmed plan.
The binding effect of a chapter 13 plan extends, however, only to those issues “which were actually litigated by the parties and any issue necessarily determined by the confirmation order.” Torres Martinez v. Arce (In re Torres Martinez), 397 B.R. 158, 165 (1st Cir. BAP 2008) (citing 8 Collier on Bankruptcy ¶ 1327.02, at 1327-3 (15th ed. 1998)); see also In re Munoz Marquez, 2011 WL 4543226, *10-11, 2011 Bankr.LEXIS 3806, *33-34 (Bankr.D.P.R. Sept. 28, 2011); In re Curtis, 2010 WL 1444851, 2010 Bankr.LEXIS 1252 (Bankr.S.D.Ill. Apr. 9, 2010). Conversely, a confirmed chapter 13 plan is not binding as to issues “not sufficiently evidenced in a plan to provide adequate protection to the creditor.” Enewally v. Washington Mutual Bank (In re Enewally), 368 F.3d 1165, 1172-73 (9th Cir.2004). Thus, for the Second Modified Plan to have the preclusive effect on DHHS’s right to intercept tax refunds suggested by the bankruptcy court, it must have specifically addressed that right. It did not. Although the First Amended Plan contained a provision acknowledging that DHHS was making such seizures, the Modified Plan and the Second Modified Plan were silent as to DHHS’s right to intercept. That silence cannot be interpreted as implicitly prohibiting DHHS from taking such action especially in light of the December 1st Order denying DHHS’s motion to reconsider confirmation of the Modified Plan in which it stated “there is no provision in the modified plan or the order approving the modified plan that prohibits the state from taking any act[i]on to pursue collection of domestic support obligations under state or federal law.” In order for the Second Modified Plan to preclude DHHS from tax intercepts, the plan should have explicitly and conspicuously said so. Because the Second Modified Plan like the Modified Plan was silent as to DHHS’s right to intercept the debtor’s tax refunds, that silence cannot be deemed under § 1327(a) as binding the State and prohibiting it from exercising those rights.
*876B. Law of the Case Doctrine
“The law of the case doctrine ‘posits that when a court decides upon a rule of law, that decision should continue to govern the same issues in subsequent stages in the same case.’ ” Vázquez Laboy v. Doral Mortg. Corp. (In re Vázquez Laboy), 647 F.3d 367, 372-73 (1st Cir.2011); Remexcel Managerial Consultants, Inc. v. Arlequin, 583 F.3d 45, 53 (1st Cir.2009) (quoting Arizona v. California, 460 U.S. 605, 618, 103 S.Ct. 1382, 75 L.Ed.2d 318 (1983)); Harlow v. Children’s Hosp., 432 F.3d 50 (1st Cir.2005); Whitehouse v. LaRoche, 277 F.3d 568, 573 (1st Cir.2002). The doctrine “is a prudential principle that ‘precludes relitigation of the legal issues presented in successive stages of a single case once those issues have been decided.’ ” Field v. Mans, 157 F.3d 35, 40 (1st Cir.1998) (quoting Cohen v. Brown Univ., 101 F.3d 155, 167 (1st Cir.1996)).
The law of the case doctrine has two aspects. See Negron-Almeda v. Santiago, 579 F.3d 45, 50 (1st Cir.2009) (citations omitted). The first, called the mandate rule, “prevents relitigation in the trial court of matters that were explicitly or implicitly decided by an earlier appellate decision in the same case.” Id. (citation omitted). For a bar to exist under the mandate rule, an issue must have been “ ‘actually considered and decided by the appellate court,’ or ... be ‘necessarily inferred from the disposition on appeal.’ ” Field v. Mans, 157 F.3d 35 at 40 (citing Commercial Union Ins. Co. v. Walbrook Ins. Co., Ltd., 41 F.3d 764, 770 (1st Cir.1994)). The second aspect of the law of the case doctrine “contemplates that a legal decision made at one stage of a criminal or civil proceeding should remain the law of that case throughout the litigation, unless and until the decision is modified or overruled by a higher court.” Negron-Almeda, 579 F.3d at 50-51 (citation omitted). Thus, once an order is final, and the same has not been appealed, it becomes the law of the case. First Am. Title Ins. Co. v. Pifalo (In re Pifalo), 379 B.R. 1, 4 (1st Cir. BAP 2007); see also Harlow v. Children’s Hospital, 432 F.3d at 55 (citations omitted) (holding that law of the case doctrine is not applicable if prior ruling was interlocutory matter).
Here, the second aspect applies. In the December 1st Order, the bankruptcy court denied DHHS’s motion to reconsider because it found that there was nothing in the First Amended Plan that “prohibits the state from taking any action to pursue collection of domestic support obligations under state or federal law....” Neither DHHS nor the debtor filed a notice of appeal or sought a stay of the December 1st Order. The December 1st Order is, therefore, a final order interpreting the Modified Plan as not prohibiting DHHS from pursuing collection. The Second Modified Plan did not change anything with respect to DHHS’s tax intercepts (both plans were silent on that issue). Thus, the December 1st Order is the law of the case as to whether the Second Modified Plan expressly prohibited DHHS from intercepting tax refunds. See In re Pifalo, 379 B.R. at 4 (holding that final orders that are not appealed become the “law of the case”).
CONCLUSION
We conclude the bankruptcy court erred as a matter of law for two reasons. First, the court erroneously ruled that because the Second Modified Plan no longer contained a permissive provision for tax refund intercepts by the State, such intercepts became implicitly prohibited, and second, the court failed to follow its own prior ruling in the December 1st Order that nothing in the Modified Plan prohibited DHHS from taking any action to pur*877sue collection of domestic support obligations under state or federal law.
We, therefore, REVERSE the bankruptcy court’s decision and REMAND for entry of an order consistent with this opinion.
. DHHS is tasked with assisting in the collection of child support arrearages from nonpaying parents.
. Unless expressly stated otherwise, all references to "Bankruptcy Code” or to specific statutory sections shall be to the Bankruptcy Reform Act of 1978, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA”), Pub. L. No. 109-8, 119 Stat. 23, 11 U.S.C. § 101, et seq.
. This provision was included in two sections, both under the section entitled "Plan Payments” and the section entitled “Domestic Support Obligations.”
.Section 501(c) provides that where a creditor does not timely file a proof of its claim, the debtor may file a proof of such claim. In his brief, the debtor asserts that he filed the proof of claim on DHHS’s behalf because the chapter 13 trustee will make disbursements under a plan only to parties who have filed proofs of claim.
. Section 362(b)(2)(F) provides that the automatic stay does not apply to the interception of tax refunds by a governmental authority seeking to collect outstanding child support obligations.
. In his Amended Motion to Modify, the debt- or stated, “That despite reasonable request of the Debtor, it has become apparent that the Creditor, State of NH DHHS Dept, of Child Support Services, will not refund the Debtor for post-petition seizures of Federal Income Tax Refunds in the total amount of $4,257.13” and that he should be allowed to amend his plan to decrease DHHS’s "pre-petition arrearage ... to account for the above mentioned seizures.”
. Section 362(b)(2)(F) provides, in pertinent part: "The filing of a petition ... does not operate as a stay ... of the interception of a tax refund, as specified in sections 464 and 466(a)(3) of the Social Security Act or under analogous State law....” 11 U.S.C. § 362(b)(2)(F).
. See, e.g., Florida Dept. of Revenue, v. Rodriguez (In re Rodriguez), 367 Fed.Appx. 25, 28 *875(11th Cir.) (noting that after confirmation, the plan and confirmation order control), cert. denied, - U.S. -, 131 S.Ct. 128, 178 L.Ed.2d 34 (2010); In re Worland, 2009 WL 1707512, 2009 Bankr.LEXIS 1512 (Bankr.S.D.Ind. Jun. 16, 2009) (holding that creditor’s collection activities were not stayed but were in violation of confirmation order since payment of ex-spouse's claim was provided for in the plan); Fort v. Florida Dept. of Revenue (In re Fort), 412 B.R. 840 (Bankr.W.D.Va. 2009); In re Dagen, 386 B.R. 777, 783 (Bankr.D.Colo.2008) ("[T]he ability of a support creditor to continue to collect a prepetition debt is only limited to the extent that the confirmed plan abrogates these rights.”); In re Gellington, 363 B.R. 497, 502 (Bankr.N.D.Tex.2007); In re Sanders, 243 B.R. 326, 330 (Bankr.N.D.Ohio 2000). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494423/ | MEMORANDUM DECISION ON MOTIONS FOR SUMMARY JUDGMENT
MARGARET DEE McGARITY, Bankruptcy Judge.
The plaintiff, The Bank of Kaukauna, brought this adversary proceeding objecting to the dischargeability of certain obligations incurred by the debtor, Richard VanDynHoven. After the defendant filed an answer, the parties filed cross-motions for summary judgment. Although the plaintiff alleged in its complaint that the debtor’s obligations were nondischargeable pursuant to 11 U.S.C. § 523(a)(2)(B), the parties subsequently agreed the adversary proceeding would instead be decided under 11 U.S.C. § 523(a)(14) and (a)(14A). They also agreed that the pertinent facts are not in dispute and that the Court should decide the matter on summary judgment based on stipulated facts and briefs.
This Court has jurisdiction under 28 U.S.C. § 1334 and this is a core proceeding under 28 U.S.C. § 157(b)(2)(I). This decision constitutes the Court’s findings of fact and conclusions of law under Fed. R. Bankr.P. 7052. For the reasons stated herein, the plaintiffs motion for summary judgment is granted and the defendant’s motion for summary judgment is denied.
BACKGROUND
The following facts are not in dispute. At all times relevant to this proceeding, Richard VanDynHoven was the sole shareholder and the person primarily responsible for the day-to-day affairs of Action Electric, Electrical Contractors, Inc. Action Electric had a business checking account and loans at The Bank of Kaukauna, and Mr. VanDynHoven guaranteed payment of Action Electric’s obligations to the bank, pursuant to written guaranty agreements. The bank regularly covered Action *216Electric’s checks and ACH1 drafts against its checking account, with Mr. VanDynHo-ven’s knowledge and consent. By October 2008, Action Electric’s checking account was overdrawn by approximately $254,000, and the overdrafts were rolled into one or more notes. Although Action Electric’s checking account had a positive balance at the end of September 2009, the account showed a negative balance beginning in October 2009 and never regained a positive balance thereafter. Nevertheless, the bank resumed honoring some checks and ACH drafts (statements show many were dishonored) in the overdrawn account until the business closed in April 2010. Mr. VanDynHoven again was aware of the status of the account and did not object to the bank covering the checks.
Between October 7, 2009, and April 30, 2010, the bank honored the following 45 ACH drafts by the IRS and the Wisconsin Department of Revenue:
Internal Revenue Service
10/07/09 $3121.98
10/14/09 $3123.86
10/21/09 $3591.38
10/28/09 $3385.84
11/04/09 $2910.86
11/12/09 $2849.94
11/18/09 $2904.86
11/25/09 $2977.28
12/02/09 $2662.34
12/09/09 $2723.58
12/16/09 $3183.30
12/28/09 $2728.80
12/30/09 $3062.58
01/06/10 $2785.10
01/13/10 $2805.04
01/20/10 $3185.34
01/27/10 $2782.94
02/03/10 $3045.86
02/11/10 $2692.80
02/17/10 $2474.76
02/24/10 $2711.92
03/03/10 $2792.78
03/10/10 $2838.18
03/17/10 $3011.34
03/24/10 $2719.62
03/31/10 $2110.18
04/08/10 $2060.44
04/14/10 $2235.40
04/21/10 $2224.02
04/28/10 $2072.48
Wisconsin Department of Revenue
10/15/09 $1266.27
10/30/09 $2097.29
11/13/09 $1333.29
11/30/09 $1240.16
12/15/09 $1216.63
12/30/09 $1265.81
01/15/10 $1847.59
02/01/10 $1277.55
02/02/10 $ 160.37
02/17/10 $1243.88
03/03/10 $1110.19
03/11/10 $ 150.00
03/16/10 $1180.64
04/01/10 $1239.43
04/16/10 $1029.08
(Stipulated Facts filed with Plaintiffs Motion for Summary Judgment, June 10, 2011). These tax payments total $101,432.98.
During the relevant period, Action Electric continued to operate and generate revenues and accounts receivable. When Mr. VanDynHoven filed a chapter 7 petition on May 19, 2010, the bank held a claim against Action Electric of approximately $885,000, $121,239.50 of which was comprised of the checking account overdraft. Of the total overdraft, $101,432.98 was paid directly to either the United States or the State of Wisconsin to pay a tax liability of Action Electric. These taxes are of a kind described in 11 U.S.C. § 507(a)(8)(C) and are not subject to discharge by a liable individual.
ARGUMENTS
The bank argues its claim of $101,432.98, arising from the IRS and Department of Revenue overdrafts, is nondischargeable *217because the overdrafts are debts incurred to satisfy tax obligations that would be nondischargeable. If the bank had not honored the IRS’s and the State of Wisconsin’s ACH drafts for Action Electric’s payroll taxes, the debtor would have been personally liable for those taxes. 26 U.S.C. § 6672; Wis. Stats. § 71.83(l)(b)2. His taxes would not have been dischargea-ble because the taxes were of a kind described in 11 U.S.C. § 507(a)(8)(C). The obligations incurred to pay such tax liabilities are also nondischargeable pursuant to 11 U.S.C. § 523(a)(14) and (a)(14A). See In re Gavin, 248 B.R. 464 (Bankr.M.D.Fla. 2000); In re Chrusz, 196 B.R. 221 (Bankr.D.N.H.1996).
The bank notes that the debtor’s obligations under his personal guaranty are a “debt” and give rise to a “claim” under the Bankruptcy Code. 11 U.S.C. § 101(12), (5)(A). The Code provides that “[a] discharge under section 727 ... does not discharge an individual debtor from any debt ... incurred to pay a tax to the United States [or other governmental unit] that would be nondischargeable pursuant to paragraph (1).” 11 U.S.C. § 523(a)(14), (a)(14A). Section 507(a)(8) defines the types of tax obligations to which the exceptions pertain, and include taxes “required to be collected or withheld and for which the debtor is liable in whatever capacity.” 11 U.S.C. § 507(a)(8)(C). The debtor is liable for Action Electric’s payroll taxes pursuant to 26 U.S.C. § 6672 and Wis. Stats. § 71.83(l)(b)2. While Action Electric continued to fund the checking account during the period of overdrafts, the bank argues the debtor is not entitled to a dollar-for-dollar credit of the deposits against the tax overdrafts.
The debtor argues2 he, as guarantor of Action Electric’s obligations, is not liable until the principal defaults. See Glaubitz v. Grossman, 10-C-927, 2011 WL 147931 (E.D.Wis. Jan. 18, 2011), rev’g In re Glaubitz, 436 B.R. 99 (Bankr.E.D.Wis.2010). There is no evidence that any demand was made of the debtor prior to the petition date; in fact, the bank tolerated the overdraft situation until the end of April 2010. The debt of Action Electric was not that of the debtor until demand was made after default by Action Electric and was only contingent as to the debtor until that time.
Additionally, the debtor points out that taxes were paid as they were incurred in the ordinary course of business, on the proper due dates, and were paid through electronic transfers directly out of Action Electric’s account. Action Electric also generated income and continued to make deposits totaling $899,717.59 into the account during the same time period, between August 2009 and the end of April 2010.3 Deposits exceeded the amount of payroll taxes in each month of the relevant period. The debtor, as guarantor of the corporate debt, should not be held liable for the open-ended extensions of revolving credit that were used to pay ordinary business expenses, including payroll taxes.
DISCUSSION
Summary judgment is required “if the movant shows that there is no genuine *218dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). The parties agreed this is the appropriate method of resolving this proceeding and submitted agreed facts outlined above.
Section 523(a)(14) excepts from discharge any debt incurred to pay a tax to the United States if that tax would be nondischargeable under section 523(a)(1).4 Taxes nondischargeable under section 523(a)(1) include employer payroll taxes. See 11 U.S.C. § 507(a)(8)(C). Section 523(a)(14) was added to the Bankruptcy Code in part to limit prebankruptcy substitution of a dischargeable obligation for one that is nondischargeable. In re Francis, 226 B.R. 385, 396 (6th Cir. BAP 1998); In re Cook, 416 B.R. 284, 289 (Bankr.W.D.Va.2009); In re Gavin, 248 B.R. 464, 465 (Bankr.M.D.Fla.2000). It also allows taxpayers to pay tax obligations with credit cards or access checks by making funds borrowed to pay taxes nondischargeable as the taxes would have been. In re White, 455 B.R. 141, 145 (Bankr.N.D.Ind.2011).
To prevail on a claim under section 523(a)(14), the creditor must show that: (1) the debt was incurred to pay a tax to the United States and (2) the tax owed to the United States would have been nondis-chargeable under section 523(a)(1) if it had not been paid prepetition. In re Dinan, 425 B.R. 583, 586 (Bankr.D.Nev.2010); In re Barton, 321 B.R. 877, 879 (Bankr.N.D.Ohio 2005). Some bankruptcy courts further require the creditor to trace the portion of the debt attributable to paying the tax. In re Chrusz, 196 B.R. 221, 224 (Bankr.D.N.H.1996) (debt arising from access check written by debtor on credit card account and deposited into checking account on which debtor then wrote check to IRS nondischargeable to extent used to pay taxes). Section 523(a)(14A) provides similar relief with respect to debts “incurred to pay a tax to a governmental unit, other than the United States, that would be nondischargeable under paragraph (1).” 11 U.S.C. § 523(a)(14A).
One relevant category of nondis-chargeable taxes under section 523(a)(1) is specified in section 507(a)(8), which includes those taxes “required to be collected or withheld and for which the debtor is liable in whatever capacity.” 11 U.S.C. § 507(a)(8)(C). Therefore, if a debt was incurred to pay a tax that was required to be collected or withheld and the debtor is liable for that tax in some capacity, that debt is nondischargeable. In re Cook, 416 B.R. 284, 288 (Bankr.W.D.Va.2009). Action Electric was liable for the taxes at issue here.
An employer is required to withhold federal income taxes from wages it pays to its employees. Thus, each time the business meets its net payroll, it is presumed that the business withheld these taxes. Employers must then periodically account for these withholdings and pay them to the Government. Id. (citations omitted). To insure payment, Congress specifically mandated that if the business does not pay, then any person who was under a duty to withhold and pay and wilfully failed to do so is personally liable for the non-payment. Id. (citing 26 U.S.C. §§ 6671 & 6672). Mr. YanDynHoven’s responsibility for withholding any payment of taxes has already been acknowledged. *219However, the debtor insists that a taxing authority assessment against him, individually, is required before the exceptions to discharge provided by section 523(a)(14) and (a)(14A) are applicable.
As noted in Cook, there is nothing in the Code which requires that the taxing authority must have made an assessment against the responsible officer before the exception to dischargeability is triggered. Id. at 289. On the other hand, any person required to collect, or pay over any tax imposed by the IRS, who willfully fails to collect, or pay such a tax, is hable to the IRS for a penalty equal to the amount of the tax owed. 26 U.S.C. § 6672. As the Fourth Circuit has explained,
26 U.S.C. § 6672 is intended as a device to recover withholding taxes an employer fails to pay to the government. In order for a person to be held liable under § 6672, two requirements must be satisfied: (1) the party assessed must be a person required to collect, truthfully account for, and pay over the tax, referred to as a “responsible person”; and (2) the responsible person must have willfully failed to insure that the withholding taxes were paid. The term “responsible person” is broad and may include many individuals connected with a corporation, and more than one individual may be the responsible person for an employer.
O’Connor v. United States, 956 F.2d 48, 50 (4th Cir.1992) (citations omitted). The amounts payable by a responsible person, although denoted a “penalty,” are treated in bankruptcy as a nondischargeable tax. See In re Paris, 355 B.R. 860, 864 (Bankr. M.D.Fla.2006) (chapter 7 debtor qualified as “responsible person” and willfully failed to see that trust fund taxes were paid; resulting obligation of debtor was nondis-chargeable); cf. Noronha v. Internal Revenue Service, 352 Fed.Appx. 18 (6th Cir. 2009) (chapter 13 debtor’s objection to IRS claim for unpaid trust fund taxes overruled; debtor had sufficient control over corporation’s financial affairs and willfully failed to pay withholding taxes). Had the taxes not been paid by the bank, the debt- or’s position in control of Action Electric would have made him liable as a responsible person.
Nevertheless, even a responsible person is not liable for a penalty under section 6672(a) unless his or her failure to collect, account for, or remit withholding taxes was willful. Coniuay v. United States, 647 F.3d 228, 232 (5th Cir.2011). “Whether ‘the failure to pay the overdue taxes [is] willful has been seen ... as calling for proof of a voluntary, intentional, and conscious decision not to collect and remit taxes thought to be owing.’” Godfrey v. United States, 748 F.2d 1568, 1576-77 (Fed.Cir.1984) (quoting Scott v. United States, 173 Ct.Cl. 650, 354 F.2d 292, 295 (1965)). The debtor caused the continuing operation of Action Electric when it could not sustain its operations and tax obligations, and he allowed the continuing payment of taxes by the bank. If the taxes had not been paid by the bank, his actions would have made him liable as a responsible person.
The case law analyzing section 523(a)(14) and (a)(14A) primarily involves debtors who used their credit cards to pay otherwise nondischargeable tax debt, see In re Cook, 416 B.R. 284 (Bankr.W.D.Va.2009) (credit card used to pay amounts demanded by IRS in tax statements of debtor’s business); In re Gavin, 248 B.R. 464 (Bankr.M.D.Fla.2000) (check drawn on credit card account and used to pay federal income tax debt nondischargeable), or debtors who used borrowed sums to pay outstanding payroll tax debt, see In re Dinan, 425 B.R. 583 (Bankr.D.Nev.2010), aff'd in part, rev’d on other grounds, 448 *220B.R. 775 (9th Cir. BAP 2011) (loan proceeds use to pay IRS back-taxes).
This Court’s colleague in the Western District of Wisconsin recently decided a section 523(a)(14) nondischargeability action in In re Mueller, 455 B.R. 151 (Bankr.W.D.Wis.2011). On April 15, 2010, the debtor incurred a $2,000 charge on his Chase Bank credit card to the U.S. Treasury for a deposit to be applied towards any income taxes later determined to be owed. On Oct. 15, 2010, it was determined that the debtor did not owe any taxes in excess of his earlier deposits and earned credits. Accordingly, the IRS refunded $2,327 to the debtor. The debtor did not use the refund to pay his credit card debt, and filed for chapter 7 relief a month later. Chase filed an adversary proceeding claiming that the $2,000 charge was excepted from discharge under section 523(a)(14). Judge Martin ruled that the claim was not excepted from discharge because Chase failed to prove that the $2,000 charge was incurred to pay a “tax owed” by the debt- or. Id. at 153. A necessary prerequisite to application of section 523(a)(14) was that the debtor actually owed some federal tax liability, which the debt in question was incurred to satisfy.5
In this case the debtor actually owed the taxes as a responsible person — even though they were not assessed because Action Electric borrowed the funds to pay them — and the debtor is liable under his guarantee for funds borrowed by Action Electric. The debtor argues, in part, that the tax obligations never became nondis-chargeable obligations as to him, individually because the IRS has never assessed any tax penalty under 26 U.S.C. § 6672. In a decision analogous to the proceeding at hand, a bankruptcy court recently refused to extend sections 523(a)(14) and 523(a)(14A) to payments that did not actually satisfy any nondischargeable tax obligation of the debtor, but instead prevented such an obligation from arising in the first place. In re White, 455 B.R. 141 (Bankr.N.D.Ind.2011). The issue arose in an adversary proceeding brought by an individual and a firm that, pursuant to an account services agreement with a corporation of which the chapter 7 debtor was an officer, had advanced funds for the payment of employment tax obligations owed by the corporation to the Internal Revenue Service and the State of Illinois. Although these payroll taxes were the obligation of the corporation and not of the debtor personally, due to her status as an alleged “responsible person” pursuant to 26 U.S.C. § 6672, the plaintiffs asserted that the debt fell within section 523(a)(14) and/or section 523(a)(14A).
The bankruptcy court observed: “[t]he plaintiffs’ contention is essentially that by payment of corporate employment tax liabilities, [the debtor’s] potential personal liability under [the Internal Revenue Code] with respect to those tax liabilities was also satisfied.” Id. at 145. The court further noted that section 523(a)(14) and (14A) were enacted in response to taxpayers’ increasing use of credit cards to pay tax liabilities: “Credit card issuers, being the ever-vigilant creditors that they are, essentially managed to righteously convince Congress that if their credit paid tax excepted from discharge, they should essentially be subrogated to the taxing authority’s exception from discharge provided for if the tax had not been paid. There *221is actually a great deal of logic to this assertion, and even if there weren’t, it’s the law.” Id.
In court pointed out if the debtor had been the corporation, as opposed to its officer, and if the corporation had been eligible for chapter 7 relief, the plaintiffs would have had a “smooth skate to the finish line of their requested relief.” Id. But the debtor in White was the officer, not the corporation, and, the court determined, the plaintiffs failed to establish that they paid a “tax” of the debtor which would have been excepted from discharge. After examining the interplay between corporate employment tax liability and “responsible person” liability under 26 U.S.C. § 6672, the bankruptcy court found that the two liabilities are entirely separate and distinct. “Even though a corporate employment tax liability has not been paid, there is ‘many a drip between the cup and the lip’ before liability can be asserted against an individual” under section 6672. Id. at 147. Specifically, the individual must be a “responsible person,” and his or her failure to pay the tax must have been “willful.”
As in this case, no independent individual tax liability had been asserted by either the IRS or the Illinois Department of Revenue against the debtor in White with respect to the corporate employment taxes at issue, nor, the court noted, was such individual liability possible, because the corporate employment taxes had been paid in full:
The fact that [the debtor’s] ‘immunity’ from fiduciary tax liability as an individual was precluded by payment of corporate employment tax liabilities to the Internal Revenue Service and the Illinois Department of Revenue does not establish an exception to discharge, but rather establishes that [the debtor] was not subject to a tax liability ‘that would be nondischargeable under paragraph (1) [of 11 U.S.C. § 523(a)]’, and in and of itself precludes the plaintiffs’ entitlement to the relief which they request.
Id. at 148. At most, the White court noted the debtor may have been contingently liable for the corporation’s employment taxes had those taxes not been paid. The employment taxes were paid, however, so personal liability for the taxes neither was, nor could have been, asserted against her. Consequently, the court found sums paid by the plaintiffs did not constitute a debt incurred to pay a tax to the United States or to any other governmental unit that would have been nondischargeable pursuant to 11 U.S.C. § 523(a)(1), with respect to the debtor, and the debt in question did not fall within section 523(a)(14) or (14A).
This Court finds such reasoning unpersuasive and contrary to the purpose of the exceptions to discharge under 11 U.S.C. § 523(a)(14) and (14A). By having the business entity under the debtor’s control borrow money to pay taxes timely, the debtor avoids ever being assessed a penalty as a responsible person, but the White court found this tactic successfully avoided the exception to discharge of funds borrowed to pay the taxes at issue. Mr. VanDynHoven was at all times contingently liable for taxes owed by Action Electric as a responsible person, so the liability for those taxes constituted a claim against him. The definition of “claim” — synonymous with “debt,” the term used in section 523(a) — includes contingent liabilities, and the lack of an impossible assessment will not avoid the reality of the debtor’s liability. See 11 U.S.C. § 101(5), (12). Similarly, the “contingent” guarantee of the Action Electric debt to the bank by the debtor, makes him liable to the bank for a nondischargeable debt to the extent of taxes paid on his behalf. Glaubitz v. Grossman, 10-C-927, 2011 WL 147931 *222(E.D.Wis. Jan. 18, 2011), rev’g In re Glaubitz, 486 B.R. 99 (Bankr.E.D.Wis.2010), is inapplicable as that case involved qualifying for a chapter 13 case, which does not include contingent obligations, whereas the debts under section 523(a)(14) and (14A) do include such obligations.
This is not the clear cut case where a debtor pays his or her taxes with a credit card or a credit card access check for the exact amount of the taxes due. The account was also used for deposits from operations and other expenses. The court in Chrusz, 196 B.R. 221, solved the inability to trace each dollar by calculating a percentage of the borrowed funds to the total funds in the debtor’s account when the tax debt was paid. The percentage was then applied to the borrowed funds to determine the nondischargeable amount. This approach will not work in this case because there was never a positive balance in the Action Electric account in any month during which the tax debts were being paid, and the total overdraft exceeds the total tax debt. Therefore, the entire $101,432.98 is excepted from the debtor’s discharge.
Based on the foregoing analysis, the plaintiffs motion for summary judgment is granted and judgment will be entered accordingly.
. Automated Clearing House (also referred to as ACH) is the network that processes electronic financial transactions in the United States. ACH credit transactions include payments to vendors or merchants made electronically or electronic check conversions where the merchant scans a check and converts it to an ACH item.
. The debtor also noted that the guaranty agreements attached to the bank's brief were signed by the debtor as President of Action Electric, but not individually. The bank subsequently submitted copies of the debtor’s guarantees of the corporation’s obligations to the bank.
. Actually, the debtor added up credits to arrive at this amount, but the credits shown on the bank statements include deposits, plus checks drawn by Action Electric and returned for insufficient funds. The bank calculated deposits only and arrived at a total of $460,858.91. The Court accepts the bank's calculation.
. Section 523(a)(1) provides in relevant part: A discharge under section 727 ... does not discharge an individual debtor from any debt—
(1) for a tax or a customs duty—
(A) of the kind and for the periods specified in section 507(a)(3) or 507(a)(8) of this title, whether or not a claim for such tax was filed or allowed!.]
11 U.S.C. § 523(a)(1).
. This ruling is, of course, distinguishable from the argument that just because the debt is no longer owed to the Internal Revenue Service, and is now an unsecured debt owed to a credit card company, it is dischargeable. See Gavin, 248 B.R. at 465 (rejecting such argument). Funds traceable to a payment of a nondischargeable section 523(a)(1) debt are nondischargeable under section 523(a)(14). Id. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494424/ | MEMORANDUM DECISION FINDING MATTER TO BE CORE
CECELIA G. MORRIS, Bankruptcy Judge.
At the hearing held on August 12, 2011, the Court directed the parties to brief the issue of whether Plaintiff has a right to a jury trial in district court, in light of the Supreme Court’s recent decision in Stem v. Marshall, 564 U.S. --, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). Having reviewed the parties’ arguments, the Court reaffirms its reasoning in its Memorandum Decision dated October 26, 2007, and holds that the present proceeding arises in the bankruptcy case and is a core matter. The subject matter of the present adversary proceeding concerns work performed for the benefit of the estate by an estate professional, and implicates a court-ordered settlement, the confirmation order, and the order approving the professional’s fees. The Court has the power to enter final orders in the present proceeding, at least up until the time the case becomes trial ready. If and when this proceeding reaches that point, the parties may reply to each others’ memoranda of law submitted with respect to this ruling, to address whether the request for a jury trial was timely and whether Plaintiff has consented to a jury trial in this Bankruptcy Court.
Introduction
Plaintiff commenced his chapter 11 case on December 19, 2003. Defendant is a real estate appraiser retained by court order dated September 28, 2004, as an estate professional. Defendant’s appraisal of the value of real property owned by the Plaintiff was at the heart of a settlement with Plaintiffs former business partners, in which the former partners paid the Plaintiffs estate one-third of the appraised value' — which was used to fund a plan that paid 100 percent of allowed claims. The Defendant’s appraisal was authorized by a stipulation of settlement between the Plaintiff and the former partners, which was approved by order dated July 27, 2004, and by the order retaining the Defendant as an estate professional. The Plaintiffs plan was confirmed by court order dated August 24, 2005; the plan was predicated upon the appraisals conducted by the Defendant.
The Court approved Defendant’s fees by order dated February 1, 2006. The approved fees represent the Plaintiffs one-third share of the cost of the Defendant’s services. The Plaintiff opposed the motion to approve fees, arguing that the Defendant improperly appraised the real property, resulting in a lower valuation and an accordingly lower payment to the debtor. Presumably, Plaintiff seeks damages on the grounds that if the property had been appraised at a higher value, there would have been money left over for the Plaintiff personally, after the allowed claims were satisfied. In approving the fees, the Court made no determination regarding whether the Plaintiff could sue the Defendant. See Memorandum Decision, October 26, 2007, at 18. Further, the Court rejected the Plaintiffs request to treat its objection to *400the fee application as a “counterclaim,” on account of the Plaintiffs failure to cite law in support of such relief. Id. at 17. Subsequently, on November 28, 2006, the Plaintiff commenced the present lawsuit in state supreme court.
The Court incorporates the procedural history set forth in the Memorandum Decision Denying Motion to Remand or Abstain dated October 26, 2007:
The Debtor commenced this action in New York State Supreme Court, Ulster County, against the Defendants (collectively, “Grubb & Ellis” or “G & E”), alleging damages of $1 million arising from an appraisal that Grubb & Ellis prepared while retained by this Court as a professional of the bankruptcy estate.
The Defendants removed the case to the United States District Court, alleging that the case is a core proceeding within the meaning of 28 U.S.C. § 157(b) “because, among other things, it is inextricably and intimately related to the administration of the estate in the Bankruptcy Case.” ... The case was transferred to this Court from the District Court, by stipulation of the parties.
Memorandum Decision, Adv. P. No. 07-09014, Docket No. 20, 2. Plaintiff disputed that the adversary proceeding was core, and moved for the Court to remand the matter to state court or to abstain. The Court denied the removal motion, holding: “Where an estate professional is retained and paid by order of the Bankruptcy Court to perform work that is vital to the bankruptcy estate and the debtor’s plan or reorganization, a subsequent claim against that professional arising from the work performed on behalf of the estate is a ‘core proceeding’ pursuant to 28 U.S.C. § 157(b).” Id.
By decision dated October 16, 2009, the Court granted Defendant’s motion for judgment on the pleadings and dismissed all claims. On appeal, the district court upheld in part and reversed in part. The district court characterized Plaintiffs claims as being for intentional misconduct and gross negligence. Copy of Memorandum & Order of U.S. District Court Judge Barbara S. Jones Signed on 6/24/2011, Adv. P. No. 07-09014, Docket No. 40, at 8-9. The court found that the bankruptcy court correctly dismissed the cause of action for fraudulent misrepresentation. Id. at 9. The district court found that the Bankruptcy Court incorrectly dismissed the claims for gross negligence and intentional wrongdoing, with respect to a property referred to as the “Hudson Valley Landing property” or the “Hudson Valley property,” which consisted of 33 two-family homes, each with its own fee simple parcel of land, and each managed at the time as rental units. See id. at 4,13. The district court stated:
Given the sparse allegations put forth in the complaint, this is a “close case” as to whether Plaintiff has adequately plead claims of gross negligence and intentional wrongdoing. But for the allegation that Plaintiff alerted Defendants to errors in the report and Defendants still refused to reconsider the appraisal of the Hudson Valley property or provide a sufficient analysis for its conclusion, Plaintiffs claim would likely fail to meet the plausibility standard for anything beyond ordinary negligence. However, accepting these allegations as true, the Court finds that Plaintiff has plead facts that could lead a reasonable juror to believe that Defendant’s conduct was intentional, willful or reckless in its disregard of Plaintiffs rights.
Id. at 14.
On July 20, 2011, after the proceeding was remanded to this Court, Plaintiffs counsel filed a demand for a jury trial on the bankruptcy court’s docket of the pres*401ent adversary proceeding. Statement/Plaintiff’s Jury Demand With Proof of Service, Adv. P. No. 07-09014, Docket No. 41.
Power of the bankruptcy court
Bankruptcy jurisdiction is established in 28 U.S.C. § 1334:
Bankruptcy cases and proceedings
(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.
(e) The district court in which a case under title 11 is commenced or is pending shah have exclusive jurisdiction ... (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. In bankruptcy, there are three types of subject matter jurisdiction regarding adversary proceedings: arising under title 11, arising in cases under title 11, and related to cases under title 11. 28 U.S.C. § 1334(b); In re Casual Male Corp., 317 B.R. 472, 475 (Bankr. S.D.N.Y.2004). Cf Ronald R. Peterson, Stem v. Marshall: Bleak House Revisited, 27 NABT-Talk: Journal of the National Association of Bankruptcy Trustees, 10, 12 (2011) (describing three bases of subject matter jurisdiction). “Arising under” jurisdiction relates to federal question claims of a particular type- — specifically, those federal questions that have their origin in the Bankruptcy Code and where relief is sought based upon a right created by title 11. Casual Male, 317 B.R. at 475-176. A matter “arises in” bankruptcy if the claim can only be brought in a bankruptcy case because it has no existence outside bankruptcy. Id. at 476 (noting that other decisions state a broader description, where the matter would not exist but for the bankruptcy). Matters are “related to” the bankruptcy if they would have a “conceivable effect” on the bankruptcy estate. Id.
“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 judge for the district.” 28 U.S.C. § 157(a). “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 [28 U.S.C. § 158].” 28 U.S.C. § 157(b)(1). A non-exhaustive list of “core” proceedings is set forth in 28 U.S.C. § 157(b)(2). Before the Supreme Court’s ruling in Stem v. Marshall, it was understood that a “core matter” either arose under or arose in a bankruptcy case. Peterson, supra, at 12.
Recent developments in the analysis of the bankruptcy court’s power to enter a final order
In Stem v. Marshall, the Supreme Court held that one kind of “core” proceeding, that of counterclaims of the estate against parties filing proofs of claim, was unconstitutional in that it violated the separation of powers doctrine. The Court ruled that the bankruptcy court, an Article I court, did not have the power to determine the debtor’s pre-petition, state-law cause of action for tortious interference *402with a gift, asserted against a creditor, where that cause of action was not fully adjudicated in the process of allowing the creditor’s claim for defamation. The Court determined that such a common law claim should have been determined by an Article III court, which preserves the impartiality of its judges with life tenure and non-diminution of salary during good behavior.
Stem rested heavily on Northern Pipeline Construction Company v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) (“Marathon”) and Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989) (“Granfinanciera ”). In Marathon, the Court determined that the scheme setting the judicial power of the bankruptcy court was unconstitutional — bankruptcy judges were given power to adjudicate state-created private rights, even where those lawsuits were not involved in the restructuring of debtor-creditor relations, without Article III protections of life tenure and non-diminution of salary. See Marathon, 458 U.S. at 84, 102 S.Ct. 2858 (“the cases before us, which center upon appellant Northern’s claim for damages for breach of contract and misrepresentation, involve a right created by state law, a right independent of and antecedent to the reorganization petition that conferred jurisdiction upon the Bankruptcy Court.”). The narrowest construction of Marathon may be summarized as, “a ‘traditional’ state common law action, not made subject to a federal rule of decision, and related only peripherally to an adjudication of bankruptcy under federal law, must, absent the consent of the litigants, be heard by an ‘Art. Ill court’ if it is to be heard by any court or agency of the United States.” Southmark Corporation v. Coopers & Lybrand (In re Southmark Corp.), 163 F.3d 925, 930 (5th Cir.1999) (citing Marathon, 458 U.S. at 92, 102 S.Ct. 2858 (Burger, C.J., dissenting)). Similarly, in Granfi-nanciera, the Court held that a defendant who had not filed a proof of claim was entitled to a jury trial, even though the claim was core-the cause of action accrued pre-petition, was grounded in common law, and the third party had not consented to the jurisdiction of the bankruptcy court or waived its right to a jury trial, as it had not filed a proof of claim. See Granfinanciera, 492 U.S. at 58, 109 S.Ct. 2782.
Since Stem, federal courts have renewed their examination of the power of the bankruptcy court to enter a final order in a lawsuit grounded in state law. The work is compounded by the failure of the Supreme Court to definitively rule that the bankruptcy court is empowered by the “public rights” doctrine to make final adjudications regarding matters that are fundamentally concerned with the restructuring of debtor-creditor relations. It appears that the core vs. non-core distinction has largely survived Stem. Stem v. Marshall,—U.S.-, 131 S.Ct. 2594, 2620, 180 L.Ed.2d 475 (2011) (“[w]e do not think the removal of counterclaims such as Vickie’s from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute”); see also Walker, Tmesdell, Roth & Assocs. v. The Blackstone Group, L.P. (In re Extended Stay), No. 09-13764, 2011 WL 5532258, at *6 (S.D.N.Y. Nov. 10, 2011) (“Withdrawing the reference simply due to the uncertainty caused by Stem is a drastic remedy that would hamper judicial efficiency on the basis of a narrow defect in the current statutory regime identified by Stem.”). An additional analysis of the proceeding’s connection to the bankruptcy and whether public or private rights are at stake is now required to determine whether the bankruptcy court has the power to adjudicate the matter.
*403In In re BearingPoint, Inc., 453 B.R. 486 (Bankr.S.D.N.Y.2011), the bankruptcy-court allowed the liquidation trustee of the confirmed debtor relief from the part of the confirmation order that required claims against former officers and directors of the debtor to be brought in the bankruptcy court. The bankruptcy court determined that the prospective claims for pre-petition breach of fiduciary duty were not “core.” Id. at 497. The court perceived that there was potential for litigants to “tie the case up in knots” by “exploiting their rights to an Article III judge determination when litigation against them is non-core.” Id. at 495. Further, the court expressed concern that, in the wake of Stem, even unequivocal consent might not be enough to empower the bankruptcy court to enter a final judgment in a non-core matter. Id. at 405-06.
In In re Salander O’Reilly Galleries, this Court denied a creditor’s motion for relief from the stay for the purpose of pursuing arbitration, as the creditor’s rights in an asset could be fully resolved in the claims allowance process. The Court noted, “[njowhere in Marathon, Granfi-nanciera, or Stem does the Supreme Court rule that the bankruptcy court may not rule with respect to state law when determining a proof of claim in the bankruptcy, or when deciding a matter directly and conclusively related to the bankruptcy.”
In Retired Partners of Coudert Brothers Trust v. Baker & McKenzie (In re Coudert Brothers), App. Case No. 11-2785, 2011 WL 5593147 (S.D.N.Y. Sept. 23, 2011), the district court determined that the bankruptcy court did not have jurisdiction to dismiss the Plaintiffs’ state law claims against private parties — and converted the bankruptcy court’s ruling into a report and recommendation of dismissal, which would be reviewed de novo. In crafting this solution to the “procedural morass,” the district court stated, “the intent behind the [1984 Act] is clear: Congress wanted Bankruptcy Judges to finally adjudicate bankruptcy-related matters whenever Article III permitted them to do so, and to issue recommended findings subject to de novo review in the District Court whenever it did not.” Id. at 22. Notably, regarding the determination of the bankruptcy court’s authority to make final adjudications, the district court framed the issue as whether the claim to be adjudicated involves a “public” or a “private” right. Id. at 12. The district court construed Stem to have held, “[bjankruptcy courts can constitutionally make final determinations with respect to private rights when those rights are necessarily fully disposed of in ruling on a proof of claim.” Id. at 15. Further, the district court construed Stem to permit consent as a sufficient basis for Article I final adjudication of non-core matters. Id. at 18.
1. The matter is a core proceeding, and the Bankruptcy Court has power to enter fínal orders.
The issue is not whether the district court can determine the claims in the proceeding at bar. The jurisdictional statute of bankruptcy law, 28 U.S.C. § 1334, vests jurisdiction of bankruptcy cases and proceedings in the district court, and was undisturbed by Stem. Indeed, in Marathon, the Court held that a breach of contract claim against a nonparty to the bankruptcy could be adjudicated on the basis of its relationship to the bankruptcy. Retired Partners of Coudert Brothers Trust, App. Case No. 11-2785 at 23, 2011 WL 5593147 (discussing Marathon). The question is whether, after referral of cases and proceedings from the district court, the bankruptcy court has the power to enter a final order in a particular proceeding, not whether it would be better for the *404proceeding to be decided in another forum. The bankruptcy court must examine the nature of the proceeding, beyond whether it appears on the list of “core” proceedings, and determine whether there is a sufficient connection to the restructuring of debtor-creditor relations that the matter can be finally decided by the bankruptcy court.
In the matter at bar, the Plaintiff characterizes its claim for gross negligence as a “counterclaim” to the Defendant’s fee application, and argues that it is therefore within the realm of proceedings the Stem Court held could not be finally adjudicated by a non-Article-III court. The Court reaffirms its rejection of Plaintiffs characterization of the objection to the fee application as a counterclaim. As before, Plaintiff offers no argument to support its legal conclusion that its alleged claim for gross negligence is a counterclaim to a fee application. “Counterclaims are affirmative claims for relief, usually asserting a right to payment by a defending party in opposition to the claims of the plaintiff or other opposing party.” 3 Moore’s Federal Practice, § 13.90[1] (Matthew Bender 3d ed.). A fee application is the process by which an estate professional is granted permission to partake of the distribution of property of the estate for work done for the estate. It is part of the claims allowance process, as estate professionals hold high-priority administrative claims against the estate for the work they do post-petition. In filing the fee application, the Defendant sought payment from the estate; it did not assert a cause of action against the Plaintiff personally or individually, which might have permitted the characterization of the present claim for gross negligence as a “counterclaim.”
Even if the present claim could be characterized as a counterclaim, it is not within the scope of the statute partially invalidated by Stem. The Court found unconstitutional 28 U.S.C. § 157(b)(2)(C), which states that core proceedings include counterclaims by the estate against persons filing claims against the estate. 28 U.S.C. § 157(b)(2) (emphasis added). In the matter at bar, Plaintiffs “counterclaim” is asserted by the Plaintiff personally, for alleged damages suffered individually, against a retained bankruptcy professional. In its decision granting the motion for judgment on the pleadings, this Court clearly stated that Plaintiff was suing in his individual capacity, not as debtor-in-possession for the benefit of the estate. This part of the ruling was undisturbed by the district court on appeal. The Plaintiffs claim for gross negligence is a personal claim, not a claim of the estate.
Regarding Plaintiffs argument that its claim could stand alone from the bankruptcy, the Court is persuaded by Southmark Corporation v. Coopers & Lybrand (In re Southmark Corp.), 163 F.3d 925 (5th Cir.1999), that the claim is inextricably intertwined with the bankruptcy. Plaintiff relies on Granfinanciera, arguing that if the fraudulent conveyance claim in that case were not “public rights,” then the “garden variety” claims asserted in the present lawsuit surely are not “public rights.” This exact argument was rejected by the Fifth Circuit in Southmark. “A malpractice claim like the present one inevitably involves the nature of the services performed for the debtor’s estate and the fees awarded under superintendence of the bankruptcy court; it cannot stand alone.” Southmark Corp. v. Coopers & Lybrand (In Re Southmark Corp.), 163 F.3d 925, 931 (5th Cir.1999). For that reason, Bear-ingPoint is distinguishable from the matter at bar, because the claims in that case were pre-petition, non-core claims. Further, in BearingPoint, there was a question of gaining jurisdiction over some of *405the prospective Defendants, who were located in Virginia. Here, there is no question of this Court’s in personam jurisdiction over the parties. Despite Plaintiffs repeated challenges to the Court’s power in the present adversary proceeding, the Court cannot imagine a louder consent to adjudication in bankruptcy court than filing a bankruptcy petition, confirming a plan that vests exclusive jurisdiction over all adversary proceedings in the bankruptcy court, and accepting the discharge — all of which were done by the Plaintiff in his bankruptcy case.
The present adversary proceeding is a core proceeding. See Memorandum Decision, October 26, 2007, 12-15. The Plaintiff sued an estate professional retained by order of the bankruptcy court and compensated from the bankruptcy estate, on a claim grounded on work performed for the bankruptcy estate. Id. at 12. The lawsuit concerns administration of the estate, as it implicates the work done for the estate by court-appointed and court-approved professionals. See id. at 13; see also 28 U.S.C. § 157(b)(2)(B). The Court is guided in this ruling by Southmark Corporation v. Coopers & Lybrand (In re Southmark Corp.), 163 F.3d 925 (5th Cir.1999), the circuit court held that claims for breach of fiduciary duty asserted by debtor against estate accountants for work done for the estate were core claims. In Southmark, the defendants were retained by the bankruptcy court as accountants to the estate’s court-appointed examiner; the accountants failed to disclose the extent of the work they performed for the entity they had been retained to investigate. The debtor argued that its claims against the estate accountants were not core, as they arose under state law and involve the debtor’s private rights against the accountants, rather than “restructuring debtor-creditor relations.” Id. at 930. Further, the debtor denied that the claims could arise only in the context of a bankruptcy case, as it could have sued any accounting firm that worked for it on similar grounds of disloyalty, nondisclosure and malpractice. Id. at 930-931.
The circuit court rejected the debtor’s arguments, stating that the professional malpractice claims alleged against the estate accountants were inseparable from the bankruptcy context. Id. at 931. The court stated, “A sine qua non in restructuring the debtor-creditor relationship is the court’s ability to police the fiduciaries, whether trustees or debtors-in-possession and other court-appointed professionals, who are responsible for managing the debtor’s estate in the best interest of creditors.” Id.
In the matter at bar, Defendant interprets the holding of Stem to be expressly limited to 28 U.S.C. § 157(b)(2)(c) (counterclaims of the estate are core); the other examples of core proceedings are unaffected. Accordingly, the Defendant argues, as this Court previously held the matter to be core pursuant to § 157(b)(2)(B) (administration of estate is core), Stem does not obligate the Court to undo its prior determination.
The Court agrees that Stem has a narrow application; the Court disagrees with the suggestion that analysis of how the matter relates to the restructuring of the debtor-creditor relationship is not necessary in light of Stem. The Court finds the reasoning of Southmark to have survived Stem.
2. A decision on the proper forum for a jury trial is premature.
In the Southern District of New York, bankruptcy courts may conduct jury trials. “If the right to a jury trial applies in a proceeding that may be heard under *406this 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(e). By order dated December 7, 1994, the United States District Court for the Southern District of New York specially designated the bankruptcy judges of the district to conduct jury trials pursuant to 28 U.S.C. § 157(e). See General Order M-139, available at http://www.nysb.uscourts.gov/.
Federal Rule of Bankruptcy Procedure states in its entirety:
Rule 9015. Jury Trials
(a) APPLICABILITY OF CERTAIN FEDERAL RULES OF CIVIL PROCEDURE. Rules 38, 39, 47-49, and 51, F. R. Civ. P., and Rule 81(c) F. R. Civ. P. insofar as it applies to jury trials, apply in cases and proceedings, except that a demand made under Rule 38(b) F. R. Civ. P. shall be filed in accordance with Rule 5005.
(b) CONSENT TO HAVE TRIAL CONDUCTED BY BANKRUPTCY JUDGE. If the right to a jury trial applies, a timely demand has been filed pursuant to Rule 38(b) F.R.Civ.P., and the bankruptcy judge has been specially designated to conduct the jury trial, the parties may consent to have a jury trial conducted by a bankruptcy judge under 28 U.S.C. § 157(e) by jointly or separately filing a statement of consent within any applicable time limits specified by local rule.
(c) APPLICABILITY OF RULE 50 F.R. CIV. P. Rule 50 F.R. Civ. P. applies in cases and proceedings, except that any renewed motion for judgment or request for a new trial shall be filed no later than 14 days after the entry of judgment.
Local Bankruptcy Rule 9015-1 states, “A statement of consent to have a jury trial conducted by a Bankruptcy Judge under 28 U.S.C. § 157(e) shall be filed not later than 14 days after the service of the last pleading directed to the issue for which the demand was made.”
“Bankruptcy courts may conduct jury trials in core proceedings.” Ben Cooper, Inc. v. The Ins. Co. of the State of Pa. (In re Ben Cooper), 896 F.2d 1394, 1402 (2d Cir.1990). In Ben Cooper, the Second Circuit determined that a claim for breach of contract that arose post-petition was a core matter, noting, “Post-petition contracts with the debtor-in-possession ... are integral to the estate administration from the date they are entered into.” Id. 1399; see also In re Arnold Print Works, Inc., 815 F.2d 165 (1st Cir.1987). Regarding the appellate scheme set out in 28 U.S.C. sections 157 and 158, the Second Circuit ruled, “[s]ince the jury verdict in a core proceeding is subject only to the traditional standards of appellate review, such proceeding does not violate the Seventh Amendment.” Ben Cooper, 896 F.2d at 1403. The Second Circuit assumed that section 157(b) was constitutional, in light of Article III. Id. Ben Cooper was decided before section 157(e) was adopted; now, the relevant legal questions are whether the jury demand was timely and whether the parties expressly consent to a jury trial in bankruptcy court, not whether the bankruptcy court has the power to conduct a jury trial.
The Court reconsiders its ruling made on the record of the hearing held on October 26, 2011. See In re Global Link Telecom Corp., 2002 WL 31385814, at *1-2 n. 3, 2002 Bankr.LEXIS 1189 at *5 n. 3 (Bankr.D.Del. Oct. 22, 2002) (“Courts have discretion to sua sponte reconsider their rulings”) (citing cases). A final determination of what court should conduct the jury *407trial in the present case is not ripe, as the matter has not been fully briefed, and the matter is not trial-ready. See McCord v. Papantoniou, 316 B.R. 113 (E.D.N.Y.2004) (denying motion to withdraw the reference in a core matter); Walker, Truesdell, Roth & Assocs. v. The Blackstone Group, L.P. (In re Extended Stay), No. 09-13764, 2011 WL 5532258, at *4 (S.D.N.Y. Nov. 10, 2011) (denying motion to withdraw the reference; “permissive withdrawal to take the case to a district court for trial by jury, on asserted Seventh Amendment grounds, will become a question ripe for determination if and when the case becomes trial-ready.”); Nattel, LLC v. Oceanic Digital Commc’ns (In re Nattel, LLC), No. 06-50421, 2010 WL 2977133, at *2 (D.Conn. July 22, 2010) (“Even in a case in which a jury trial right is clearly established, a district court may conserve judicial resources by permitting the bankruptcy court to conduct discovery and rule on pretrial motions; the district court becomes involved, if necessary, only when it is clear that the case is going to require a jury trial.”).
In the memoranda of law, the Plaintiff argued that his jury demand was timely, and Defendant argued that Plaintiff expressly consented to a jury trial in this Court. The parties should have the opportunity to reply to each others’ briefs. Therefore, if and when the adversary proceeding becomes trial ready, the Court will set a date by which reply papers may be filed by the parties.
Conclusion
The present adversary proceeding is a core proceeding, pursuant to 28 U.S.C. sections 157(b)(2)(A) and (O), and the reasoning set forth in Southmark and the Memorandum Decision entered in this proceeding on October 26, 2007. The Bankruptcy Court has the power to enter final orders in this matter, at least up to the time the case becomes trial-ready. The Court will set a schedule for the parties to reply to each others’ briefs and address whether the jury demand was timely and whether Plaintiff expressly consented to jury trial in this Court, at a subsequent status conference.
Counsel to the Defendant shall submit an order consistent with this decision. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494426/ | PER CURIAM.
Supplies & Services, Inc. is the “Debtor” in a chapter 11 case in the District of Puerto Rico. NACCO Materials Handling Group, Inc., doing business as Yale Materials Handling Corporation (“NMHG”),1 is a creditor in that case and asserts a first perfected security interest in the Debtor’s inventory and related assets. The Debtor brought an adversary proceeding seeking a declaration that the security agreement is ineffective under North Carolina law and that NMHG’s security interest is void under 11 U.S.C. § 544. In that action, the *702bankruptcy court denied NMHG’s motion for summary judgment and granted the motions for summary judgment filed by the Debtor and Banco Popular de Puerto Rico (“BPPR”), an intervenor and holder of a competing security interest. The bankruptcy court also denied NMHG’s motion to set aside the default entered against them for failing to file a timely answer. NMHG has appealed each order. We REVERSE the order granting the motions for summary judgment filed by the Debtor and BPPR. We also REVERSE the order denying the motion to set aside default. We REMAND the case to the bankruptcy court for further action consistent with this opinion. We also DENY BPPR’s motion to strike portions of NMHG’s reply brief.
BACKGROUND2
Prior to the bankruptcy, the Debtor’s primary business was the lease, sale, and sendee of forklifts and other materials handling equipment. In September 1969, the Debtor and Eaton Yale & Towne International, Inc. (“Eaton”) entered into an agreement whereby the Debtor agreed to market and service certain products in the region in exchange for a commission on sales of those products. Yale Materials Handling Corporation, now a division of NMHG, eventually acquired Eaton’s rights and interests under the agreement.
In 2002, NMHG and the Debtor entered into a floor plan agreement that enabled the Debtor to purchase inventory under certain credit facilities. Section 1.03(c) of the floor plan agreement provides:
Borrower will execute and file any and all financing statements, registrations, or similar documents necessary under the law of Puerto Rico to perfect, register, place on the public record, or otherwise establish or strengthen Creditor’s rights to and in the Collateral under applicable law, and Borrower shall use its best efforts to maintain all of the foregoing in full force and effect.
Section 7.01 of the floor plan agreement also provides the following:
Governing Law: (a) All questions of the interpretation or meaning of this Agreement, the rights, duties, and obligations of the parties, and resolution of disputes between the parties, shall be governed by the substantive law of the State of North Carolina, U.S.A., but not its choice of law rules. The parties further agree that their rights and responsibilities shall be governed by the Uniform Commercial Code as the same is in effect at all relevant times in the State of North Carolina and shall not be governed by the Convention on International Contracts for the Sale of Goods.
Contemporaneously with the floor plan agreement, the Debtor executed a security agreement granting NMHG a security interest in the Debtor’s machinery, inventory, and equipment. Section 9 of the security agreement also provides:
9. INTERPRETATION. The validity, construction and enforcement of this Agreement are determined and governed by the laws of the State of North Carolina. All terms not otherwise defined have the meanings assigned to them by Articles I and IX of the Uniform Commercial Code....
On January 28, 2003, NMHG filed a financing statement relating to security agreement with the Puerto Rico Department of State.3 NMHG did not file any *703other financing statement or continuation statement relating to the floor plan agreement or the security agreement in Puerto Rico or in any other jurisdiction.4
The Debtor filed a chapter 11 petition in August 2010. Thereafter, NMHG filed a motion seeking to lift the automatic stay in connection with its collateral, which the Debtor opposed. NMHG also moved to prohibit the Debtor from using cash collateral, and a final hearing on both motions was scheduled for November 17, 2010.
In the meantime, the Debtor commenced an adversary proceeding containing two counts. The first sought a declaration that the security agreement is ineffective under North Carolina law and the second count sought a determination that NMHG’s security interest is void under 11 U.S.C. § 544. After granting an extension, the bankruptcy court set December 4, 2010, as the deadline for filing responsive pleadings.
During the November 17, 2010 hearing on the motions to lift the automatic stay and prevent the use of cash collateral, the parties agreed that there were no material facts in dispute and that the adversary proceeding could be determined as a matter of law. On that basis, the bankruptcy court ordered the parties to submit simultaneous motions for summary judgment in the adversary proceeding by December 7, 2010. The bankruptcy court also scheduled a status conference in the adversary proceeding for January 12, 2011. At the same time, the bankruptcy court ordered BPPR, who claimed a perfected security interest in certain machinery, inventory, cash, and cash collateral, to intervene in the adversary proceeding.5
NMHG did not file responsive pleadings in the adversary proceeding before or after the return date of December 4, 2010. Following the bankruptcy court’s instructions, however, NMHG did file a timely motion for summary judgment on December 7, 2010. In its motion, NMHG asserted, among other things, that the agreements contain a general choice of law provision, but that Puerto Rico law governs perfection. It also asserted that its security interest remains perfected because financing statements are effective for ten years in Puerto Rico.
In its timely summary judgment motion, the Debtor asserted, among other things, that the agreements between the parties required the application of North Carolina law, that North Carolina law limits the validity and duration of a filed financing statement to five years unless the creditor timely files a continuation statement, and that NMHG never filed a continuation statement with respect to the security agreement and floor plan agreement. On that basis, the Debtor argued that NMHG’s security interest had terminated before the commencement of the bankruptcy case and that, pursuant to 11 U.S.C. § 544, any security interest claimed by NMHG was null and void.
BPPR also timely filed a motion for summary judgment. BPPR adopted the Debtor’s argument that NMHG’s security interest was no longer valid on the petition date. BPPR also asserted that it has a perfected senior security interest in the *704Debtor’s entire inventory of equipment and parts upon the commencement of the case and that, at best, NMHG’s security interest covered no more than the equipment and parts which were on open account on the petition date.
On December 9, 2010, the Debtor filed a motion seeking a default judgment due to NMHG’s failure to answer the complaint. The next day, the bankruptcy court ordered that a default be entered against NMHG because of its failure to answer the complaint. On the same day, the bankruptcy court entered its opinion and order denying NMHG’s motion for summary judgment and granting the motions for summary judgment filed by the Debtor and BPPR. In rendering its decision, the bankruptcy court determined that pursuant to the choice of law clause of the security agreement, NMHG was obligated to file a continuation statement pursuant to North Carolina law and that, having failed to do so, NMHG’s security interest “is now expired, ineffective, unperfected and shall be considered a general unsecured claim” and BPPR “has a senior secured priority interest over Debtor’s entire inventory of equipment and parts.” Implicitly in the bankruptcy court’s decision is a determination of both counts of the complaint.
On December 21, 2010, NMHG filed a notice of appeal from the summary judgment order. It also sought a stay pending-appeal from the bankruptcy court and requested that the bankruptcy court set aside the entry of default pursuant to Fed. R.Civ.P. 55(c), applicable in bankruptcy proceedings through Fed. R. Bankr.P. 7055. Attached to NMHG’s motion to set aside entry of default was an answer to the complaint. After a hearing, the bankruptcy court denied the motion to set aside the entry of default, stating that “the opinion and order stands.” It also denied the request for a stay pending appeal. NMHG then filed a timely appeal of the bankruptcy court’s order denying its motion to set aside the entry of default.
JURISDICTION
We have jurisdiction to hear appeals from: (1) final judgments, orders, and decrees; or (2) with leave of court, from certain interlocutory orders. 28 U.S.C. § 158(a); Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (1st Cir. BAP 1998). A decision is considered final if it “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment,” id. at 646 (citations omitted), whereas an interlocutory order “only decides some intervening matter pertaining to the cause, and ... requires further steps to be taken in order to enable the court to adjudicate the cause on the merits.” Id. (quoting In re American Colonial Broad. Corp., 758 F.2d 794, 801 (1st Cir.1985)).
Generally, a bankruptcy court’s order denying a motion for summary judgment is not a final order. See CRS Steam, Inc. v. Engineering Resources, Inc. (In re CRS Steam, Inc.), 233 B.R. 901 (1st Cir. BAP 1999). However, an order denying a party’s motion for summary judgment that also grants an opposing party’s cross motion for summary judgment is a final order because it ends the litigation on the merits. See Ragosa v. Canzano (In re Colarusso), 295 B.R. 166, 171 (1st Cir. BAP 2003), aff'd, 382 F.3d 51 (1st Cir.2004).
A bankruptcy court’s refusal to set aside an entry of default under Fed. R.CivP. 55(c) prior to entry of judgment is generally interlocutory and not appealable. See Iowa State Univ. Research Found., Inc. v. Greater Continents Inc., 81 Fed.Appx. 344, 348 (Fed.Cir.2003); Johnson v. Dayton Elec. Mfg. Co., 140 F.3d 781, 783 (8th Cir.1998); Ackra Direct Mktg. Corp. v. Fingerhut Corp., 86 F.3d 852, 855 (8th *705Cir.1996). Therefore, as a preliminary matter, we ordered NMHG to show cause why its appeal of the order denying its motion to set aside the default should not be dismissed for lack of jurisdiction. Upon consideration of NMHG’s response, we determined that order to be a final order because it left nothing for the court to do but execute the judgment.
STANDARD OF REVIEW
We apply the clearly erroneous standard to findings of fact and de novo review to conclusions of law. See Lessard v. Wilton-Lyndeborough Coop. School Dist., 592 F.3d 267, 269 (1st Cir.2010). Generally, orders granting summary judgment are reviewed de novo, construing the record in the light most favorable to the nonmovant and resolving all reasonable inferences in that party’s favor. See Gosselin v. Webb, 242 F.3d 412, 414 (1st Cir.2001) (citing Landrau-Romero v. Banco Popular De Puerto Rico, 212 F.3d 607, 611 (1st Cir.2000)); see also Jones v. Svreck (In re Jones), 300 B.R. 133, 137 (1st Cir. BAP 2003); Rijos v. Vizcaya (In re Rijos), 263 B.R. 382, 388 n. 5 (1st Cir. BAP 2001). Therefore, we will apply de novo review to the summary judgment order. We will review the bankruptcy court’s refusal to set aside the default for abuse of discretion. See Pena v. Gonzalez (In re Pena), 397 B.R. 566, 574 (1st Cir. BAP 2008).
DISCUSSION
I. The Summary Judgment Standard
Fed.R.Civ.P. 56 (“Rule 56”) is applicable in adversary proceedings in bankruptcy cases pursuant to Fed. R. Bankr.P. 7056. Summary judgment is appropriate when the record shows that “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” See Fed.R.Civ.P. 56(a).6 Therefore, if there clearly exist factual issues “that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party,” summary judgment is inappropriate. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); see also Borges v. Serrano-Isern, 605 F.3d 1, 4-5 (1st Cir.2010); Estrada v. Rhode Island, 594 F.3d 56, 62 (1st Cir.2010). Here, the parties agreed that there were no material facts in dispute and that the issue was appropriate for summary judgment disposition.
II. The Choice of Law Issue
The parties’ dispute centers around the question of whether Puerto Rico law or North Carolina law applies to the perfection of NMHG’s security interest. Under North Carolina law, perfection by financ*706ing statement is limited to five years unless it is renewed.7 The effective period under Puerto Rico law is ten years.8 The bankruptcy court applied North Carolina law pursuant to the choice of law provision in the security agreement, and granted summary judgment to the Debtor and BPPR because the five-year perfection period had lapsed prior to the commencement of this case. NMHG argues that the bankruptcy court erred because Puerto Rico law governs perfection and the validity of the agreements is not at issue. If it is correct, its security interest would have been perfected when the case was commenced. The Debtor and BPPR concede that Puerto Rico law governs perfection, but insist that this case involves the validity of the security interest under North Carolina law.
We conclude that Puerto Rico law governs perfection and that the bankruptcy court erred in applying North Carolina law.
A. The Choice of Law Clause
As noted above, section 9 of the security agreement contains the following choice of law provision:
9. INTERPRETATION. The validity, construction and enforcement of this Agreement are determined and governed by the laws of the State of North Carolina. All terms not otherwise defined have the meanings assigned to them by Articles I and IX of the Uniform Commercial Code....
Choice of law clauses in contracts are •pri-ma facie valid and generally enforced unless the resisting party shows that enforcement would be unreasonable and unjust, or that the clause is invalid due to fraud, overreaching, or a strong public policy. See Rafael Rodriguez Barril, Inc. v. Conbraco Indus., Inc., 619 F.3d 90, 93 (1st Cir.2010) (citing Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth, Inc., 473 U.S. 614, 632, 105 S.Ct. 3346, 87 L.Ed.2d 444 (1985)). The parties’ choice of law in this case relates to the “validity, construction and enforcement” of the agreements, and it will be honored because it has not been challenged. As discussed below, the concern here is over the lapse in perfection, an issue that does not affect the validity of the underlying agreements. Under North Carolina law, perfection is generally governed by the law of the jurisdiction where the debtor and/or collateral is located.9 Further, as noted above, the parties agreed in section 1.03(c) of the floor plan *707agreement that Puerto Rico law would govern perfection.
B. Validity vs. Perfection
Perfection of a security interest governing the type of collateral present in this case is achieved by the filing of a financing statement. Perfection relates to the interest of third parties in the collateral; it does not affect the validity of the security agreement between the debtor and the secured party. “[A] defective financing statement does not affect the validity of the security interest between the parties.” William C. HillmaN, Dooument-ING SECURED TRANSACTIONS: EFFECTIVE Drafting & Litigation § 4:5 n. 41 (2d ed. 2002 & Supp. 2011) (citing Whitmore & Arnold, Inc. v. Lucquet, 233 Va. 106, 353 S.E.2d 764 (1987)); see also In re Guilbert, 176 B.R. 302, 307 (D.R.I.1995) (“[P]erfection does not relate to the validity of the [security] agreement”). Validity and perfection are entirely independent. “The attached security interest is valid as between the parties, has priority over a general creditor, but, unless perfected, is subject to the rights of many others acquiring interests in the property.” Hillman, supra, at § 4:5. On the other hand, “[t]o acquire rights valid against third parties, it is necessary that the security interest be perfected.” Id. at § 4:6. A security agreement’s validity is based upon attachment and enforceability, but not perfection. “While ‘attachment’ relates to the creation and enforceability of a security interest between the parties to the transaction, ‘perfection’ is an additional step which makes the security interest effective against third parties.” Advanced Analytics Lab., Inc. v. Envtl. Aspecs, Inc. (In re Envtl. Aspecs, Inc.), 235 B.R. 378, 385 (E.D.N.C.1999) (quoting Thompson v. Danner, 507 N.W.2d 550, 554 (N.D.1993)); see also In re L.M.S. Assocs., Inc., 18 B.R. 425, 429 (Bankr.S.D.Fla.1982) (“Perfection does not affect the rights and obligations between a debtor and his secured creditor, but relates to rights among competing creditors or others with interests in the collateral.”). Thus, a security agreement can be valid between the parties without being perfected.
Nonetheless, the Debtor and BPPR insist that lapse of perfection affects the validity of the underlying security agreement. But, as established above, validity and effectiveness relate to the relationship between the debtor and the secured party. Perfection relates to third parties. Therefore, lapse of perfection likewise relates to third parties and does not impact the validity and effectiveness of a security agreement. “The purpose of filing a financing statement is to perfect a security interest, and, thus, attain additional protection against conflicting claims in the same collateral_ Allowing a financing statement to lapse does not invalidate the security interest,” but rather upon lapse the security interest becomes unperfected. See Frank v. James Talcott, Inc., 692 F.2d 734, 737 (11th Cir.1982) (explaining further that unperfected interest would still be enforceable as between the debtor and creditor, but it could lose priority against third party creditors).
Therefore, as a lapse of a financing statement relates solely to the perfection of the security interest, and in no way implicates the validity of the security agreement, the laws of the jurisdiction governing the perfection of the financing statement should apply to a lapse of the financing statement. In this case, Puerto Rico law governs perfection. Due to the bankruptcy court’s erroneous application of North Carolina law, we conclude that the bankruptcy court erred in: (1) granting summary judgment in favor of the Debtor and BPPR and against NMHG; (2) holding that NMHG’s security interest had lapsed and “is now expired, ineffective, unperfected and shall be considered a *708general unsecured claim”; and (3) determining that BPPR “has a senior secured priority interest over Debtor’s entire inventory of equipment and parts.”
III. Order Denying Motion to Vacate Default
NMHG argues that the entry of default was erroneous and that the bankruptcy court abused its discretion when it refused to vacate the default. Rule 55(a) provides: “when a party against whom a judgment for affirmative relief is sought has failed to plead or otherwise defend,, and that failure is shown by affidavit or otherwise, the clerk must enter the party’s default.” Fed.R.Civ.P. 55(a) (emphasis supplied). According to NMHG, entry of default was not appropriate because it had otherwise defended against the adversary proceeding by filing its motion for summary judgment as instructed by the bankruptcy court. NMHG claims that “just cause” existed for the bankruptcy court to set aside the default. We agree.
Pursuant to Rule 55(c), the bankruptcy court may set aside an entry of default for “good cause.” Fed.R.Civ.P. 55(e). The determination of whether a party may be relieved from an entry of default rests within the trial court’s sound discretion, and should not be overturned absent an abuse of that discretion. See Coon v. Grenier, 867 F.2d 73, 75 (1st Cir.1989); In re CRS Steam, Inc., 233 B.R. at 904; Zeitler v. Zeitler (In re Zeitler), 221 B.R. 934, 937 (1st Cir. BAP 1998).
The First Circuit has held that setting aside an entry of default under Rule 55(c) is a case-specific inquiry, and the court should consider a number of factors, including: “(1) whether the default was willful; (2) whether setting it aside would prejudice the adversary; (3) whether a meritorious defense is presented; (4) the nature of the defendant’s explanation for the default; (5) the good faith of the parties; (6) the amount of money involved; and (7) the timing of the motion.” McKinnon v. Kwong Wah Rest, 83 F.3d 498, 503 (1st Cir.1996) (citing Coon, 867 F.2d at 76). In refusing to set aside the default, the bankruptcy court stated that “the opinion and order stands” and that it was not going to set aside the default as “the matters are now before the Bankruptcy Appellate Panel.” It does not appear that the bankruptcy court considered any of the other factors set forth by the First Circuit. This apparent failure suggests an abuse of discretion, particularly in light of: (1) the defense mounted by NMHG in its timely summary judgment motion; and (2) the defense raised in the answer NMHG filed with its motion to set aside the default.10 We conclude, under the unique circumstances of this case, that NMHG’s filing of a summary judgment motion at the direction of and within the time period set by the bankruptcy court satisfied the “otherwise defend” clause of Rule 55(a) and that good cause existed to vacate the default.
IV. BPPR’s Motion to Strike Portions of NMHG’s Reply Brief
BPPR filed a motion seeking to strike portions of NMHG’s reply brief on August *7095, 2011, nine days after this case was submitted for review on the briefs and almost eleven weeks after the subject brief was filed. As those portions of NMHG’s reply brief did not factor into our decision today, we deny the motion to strike.
CONCLUSION
We REVERSE the order granting summary judgment to the Debtor and BPPR and REVERSE the order denying NMHG’s motion to set aside the default. The matter is REMANDED to the bankruptcy court for further action consistent with this opinion. We also DENY BPPR’s motion to strike portions of NMHG’s reply brief.
. NMHG, NACCO Industries, Inc. and Yale Materials Handling Corporation were named as defendants in the underlying adversary proceeding. Throughout the proceedings before the bankruptcy court, they jointly filed various pleadings, including the notice of appeal, but have always asserted that NMHG is the real and only party to this action as NAC-CO Industries, Inc. was not a party to any of the documents referenced in the Debtor’s adversary complaint and the Debtor did not assert any claims against it. They also assert that Yale Materials Handling Corporation is not a proper party because it is an unincorporated division of NMHG and is not a separate legal entity. As a result, we will refer only to NMHG throughout this opinion, even though some pleadings were filed in the name of all three entities.
. The parties stipulated to the facts in a Joint Statement of Uncontested Facts set forth in their Pre-Trial Order.
. We accept that this was the appropriate index for perfection under Puerto Rico law because there has been no assertion to the contrary.
. In 2007, the parties executed another series of agreements, including a promissory note, a forbearance agreement, a security agreement, and a guaranty agreement from the Debtor’s principals to NMHG. In connection with these documents, NMHG filed a financing statement with the Puerto Rico Department of State on February 16, 2007. These agreements are not, however, at issue in this appeal.
. There is nothing in the record indicating a final disposition of the motions to lift the automatic stay and prevent the use of cash collateral at that time.
. Pursuant to an amendment to Rule 56 that became effective on December 1, 2010 (after the commencement of this adversary proceeding), the summary judgment standard now appears in Rule 56(a) rather than, as it formerly did, Rule 56(c). See Fed.R.Civ.P. 56 Advisory Committee Notes (2010 Amendments) ("Subdivision (a) carries forward the summary-judgment standard expressed in former subdivision (c)....”). Pursuant to 28 U.S.C. § 2074(a) and the April 28, 2010 U.S. Supreme Court orders, the amended rule governs all proceedings commenced on or after December 1, 2010, and all proceedings then pending "insofar as just and practicable.” Noting that the amendments to Rule 56 "are intended to improve the procedures for presenting and deciding summary-judgment motions” and "are not intended to change the summary-judgment standard or burdens," the First Circuit has held that applying the amended rule in a pending appeal is just and practicable and would not work a manifest injustice. Farmers Ins. Exch. v. RNK, Inc., 632 F.3d 777, 782 n. 4 (1st Cir.2011) (citing Committee on Rules of Practice and Procedure, Report of the Judicial Conference, at 14 (Sept. 2009)). Accordingly, it is appropriate for us to decide the present appeal with reference to the summary judgment standard set forth in the amended version of Rule 56.
. The North Carolina statute provides, in relevant part:
(a) Five-year effectiveness.—Except as otherwise provided in subsections (b), (e), (Í), and (g) of this section, a filed financing statement is effective for a period of five years after the date of filing....
(c) The effectiveness of a filed financing statement lapses on the expiration of the period of effectiveness unless before the lapse a continuation statement is filed pursuant to subsection (c) of this Code section. ...
N.C. Gen.Stat. § 25-9-515.
. The Puerto Rico statute provides, in relevant part:
... [A] filed financing statement is effective for a period of ten (10) years from the date of filing. The effectiveness of a filed financing statement lapses on the expiration of the 10-year period unless a continuation statement is filed prior to the lapse.
P.R. Laws Ann. tit. 19, § 2153.
.Under North Carolina law, where a debtor and/or collateral is "located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or nonperfection, and the priority of a security interest in collateral.” N.C. Gen.Stat. § 25-9-301. This section dictates that, because the Debtor and the subject collateral were (at all relevant times) located in Puerto Rico, the laws of Puerto Rico govern all issues relating to the perfection of NMHG's security interest, including the duration of the financing statement.
. By its very language, Rule 55(a)'s "or otherwise defend" clause is broader than a mere failure to plead. See Fed.R.Civ.P. 55(a). Therefore, the filing of a motion for summary judgment can defeat a motion for default. See Rashidi v. Albright, 818 F.Supp. 1354, 1355-56 (D.Nev.1993) (finding a motion for summary judgment sufficient to satisfy the "otherwise defend” requirement under Rule 55 because "it speaks to the merits of the case and demonstrates a concerted effort and an undeniable desire to contest the action”), aff'd, 39 F.3d 1188 (9th Cir.1994); Ivy v. Thornton (In re Thornton), 419 B.R. 787, 790 (Bankr.W.D.Tenn.2009) (citing cases). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494427/ | OPINION
ARTHUR I. HARRIS, Bankruptcy Judge.
The chapter 13 debtor, Gary D. Barbee (“Debtor”), instituted an adversary proceeding against U.S. Bank National Association as trustee for the Truman FHA Trust 2008-1, by and through its mortgage servicing agent BAC Home Loan Servicing (“Bank”) seeking to avoid the Bank’s interest in his manufactured home pursuant to 11 U.S.C. § 544. The parties filed cross-motions for summary judgment on stipulated facts. Appellant appeals the bankruptcy court’s September 17, 2010, order granting summary judgment in favor of Debtor. For the reasons that follow, the Panel AFFIRMS the bankruptcy court’s order.
I. ISSUES ON APPEAL
The issue presented by this appeal is whether the bankruptcy court erred in granting summary judgment in favor of Debtor. Underlying this issue is whether the court correctly concluded that Debtor has standing to pursue an avoidance action, and whether the court correctly concluded that the Bank’s lien on Debtor’s manufactured home was not perfected, and therefore avoidable, because there was no notation of the lien on the certificate of title and the home was never converted from personal to real property.
II. JURISDICTION AND STANDARD OF REVIEW
The Bankruptcy Appellate Panel of the Sixth Circuit has jurisdiction to decide this appeal. The United States District Court for the Eastern District of Kentucky has authorized appeals to the Panel, and neither party has timely elected to have this appeal heard by the district court. 28 U.S.C. § 158(b)(6) and (c)(1). A final order of the bankruptcy court may be appealed as of right pursuant to 28 U.S.C. § 158(a)(1). For purposes of appeal, an order is final if it “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” Midland Asphalt Corp. v. United States, 489 U.S. 794, 798, 109 S.Ct. 1494, 1497, 103 L.Ed.2d 879 (1989) (citations omitted). An order granting summary judgment is a final order. Drown v. Nat’l City Bank (In re Ingersoll), 420 B.R. 414, 414-15 (6th Cir. BAP 2009).
The bankruptcy court’s final order granting Debtor’s motion for summary judgment is reviewed de novo. See Int’l Dairy Foods Ass’n v. Boggs, 622 F.3d 628, 635 (6th Cir.2010). “ ‘Under a de novo standard of review, the reviewing court decides an issue independently of, and without deference to, the trial court’s de*713termination.’ ” In re Ingersoll, 420 B.R. at 415 (quoting Buckeye Check Cashing, Inc. v. Meadows (In re Meadows), 396 B.R. 485 (6th Cir. BAP 2008)).
III. FACTS
The relevant facts in this case are undisputed. On November 15, 1999, Debtor and Rebecca Ruth Gaunce (“Gaunce”) borrowed $75,558.93 from Countrywide Home Loans, Inc. (“Countrywide”), repayment of which was secured by the grant of a mortgage lien in favor of Countrywide. The mortgage granted to Countrywide is dated November 15, 1999, and was recorded in the office of the Bourbon County Clerk on December 1, 1999. That mortgage encumbered the real property and all improvements and fixtures located at 106 Vimont Street, Millersburg, Kentucky. On October 22, 2009, the note and mortgage were assigned to the Bank.
Debtor and Gaunce used the proceeds of the loan to acquire the real property from the Estate of Joseph F. O’Nan. Located on the property is Debtor and Gaunce’s manufactured home. Attached to the home is a metal plate that states:
As evidenced by this label No. NTA 213282 the manufacturer certifies to the best of the manufacturer’s knowledge and belief that this manufactured home has been inspected in accordance with the requirements of the Department of Housing and Urban Development and is constructed in conformance with the federal manufactured home construction and safety standards in effect at the date of manufacture.
(Adv. Proc. Doc. # 13, Ex. 8.) Also in the record is a letter from a loan officer to Countrywide regarding Debtor’s loan from Countrywide advising that “[i]n 1997, this double wide mobile home was gutted and rebuild (sic) as an actual house.” (Adv. Proc. Doc. # 6-1, at 22.) Debtor and Gaunce did not acquire a separate title to the manufactured home; however, the record is unclear as to whether a certificate of title has ever been issued for the manufactured home.
On November 11, 2009, Debtor filed a petition for relief under chapter 13 of the Bankruptcy Code.1 On April 16, 2010, Debtor filed a motion seeking derivative standing to file an adversary proceeding to avoid the Bank’s lien on the manufactured home. On May 17, 2010, the bankruptcy court granted Debtor’s motion.
Debtor filed his adversary complaint on May 23, 2010. In his complaint, Debtor asserted that as a hypothetical lien creditor, he has superior title to the manufactured home located on the property, and that any interest the Bank has in the home is avoidable pursuant to 11 U.S.C. § 544 because the Bank failed to perfect its lien on the manufactured home pursuant to Kentucky law.2
The Bank and Debtor filed cross-motions for summary judgment. The Bank asserted that Debtor did not have standing to bring the avoidance action, and that he did not acquire title to the home pursuant to Kentucky Revised Statute § 186A.215. The Bank claimed that the home does not constitute an asset of the estate because Debtor acquired no interest in the home *714apart from its status as an improvement to real property or a fixture. Additionally, the Bank argued that Debtor’s claims were barred by 11 U.S.C. §§ 1322(b)(2) and 1325(a)(5) in that Debtor may not modify the Bank’s rights as the holder of a mortgage secured solely by his residence.3
The bankruptcy court heard oral argument on September 13, 2010. The parties agreed that there were no genuine issues of material fact and that disposition of the cross-motions for summary judgment would fully adjudicate all claims. On September 17, 2010, the bankruptcy court issued an order granting summary judgment in favor of Debtor and denying the Bank’s motion for summary judgment. The bankruptcy court held that Debtor has standing to bring the avoidance action, and that the Bank’s lien on the manufactured home was avoidable because the lien was not noted on the certifícate of title, nor had the home been converted to real property.
IV. DISCUSSION
A. Derivative Standing of Debtor to Pursue Lien Avoidance Under 11 U.S.C. § 544
Citing to the Sixth Circuit Bankruptcy Appellate Panel’s decision in Countrywide Home Loans v. Dickson (In re Dickson), 427 B.R. 399 (6th Cir. BAP 2010), the bankruptcy court held that Debtor has derivative standing to pursue the lien avoidance under § 544. The Bank argues that Debtor lacked standing to bring the avoidance action because a debt- or cannot be granted derivative standing to exercise the trustee’s strong arm powers with regard to consensual liens. Debt- or asserts that he has derivative standing to pursue lien avoidance under § 544 pursuant to the Bankruptcy Appellate Panel’s decision in Dickson.
In Dickson, Countrywide Home Loans asserted that a chapter 13 debtor lacked standing to pursue avoidance of the lien on her manufactured home. The bankruptcy court in that case concluded that the debt- or had derivative standing to avoid Countrywide’s lien under either § 544 or § 547. In addressing the issue, the Bankruptcy Appellate Panel acknowledged that courts are split on whether a chapter 13 debtor may be granted derivative standing to bring an avoidance action. See Realty Portfolio, Inc. v. Hamilton (In re Hamilton), 125 F.3d 292 (5th Cir.1997) (discussing split in cases with some courts granting standing by emphasizing “reality” of chapter 13 bankruptcies, limited role of chapter 13 trustees, and perceived unfairness to chapter 13 debtors of denying standing under § 544, and other courts refusing to grant standing based on lack of explicit statutory foundation for debtor to seek avoidance and relying on plain language of Code). The Dickson Panel concluded that the bankruptcy court had properly granted the debtor derivative standing to pursue lien avoidance. Dickson, 427 B.R. at 406.
In Dickson, the Bankruptcy Appellate Panel based its conclusion, in part, on the decision of the Sixth Circuit Court of Appeals in Hyundai Translead, Inc. v. Jackson Truck & Trailer Repair, Inc. (In re Trailer Source, Inc.), 555 F.3d 231 (6th Cir.2009). In In re Trailer Source, the Sixth Circuit held that the Bankruptcy Code allows courts to grant derivative standing to creditors to bring avoidance actions on behalf of the bankruptcy estate in chapter 11 and chapter 7 proceedings where the trustee refuses to do so. “Although the case was decided in the specific context of a Chapter 7 bankruptcy case wherein a creditor sought to avoid a fraud*715ulent transfer, the Sixth Circuit in Hyundai Translead relied upon principles generally applicable to Chapter 13 debtors and lien avoidance under 11 U.S.C. §§ 544 and 547.” In re Dickson, 427 B.R. at 404. The Dickson Panel explained that the realities of chapter 13 bankruptcies “make it imperative for a debtor to be able to pursue avoidance claims if the Chapter 13 trustee refuses to do so.” Id. at 405. Those realities identified by the Bankruptcy Appellate Panel in Dickson included the chapter 13 trustee’s lack of resources to pursue meritorious avoidance claims, the need for the chapter 13 debtor’s plan to comply with § 1325(a)(4), and the possibility of a debtor being accused of proposing a plan in bad faith if his plan does not contemplate avoidance of an obviously avoidable lien. Id.
While acknowledging the Bankruptcy Appellate Panel’s holding in Dickson, the Bank argues that Debtor lacked standing to pursue avoidance of the lien based upon the plain language of the Bankruptcy Code and the reasoning of courts which have found that a chapter 13 debtor lacks standing to exercise the trustee’s avoidance powers. At the time the Bank filed its brief in this appeal, an appeal of the decision in Dickson was pending before the Sixth Circuit Court of Appeals. Therefore, the Panel issued an order holding this appeal in abeyance pending a decision of the Sixth Circuit in Dickson.
The Sixth Circuit issued a decision in Dickson on August 26, 2011; however, the Court of Appeals never reached the issue of derivative standing. Instead, the Sixth Circuit held that the transfer at issue in Dickson was involuntary, so that the debt- or had direct, statutory standing to seek avoidance of the creditor’s lien under 11 U.S.C. § 522(h). Thus, the Sixth Circuit concluded: “In view of our holding that Dickson possesses direct standing, it is unnecessary for us to address the issue of whether she possesses ‘derivative standing’ as found by the BAP.” Countrywide Home Loans v. Dickson (In re Dickson), 655 F.3d 585, 593 (6th Cir.2011) (citation omitted).
Without deciding whether a later panel must always follow the precedent of a prior panel, we see no reason in this case to break with the principles of stare deci-sis and therefore follow the holding of the Bankruptcy Appellate Panel’s decision in Dickson. Adhering to precedent promotes uniformity of case law throughout the Circuit and promotes “the goals of ‘stability’ and ‘predictability’ that the doctrine of statutory stare decisis aims to ensure.” CSX Transp., Inc. v. McBride, — U.S. -, 131 S.Ct. 2630, 2641, 180 L.Ed.2d 637 (2011) (quoting Hilton v. S.C. Public Rys. Comm’n, 502 U.S. 197, 202, 112 S.Ct. 560, 116 L.Ed.2d 560 (1991)). Furthermore, the Bank is free to seek review of our decision in the Court of Appeals, which is not bound by decisions of Bankruptcy Appellate Panels. See Phar-Mor, Inc. v. McKesson Corp. (In re Phar-Mor, Inc.), 534 F.3d 502, 507 (6th Cir.2008). Therefore, we will follow the holding of the Bankruptcy Appellate Panel’s decision in Dickson and affirm the bankruptcy court’s determination that Debtor has derivative standing to avoid the Bank’s lien pursuant to § 544.
B. Perfection of the Bank’s Lien On Debtor’s Manufactured Home
1. The manufactured home is property of Debtor’s estate.
Before the bankruptcy court, the Bank argued that Debtor never acquired title to the manufactured home pursuant to Kentucky Revised Statute § 186A.215, and therefore, never acquired an interest in the home apart from its status as an improvement to real property or fixture. The Bank asserts that the home either *716does not constitute an asset of the estate or is an improvement to real property and therefore subject to the Bank’s mortgage lien.
Kentucky Revised Statute § 186A.215 provides, in pertinent part:
(1) If an owner transfers his interest in a vehicle, he shall, at the time of the delivery of the vehicle, execute an assignment and warranty of title to the transferee in the space provided therefor on the certifícate of title ... The transferor shall cause the application with the certificate of title attached to be delivered to the transferee.
(3) The application with its supporting documentation attached shall promptly be submitted to the county clerk....
“The adoption of K.R.S. 186A.010 et seq. changed Kentucky from an equitable title state to a certifícate of title state wherein the legal titleholder is considered the owner of a vehicle in the absence of a valid conditional sales or lease agreement.” Potts v. Draper, 864 S.W.2d 896, 900 (Ky.1993) (citing Ky.Rev.Stat. Ann. § 186.010(7)).
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.” 11 U.S.C. § 541(a)(1). “This definition is unquestionably broad, its main purpose being to ‘bring anything of value that the debtors have into the [bankruptcy] estate.’ ” Lyon v. Eiseman (In re Forbes), 372 B.R. 321, 330 (6th Cir. BAP 2007) (quoting Booth v. Vaughan (In re Booth), 260 B.R. 281, 284-85 (6th Cir. BAP 2001)). As the bankruptcy court here found, Debtor “clearly has an interest in the property that would fall under the definition as set forth in 11 U.S.C. § 541.” (Adv. Proc. Doc. # 22, Order, at 5.) Debtor has, at a minimum, an equitable interest in the manufactured home. Therefore, the manufactured home is property of Debtor’s bankruptcy estate.
2. Debtor’s manufactured home is personal property, and any lien encumbering it can be perfected only by a notation on the certificate of title.
The Bank’s assertion that the manufactured home is subject to the Bank’s mortgage lien as an improvement to real property is incorrect. Property interests are created and defined by state law unless some federal interest requires a different result. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918, 59 L.Ed.2d 136 (1979). In Kentucky, a manufactured home is personal property for which a certificate of title is required. See Ky.Rev.Stat. Ann. § 186A.070(1); see also Citizens Nat’l Bank of Jessamine Cnty. v. Washington Mut. Bank, 309 S.W.3d 792, 796 (Ky.Ct.App.2010). In order to perfect a lien on personal property, the lien must be noted on the certificate of title. See Ky.Rev.Stat. Ann. § 186A.190(2) (“[T]he sole means of perfecting and discharging a security interest in property for which a certificate of title is required by this chapter is by notation on the property’s certificate of title.... ”); see also In re Dickson, 655 F.3d at 590; Citizens Nat’l Bank, 309 S.W.3d at 796. “However, a manufactured home may be converted from personal property to an improvement to real estate, KRS § 186A.297, thereby allowing perfection through first recording without notice, KRS § 382.110.” In re Dickson, 655 F.3d at 590. By filing an affidavit of conversion to real estate and surrendering the Kentucky certificate of title, a manufactured home will be deemed “ ‘an improvement to the real estate upon which it is located.’ ” PHH Mortgage Servs. v. Higgason, 345 B.R. 584, 586-87 (E.D.Ky.2006) (quoting Ky.Rev.Stat. Ann. § 186A.297).
*717In Dickson, the Sixth Circuit held that a creditor can also obtain a perfected lien on a manufactured home by obtaining a state court order converting the manufactured home to an improvement to real property. See Dickson, 655 F.3d at 590-91. Thus, a creditor who is unable to obtain a lien on the certificate of title or an affidavit of conversion of the manufactured home to real property in accordance with Kentucky Revised Statute § 186A.297(1), can still obtain a perfected lien through the state court procedure used by the creditor in Dickson. It is undisputed that Debtor did not comply with Kentucky Revised Statute § 186A.297 by filing an affidavit of conversion and surrendering the certificate of title or by seeking a court order converting the property. Therefore, the manufactured home remained personal property, and the sole means of perfecting a lien on the home was by placing a notation of the lien on the certificate of title. It is undisputed that the Bank’s lien was not noted on the certificate of title. Therefore, the Bank did not perfect its lien on Debtor’s manufactured home.
In support of its position that the manufactured home is a fixture encumbered by the “plain language” of its mortgage, the Bank cites, for the first time on appeal, to the unpublished decision of Whisman v. Whisman, 2007-CA-002534-MR, 2009 WL 2971552 (Ky.Ct.App. Sept. 18, 2009). The Bank’s reliance on Whisman is misplaced as it does not advance the Bank’s position that its interest in Debtor’s manufactured home is not avoidable pursuant to 11 U.S.C. § 544. Whisman was a case involving a Kentucky divorce proceeding and a court-ordered sale of real property upon which a manufactured home was located. The appellant contended that the manufactured home was not a part of the land for purposes of the sale because there was no certificate of title in the record, nor had an affidavit affixing the home to the property been recorded with the county clerk. The issue before the court was “whether the trailer was affixed to the property and passed with the commissioner’s sale or is the personal property of [the appellant].” Id. at *2.
In support of her position, the appellant in Whisman relied on PHH Mortgage Servs. v. Higgason for the proposition that because no certificate of title was surrendered to the county clerk, and no affidavit of conversion to real property was filed in compliance with Kentucky Revised Statute § 186A.297(1), the trailer did not become permanently affixed to the land so as to pass with the sale of the property. Whisman, 2009 WL 2971552, at *3 (citing PHH Mortg. Servs., 345 B.R. at 587-88). The Whisman court explained that such reliance was misplaced because that case, as well as the earlier case of Hiers v. Bank One, 946 S.W.2d 196 (Ky.Ct.App.1996), “dealt with perfection of security interests in a manufactured home as against other creditors. Although both are somewhat analogous to the present issue, and thus somewhat instructive, neither decides this particular issue.” Whisman, 2009 WL 2971552, at *3.
The Whisman court reasoned:
[W]e are without evidence indicating to whom the trailer belonged, when it was purchased or whether it was permanently affixed to the property. Despite [the appellant’s] contention that the trailer was personal property and not a permanent fixture, [the appellant] presented no evidence to support her position.... By contrast, ... [the appellee] submitted photographs of the trailer in question. After reviewing the evidence presented, the court ruled that the trailer was permanently affixed to the property and sold at the master commissioner’s sale. Based upon the only evidence presented, we cannot find that the court’s finding of fact on this issue was clearly *718erroneous. We therefore uphold the trial court’s determination that the trailer was permanently affixed to the property.
Id. The Whisman court, therefore, held only that an affixed manufactured home without a title may be conveyed by deed. See also In re Starks, No. 10-22108, 2011 WL 248521 (Bankr.E.D.Ky. Jan. 24, 2011) (rejecting reliance upon Whisman by mortgagee objecting to chapter 13 plan confirmation). The current case is distinguishable from Whisman for the same reason PHH Mortgage Services and Hiers were. Here, the issue is perfection of a security interest in a manufactured home as against other creditors.
The Sixth Circuit’s discussion in Dickson regarding the failure of Countrywide’s mortgage to grant a lien on the debtor’s manufactured home further illuminates the Bank’s misplaced reliance upon Whisman. In Dickson, the Sixth Circuit explained:
In the case at bar, the plain language of the mortgage contract did not grant Countrywide a lien on Dickson’s manufactured home as personal property. Rather, the mortgage grants Countrywide a lien on the real estate and “all improvements now or hereafter erected on the property, and all easements, appurtenances, and fixtures now or hereafter a part of that property.” Accordingly, unless converted to an improvement to real estate, Countrywide did not obtain a security interest in the manufactured home through the mortgage contract.
Moreover, even if Countrywide obtained a lien against the manufactured home by way of the mortgage contract, it is undisputed that Countrywide did not note this security interest on the certificate of title.... Accordingly ... Countrywide did not have a perfected lien on Dickson’s manufactured home. Dickson, 655 F.3d at 590 (footnotes and internal citations omitted). Similarly, even if the Bank were correct in its position that it obtained a lien against the manufactured home by way of its mortgage, it did not perfect that lien. Therefore, the lien is avoidable pursuant to § 544.
The Bank next argues that the priority scheme set forth in Article 9 of Kentucky’s version of the Uniform Commercial Code provides a mechanism for a mortgage to have priority over a security interest in a manufactured home—in particular, Kentucky Revised Statute § 355.9-334(5)(d). The Bank asserts that the priority scheme in § 355.9-334 provides that a mortgage is a method of perfecting a lien on a manufactured home that is a fixture. However, the Bank makes this argument for the first time on appeal. Therefore, it is waived. See Bailey v. Floyd Cnty. Bd. of Educ., 106 F.3d 135, 143 (6th Cir.1997) (“It is well-settled that this court will not consider arguments raised for the first time on appeal unless our failure to consider the issue will result in a plain miscarriage of justice.”). As the Panel sees no reason for departing from this well-settled policy, the Panel declines to consider the Bank’s argument based on Kentucky Revised Statute § 355.9-334(5)(d), which is raised for the first time on appeal.
Y. CONCLUSION
For the foregoing reasons, the Panel AFFIRMS the order of the bankruptcy court.
. Also on November 11, 2009, Gaunce filed a separate chapter 13 petition. Her chapter 13 plan proposed to treat the Bank’s $79,000 claim as having a secured value of only $7,500 according to 11 U.S.C. § 506(a). Her plan was confirmed on March 22, 2010, without objection.
. Debtor’s complaint also asserted that the order confirming Gaunce’s chapter 13 plan has res judicata effect as to the non-existence of a lien on the home. The bankruptcy court rejected this contention, and Debtor has not filed a cross-appeal on this issue.
. The bankruptcy court rejected the Bank’s argument regarding §§ 1322(b)(2) and 1325(a)(5); however, the Bank has not raised this argument on appeal. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494428/ | OPINION AND ORDER
SCOTT W. DALES, Bankruptcy Judge.
I. INTRODUCTION
Chapter 13 Debtor Robert Borin (“Mr. Borin” or the “Debtor”) objects to the claim of his mortgagee, Arch Bay Holdings, LLC — Series 2010C (“Arch Bay”), on the grounds that the creditor’s Proof of Claim overstates the arrearage by failing to give him credit for prepetition payments. See Debtor’s Objection to the Proof of Claim Number 14-1 Filed By Arch Bay Holdings, LLC — Series 2010C (the “Objection,” DN 41). Arch Bay filed a written response (the “Response,” DN 53). The court conducted an evidentiary hearing on October 25, 2011 in Traverse City, Michigan.
*720This Opinion and Order constitutes the court’s findings of fact and conclusions of law in accordance with Fed. R. Bankr.P. 7052 and 9014. For the following reasons, and to the extent described herein, the court will sustain the Debtor’s Objection to Arch Bay’s Proof of Claim.
II. JURISDICTION
The court has jurisdiction over the Debtor’s bankruptcy case pursuant to 28 U.S.C. § 1334. The case and this contested matter have been referred to the United States Bankruptcy Court pursuant to 28 U.S.C. § 157(a) and L.Civ.R. 83.2(a) (W.D. Mich.). An objection to claim is clearly a “core” proceeding within the meaning of 28 U.S.C. § 157(b)(2)(B), and the Supreme Court’s recent decision in Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), does not undermine this court’s authority to enter a final order. Indeed, by citing Katchen v. Landy, 382 U.S. 323, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966) and Langenkamp v. Culp, 498 U.S. 42, 44, 111 S.Ct. 330, 112 L.Ed.2d 343 (1990), the high court recognized that non-tenured judicial officers may resolve disputes in the claims allowance process, including disputes “integral to the restructuring of the debtor-creditor relationship.” Stern, 131 S.Ct. at 2617. Accordingly, this Opinion and Order will be final, subject to appellate review under 28 U.S.C. § 158.
III. ANALYSIS
At the hearing on the Objection, the Debtor was the only witness. Arch Bay relied exclusively on the prima facie evi-dentiary effect of its Proof of Claim and offered no testimony or other evidence beyond the fact that it filed a Proof of Claim. See Fed. R. Bankr.P. 3001(f). The parties agreed that the Debtor bears the initial burden of rebutting the presumption of validity and amount of Arch Bay’s claim. They also agreed that if the Debtor succeeds in rebutting the presumption, Arch Bay must then shoulder the burden of proving its claim. See In re Weese, 428 B.R. 380 (Bankr.W.D.Mich.2010). Having the opportunity to judge the demeanor and credibility of Mr. Borin, the court concludes that he has rebutted the prima facie evidentiary effect of Arch Bay’s Proof of Claim to the extent provided in this Opinion.
In 1970, Mr. Borin purchased and developed a parcel of real estate in Mantón, Michigan which, on the petition date, included several improvements: a residence, a barn, and a guest house with apartment. The real estate is a 40-acre parcel where Mr. Borin has for many years operated a conference center. He is a counselor with a Masters degree in psychology who has developed his land, at least in part, as a family resort and healing environment for troubled children. See Exhibit A (brochure for “Borinville”). He also rents some of the outbuildings, from which the court infers that he uses the 40-acre property for commercial and residential purposes.
Beginning sometime in 2008, Mr. Borin suffered two unfortunate events that interfered with his ability to work and his otherwise stellar mortgage payment history. The guest house structure caught fire and, more dramatically, Mr. Borin broke his neck in five places when he was “T-boned” in a car accident. His injuries prevented him from working during the many months of convalescence. Understandably, confined in traction, he fell behind in making his payments to the lender, Citi-Mortgage, Inc. (“CitiMortgage”), who then held his note and mortgage. See Exhibits 1,1A & 2A (Proof of Claim).
After enduring these unfortunate injuries, Mr. Borin contacted the servicer for CitiMortgage about possible forbearance or modification of his payment schedule *721under the note. In approximately August 2009, he applied for a loan modification and pursuant to oral direction from his mortgage servicer, he made payments in the reduced amount of $1,240.00, starting in September 2009 and continuing for 12 months. After making these payments for several months, he learned that the lender or its servicer had declined to modify his payment obligation, even though they accepted his reduced payments while his application for modification was pending, but before the servicer informed him that it had denied the request. Mr. Borin credibly testified that during this period the lender or its servicer was unresponsive to his request for information regarding the status of his modification or its reconsideration. He also admitted that, as a matter of fact, neither CitiMortgage, nor Arch Bay, nor any other servicer ever formally modified his repayment obligation (except to the extent they directed him to make reduced payments in the amount of $1,240.00 during the approval process).
As a result, he retained two different attorneys and a loan modification “expert” to assist him in resolving his payment situation with the lender. Unfortunately, the lawyers and modification expert were also unsuccessful in securing formal or documented modification of the loan. The testimony established that the lender or its agents ignored Mr. Borin’s efforts to communicate, directly and through professional advocates. Sometime in early 2010, when Arch Bay’s agent came to the property inquiring about selling it, Mr. Borin learned that the lender was in the process of foreclosing his interest. At that point, understandably frustrated, he filed a voluntary petition for relief under Chapter 13. Presently, his proposed Chapter 13 Plan remains unconfirmed, due in part to the pendency of this claim objection.
On July 18, 2011, Arch Bay timely filed its Proof of Claim (Claim No. 14) which recites that the total secured debt due from Mr. Borin is $313,188.61. This figure includes a $36,897.69 arrearage. Arch Bay attached a copy of the note and mortgage and two assignment documents to its Proof of Claim, together with a one-page itemization of the charges comprising the arrear-age.
The court finds, based upon Mr. Borin’s credible testimony and the documentary evidence submitted, that Arch Bay has overstated the arrearage and therefore its Claim. More specifically, the court finds that Arch Bay has failed to give Mr. Borin credit for $14,880.00 representing twelve reduced payments of $1,240.00 that he made in rebanee on the mortgage servicer’s statements between September 2009 and August 2010.1
In addition, the arrearage claim includes $1,472.54 in late fees that Arch Bay or its predecessor tacked onto the debt, perhaps during the pendency of Mr. Borin’s modification request.
Arch Bay’s authority to collect late payments derives from the seventh paragraph of the Interest First Adjustable Rate Note. See Exh. 1A at ¶ 7. That paragraph provides that if Mr. Borin fails to make a full payment, the amount of the late charge will be “5.000% of my payment of overdue interest, during the period when my payment is interest only, and of principal and interest thereafter.” See Exh. 1A at ¶ 7. By failing to produce a witness, however, Arch Bay has provided the court with no assistance in calculating the late charge. The court does not know *722how Arch Bay (or its servicer or predecessor) applied Mr. Borin’s payments, as this might affect the calculation. See, e.g., In re Weese, 428 B.R. at 384 (application of payments affects late fee calculation). Without supporting documents or testimony, and given the credible testimony that Mr. Borin’s payments were not late but only reduced in accordance with the lender’s agent’s instructions, the court will disallow the late charges entirely.
To the extent Arch Bay argues that M.C.L. § 566.132 precludes the oral modification or forbearance implicit in excusing the late charges, the court notes that the section protects only a “financial institution” as defined in that statute. Because Arch Bay did not offer any witness or other evidence, the record does not permit the court to find that Arch Bay qualifies as “a state or national chartered bank, a state or federal chartered savings bank or savings and loan association, a state or federal chartered credit union, a person licensed or registered under the mortgage brokers, lenders, and servicers licensing act, Act No. 173 of the Public Acts of 1987, being sections 445.1651 to 445.1683 of the Michigan Compiled Laws, or Act No. 125 of the Public Acts of 1981, being sections 493.51 to 493.81 of the Michigan Compiled Laws, or an affiliate or subsidiary thereof.” M.C.L. § 566.132(3) (defining “financial institution”). Without evidence from Arch Bay (a limited liability company, judging from its formal name), the court will not assume that Arch Bay comes within the protection of the statute.
In its written closing argument, Arch Bay also argues that the parol evidence rule prevents the court from recognizing an oral modification of the parties’ written note and mortgage. The short answer to this argument based on the parol evidence rule is that the rule “is not so broad as to prevent a showing of subsequent oral modifications.” Michigan Nat. Bank of Detroit v. Holland-Dozier-Holland Sound Studios, 73 Mich.App. 12, 250 N.W.2d 532, 533 (1976) (citing Rasch v. National Steel Corp., 22 Mich.App. 257, 177 N.W.2d 428 (1970)). Indeed, the unpublished Sixth Circuit decision that Arch Bay cites in its written closing argument itself recognizes that “[cjontracts that are within the Statute of Frauds may be modified orally so long as the modified terms are not themselves within the statute.” See Kleese v. FDIC (In re Conneaut Devel., Inc.), 1996 WL 15643, 1996 U.S.App. LEXIS 1390 (6th Cir. Jan. 16, 1996) (interpreting Ohio law). Here, as the court noted, Arch Bay has not established that it qualifies as a “financial institution” within the meaning of the particular statute of frauds it cites.2
For the foregoing reasons, the court will sustain the Objection to Arch Bay’s Claim by reducing the arrearage to $20,545.15. This figure reflects credits in Mr. Borin’s favor for (1) the payments he made while the modification request was pending, and (2) the elimination of the late charges allo-cable to that same period.
IV. CONCLUSION
The record establishes that Mr. Borin made an earnest and honest effort to meet his obligations to Arch Bay or its predecessors by seeking a modification of his mortgage payments following a serious injury and fire at the rental unit on his property. The lender or its agents returned the favor by dodging his inquiries, failing to apply his payments, imposing late fees after they induced him to continue making payments in a reduced amount, *723ignoring his counsel’s inquiries, and finally failing to send a witness to the claim objection hearing.
Perhaps now, given the nature of Mr. Borin’s 40 acre mixed-use parcel and the Chapter 13 power to modify the rights of secured creditors, he may at last succeed in modifying his mortgage through his plan. See 11 U.S.C. § 1322(b)(2) (Chapter 13 plan may “modify the rights of holders of secured claims, other than a claim secured only by a security interest in real property that is the debtor’s principal residence ... ”); In re Dinsmore, 141 B.R. 499 (Bankr.W.D.Mich.1992) (mortgage secured by debtor’s residence and commercial real estate is not protected from modification by § 1322(b)(2)); see generally Keith M. Lundin & William H. Brown, Chapter 13 Bankruptcy, 4th Edition, § 122. 1, at ¶ 1, Rev. June 14, 2004, www.Chl3onhne.com (“On the theory that a ‘principal residence’ is a place where the debtor lives, not a place that produces income, many decisions recognize that a security interest that includes rental property, farmland or other income-producing property is not protected from modification by § 1322(b)(2)”).
The court will consider confirmation of the Debtor’s Chapter 13 Plan in a few weeks. For now, it is enough to conclude that his Objection to Arch Bay’s claim is well-taken.
NOW, THEREFORE, IT IS HEREBY ORDERED that the Objection (DN 41) is SUSTAINED as provided herein.
IT IS FURTHER ORDERED that Arch Bay shall have a claim in the amount of $296,836.07, which includes an arrearage in the amount of $20,545.15.
IT IS FURTHER ORDERED that the Clerk shall serve a copy of this Opinion and Order pursuant to Fed. R. Bankr.P. 9022 and LBR 5005-4 upon Claude C. Woods, Esq., Jonathan Rosenthal, Esq., and Robert M. Borin.
IT IS SO ORDERED.
. The court infers that a mortgage servicer held Mr. Borin's payments in a so-called “suspense account” that evaporated as his note, mortgage, and related servicing rights, shuttled from one secondary mortgage market participant to the next.
. Arch Bay's citation to Barter v. U.S. Bank, N.A., 2011 WL 124502, 2011 U.S. Dist. LEXIS 3780 (E.D.Mich. Jan. 13, 2011), may establish that U.S. Bank, N.A. is a "financial institution” but does not establish that Arch Bay is. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494430/ | OPINION
THOMAS L. PERKINS, Chief Judge.
This matter is before the Court on the motion for summary judgment filed by the Plaintiff, Halliburton Energy Services, Inc. (HES), seeking to give issue preclusive effect to an arbitration award.
HES commenced the arbitration proceeding on January 17, 2006, against its former employee, the Debtor, Chester S. McVay (DEBTOR), before the Employment Arbitration Tribunal of the American Arbitration Association pursuant to an arbitration provision contained in the employment agreement between the parties. In December, 2006, evidence was taken by arbitrator Karen K. Fitzgerald, briefs were submitted, and the arbitrator issued a 20-page written decision entitled “Final Award” on March 21, 2007.
The Final Award identifies the claims asserted by HES as follows:
1. breach of the Intellectual Property Agreement (IPA), and
2. breach of the agreement to arbitrate.
During the arbitration, HES sought to add a claim for the tort of misappropriation of trade secrets, but leave to amend was denied. The specific relief sought by HES included return of property, damages resulting from the DEBTOR’S breach of the IPA, attorney fees, and a permanent injunction. The DEBTOR asserted counterclaims against HES including a declaratory judgment that he, not HES, is the rightful owner of a program identified as the “standard industry software program.”
The claims revolve around the IPA executed by the DEBTOR when he began working for HES in January, 2001, in Dallas, Texas. He resigned in early January, 2006, to take a job with Caterpillar. The arbitrator found that before he left HES, the DEBTOR transferred a large amount of computer stored data to a thumb drive and copied and removed “hundreds of pages of HES documents.” He was asked at his exit interview to return all documents and electronic files in his possession as required by the IPA. During the exit interview, the DEBTOR expressed his belief that he, not HES, owned the disputed software program.
Within days of the exit interview, HES sued for and obtained a Temporary Restraining Order preventing the DEBTOR from removing from the state of Texas any documents or property belonging to HES and ordering their return within five days. Although the DEBTOR turned over both computers and all paper copies of HES documents in his possession, he took the undisclosed thumb drive with him when he moved to Iowa to work for Caterpillar. Ultimately, the DEBTOR turned over the thumb drive to HES in December, 2006. The DEBTOR had deleted the materials off of the thumb drive, but they could be recovered and viewed through a special data recovery software program.
The arbitrator concluded that the DEBTOR “breached the IPA by refusing to return HES property to HES when requested.” She also concluded that the DEBTOR breached the IPA by disclosing confidential HES documents to third parties, including his father. The arbitrator also awarded injunctive relief to prevent the dissemination or use of HES information.
HES attempted to add a claim for breach of fiduciary duty in its Post-hearing Brief, but the arbitrator denied that late addition. The Final Award indicates that HES had also sued the DEBTOR’S father, Leland McVay, in Oklahoma for an injunction against his potential use or dissemination of HES proprietary information. In *739the arbitration proceeding, HES sought reimbursement of the attorney fees incurred in that action, contending that “it was [the DEBTOR’S] tort that required HES to act to protect its interests by filing the lawsuit against Leland McVay.” The arbitrator determined that the fees were not recoverable as damages against the DEBTOR for his breach of the-IPA.
With respect to the counterclaim that he be awarded ownership of the disputed software program, the DEBTOR argued that he developed the basic program on his own time and not as an employee of HES. The arbitrator agreed, finding that he developed the original program “on his own time in the evenings at his house,” that he “never shared this program with HES,” and that this work was not done as part of his job duties for HES. The arbitrator determined the evidence established, however, that over time the DEBTOR did begin to work on the software as part of his job duties for HES. Eventually, he shared the program with HES and made changes and modifications to it as instructed or requested by HES. The arbitrator determined that the final, modified version (the November, 2004, version) was substantially developed by the DEBTOR as part of his employment with HES. The IPA provides that any original work of authorship under the Copyright Act of 1976 that the DEBTOR creates as an HES employee shall be considered a work made for hire, to which HES shall have the sole and exclusive right, title and interest (including trade secret and copyright interests). Based on that contract provision, the arbitrator determined that HES, not the DEBTOR, owned the November, 2004, version of the software program.
The arbitrator awarded HES injunctive relief, a declaratory judgment that it owned the disputed program, damages for breach of contract in the amount of $24,047.27, attorney fees of $150,000 for pursuit of the breach of contract claim and expert witness costs of $20,944.15. The monetary awards total $194,991.42. On the DEBTOR’S counterclaims, the arbitrator found that the DEBTOR was entitled to a “take nothing judgment.” Except for the limited application of the federal copyright laws, the arbitrator looked to Texas state law to provide the substantive rules of decision.
Following issuance of the Final Award, the DEBTOR brought an action in the U.S. District Court for the Northern District of Texas to vacate the arbitrator’s decision. On November 13, 2009, the magistrate judge issued recommended findings and conclusions that the arbitration award be confirmed, not vacated. On January 22, 2010, the district court adopted the magistrate’s recommendation and entered a judgment confirming the award. The DEBTOR filed an appeal with the Court of Appeals for the Fifth Circuit, which remains pending.
The DEBTOR filed his voluntary Chapter 7 petition in this Court on August 30, 2010, listing HES as an unsecured creditor. After investigating the DEBTOR’S financial situation, the Chapter 7 Trustee filed a no asset report meaning the estate has no assets with which to make a distribution to creditors.
HES filed a timely adversary complaint on December 20, 2010, seeking a determination that the debt evidenced by the Final Award is not dischargeable, first, under section 523(a)(4) of the Bankruptcy Code, as a debt for fraud or defalcation while acting in a fiduciary capacity or as one arising from embezzlement; and second, under section 523(a)(6), as a debt for willful and malicious injury to another entity or to the property of another entity.
The complaint also seeks to have the DEBTOR’S discharge denied entirely, first, under section 727(a)(2), alleging that *740the DEBTOR, with intent to hinder, delay or defraud, has transferred, removed, destroyed, mutilated, or concealed his property within one year before bankruptcy or permitted same, or property of the estate after the filing; second, under section 727(a)(4), alleging that he knowingly and fraudulently made false oaths in the course of this bankruptcy proceeding by failing to disclose the existence or transfer of assets; and, third, under section 727(a)(3), alleging that the DEBTOR, without justification, concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which his financial condition or business transactions might be ascertained.
The motion for summary judgment filed by HES seeks judgment only as to the two nondischargeability claims brought under section 523, and not as to the three denial of discharge claims brought under section 727. The motion is premised entirely on the issue preclusive effect of the Final Award issued by the arbitrator and confirmed by the district court. HES contends that the findings of fact made by the arbitrator, by themselves, entitle it to summary judgment on the nondischargeability claims. HES argues that the same issues of fact are at issue here and that the DEBTOR is collaterally estopped from re-litigating them.
Under Federal Rule of Civil Procedure 56, made applicable to adversary proceedings in bankruptcy by Federal Rule of Bankruptcy Procedure 7056, summary judgment is proper if the pleadings, depositions, answers to interrogatories, and admissions on file, together with any affidavits, show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In order to prevail on a motion for summary judgment, the moving party must establish there is no genuine issue of material fact as to any essential element of the claim. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). When a moving party has met its initial burden of showing there is no genuine issue of material fact, the burden shifts to the non-movant to go beyond the pleadings and come forward with specific facts showing that there is a genuine issue for trial. Inferences to be drawn from underlying facts must be viewed in the light most favorable to parties opposing the motion. In re Chambers, 348 F.3d 650 (7th Cir.2003). A material factual dispute is sufficient to prevent summary judgment only when the disputed fact is determinative of the outcome under applicable law. It is not the role of the trial court to weigh the evidence or to determine its credibility, and the moving party cannot prevail if any essential element of its claim for relief requires trial. Anderson, 477 U.S. at 249, 106 S.Ct. at 2511.
The doctrine of collateral estop-pel or issue preclusion bars the relitigation of issues decided in a prior proceeding involving the same parties. It is well-established that where a federal court is presented with a prior judgment issued by a state court, the law of that state determines its issue preclusive effect. Marrese v. American Academy of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 1331-32, 84 L.Ed.2d 274 (1985); Wozniak v. DuPage County, 845 F.2d 677, 682 (7th Cir.1988). This principle derives from the full faith and credit statute, 28 U.S.C. § 1738, which refers to judicial proceedings of any court of any state. But arbitration is not a judicial proceeding and § 1738 does not apply to arbitration awards. McDonald v. City of West Branch, Mich., 466 U.S. 284, 287-88, 104 S.Ct. 1799, 1801-02, 80 L.Ed.2d 302 (1984).
*741It is not settled whether arbitration proceedings will have any preclusive effect on the subsequent litigation of federal claims. Dean Witter Reynolds, Inc. v. Byrd, 470 U.S. 213, 222-23, 105 S.Ct. 1238, 1243, 84 L.Ed.2d 158 (1985); E.E.O.C. v. Frank’s Nursery & Crafts, Inc., 177 F.3d 448, 463 n. 8 (6th Cir.1999). HES relies on the fact that the Final Award was challenged and affirmed in federal district court. When a court reviews and affirms an arbitration award, the substance of the review process becomes important. The issue is whether the prior proceeding afforded the litigant a full and fair opportunity for a judicial determination of the issues on their merits. Ryan v. City of Shawnee, 13 F.3d 345 (10th Cir.1993).
The preclusive effect of a federal court judgment is determined by federal common law, but the rule of decision differs depending upon whether the federal court’s jurisdiction over the issue was based on diversity or federal question. Taylor v. Sturgell, 553 U.S. 880, 891, 128 S.Ct. 2161, 2171, 171 L.Ed.2d 155 (2008). Under federal common law, a federal diversity judgment is to be accorded the same preclusive effect that would be applied by the state courts in the state in which the federal diversity court sits. Id. at 891, n. 4, 128 S.Ct. 2161; Semtek Int’l Inc. v. Lockheed Martin Corp., 531 U.S. 497, 508, 121 S.Ct. 1021, 1028, 149 L.Ed.2d 32 (2001). For judgments in federal question cases, federal common law supplies the rule of decision. Taylor, 553 U.S. at 891, 128 S.Ct. 2161. So Texas law applies here as the federal court that confirmed the Final Award, did so in the exercise of its diversity jurisdiction.
The pendency of an appeal from the prior judgment prevents issue preclusion in some states. In Illinois, for example, finality requires that the potential for appellate review must have been exhausted. Ballweg v. City of Springfield, 114 Ill.2d 107, 113, 102 Ill.Dec. 360, 499 N.E.2d 1373 (1986). The Texas Supreme Court, however, has adopted the rule that a judgment is final for the purposes of issue and claim preclusion despite the taking of an appeal unless what is called an appeal actually consists of a trial de novo. Scurlock Oil Co. v. Smithwick, 724 S.W.2d 1 (Tex.1986). In confirming the Final Award, the district court applied section 10(a) of the Federal Arbitration Act, 9 U.S.C. § 10(a), which provides for a limited review of an arbitration award and does not contemplate a new trial or a review of the findings of fact made by the arbitrator. The Court therefore concludes that under applicable Texas law, the pendency of the appeal to the Fifth Circuit does not prevent the arbitration award from being considered “final” for collateral estoppel purposes.
Under Texas law, a party seeking to apply the bar of collateral estoppel must establish that:
1. the facts sought to be litigated in the second action were fully and fairly litigated in the first action;
2. those facts were essential to the judgment in the first action; and
3. the parties were cast as adversaries in the first action.
Sysco Food Services, Inc. v. Trapnell, 890 S.W.2d 796, 801 (Tex.1994). The issue decided in the prior action must be identical to the issue in the pending action. State & County Mut. Fire Ins. Co. v. Miller, 52 S.W.3d 693, 696 (Tex.2001). Texas courts apply collateral estoppel principles to arbitration awards. Continental Holdings, Ltd. v. Leahy, 132 S.W.3d 471, 474 (Tex.App.2003). However, if an issue was not actually decided in a prior arbitration proceeding or if its resolution was not necessary to the arbitration award, its litigation in a subsequent proceeding is not barred by collateral estoppel. Id. at 474-75.
*742In order to prevail on its motion for summary judgment, HES must establish that the facts determined by the arbitrator and necessary to the award are sufficient to prove, as more likely than not, each and every element of one or the other of the nondischargeability claims. Given that the DEBTOR’S state of mind was not at issue in the arbitration case and that all reasonable inferences must be drawn in favor of the DEBTOR, HES has a tough row to hoe.
The Court will first address the claim under section 523(a)(6), which requires that the conduct in question be willful and malicious. Neither term is defined in the Bankruptcy Code. The Supreme Court has defined “willful” to mean conduct intended to cause harm, not merely intentional conduct that results in an injury that was not intended by the actor. Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). The court drew an analogy with an intentional tort where the actor intends the consequences of the act, not simply the act itself. Id. The term “malicious ” involves acting in conscious disregard of one’s duties or without just cause or excuse. Matter of Thirtyacre, 36 F.3d 697, 700 (7th Cir.1994). It is the knowledge of wrongdoing and the absence of excuse that define malicious behavior for purposes of section 523(a)(6). In re Young, 428 B.R. 804, 818 (Bankr.N.D.Ind.2010).
Where the conduct in question involves a breach of a contract rather than commission of a tort, section 523(a)(6) does not generally apply. See Geiger, 523 U.S. at 62, 118 S.Ct. 974 (knowing breach of contract could qualify as a situation where the act is intentional but the injury is not, so that the debt is not within the scope of section 523(a)(6)); In re Williams, 337 F.3d 504, 509 (5th Cir.2003); In re Salvino, 373 B.R. 578, 589-91 (Bankr.N.D.Ill.2007) (breach of contract not involving tor-tious conduct is outside the scope of § 523(a)(6)); In re Khafaga, 419 B.R. 539, 550 (Bankr.E.D.N.Y.2009) (knowing breach of contract is not malicious absent some aggravating circumstance evidencing conduct so reprehensible as to warrant denial of the fresh start that the bankruptcy discharge is intended to provide). See, also, XCO Int’l Inc. v. Pacific Scientific Co., 369 F.3d 998, 1002 (7th Cir.2004) (breach of contract is not a tort; because liability for breach is strict, contract breakers are often innocent in a moral sense and so should not be punished.).
In its motion, HES contends that the Final Award “provides abundant factual detail” from which the Court “may find directly or by inference” that the DEBTOR intended to harm HES in conscious disregard of his duties without just cause or excuse. HES cites various examples of facts set forth in the arbitrator’s summary, such as the DEBTOR’S printing and downloading documents, his delay in turning over information, his demeanor at his exit interview and the delay in turning over the thumb drive. It is apparent HES is asking this Court to use the summary of the evidence set forth by the arbitrator to draw its own original inferences from that summary, and to make original findings based only on that summary as to the elements of the nondischargeability actions asserted here without regard to the elements of the breach of contract action litigated in the arbitration proceeding, and without regard to the findings of ultimate facts actually made by the arbitrator in support of her conclusions that a breach of contract occurred.1 HES utterly misapprehends how collateral estoppel works.
*743A court faced with an issue of collateral estoppel is not at leisure to adopt a prior evidentiary record, much less a prior tribunal’s mere summary of evidence, as its own and use it to make its own original findings of fact. The second court is limited to the findings of fact actually made by the first tribunal. A plaintiff that relies on collateral estoppel to seek summary judgment on its own affirmative claim bears the burden to identify specific findings in the original, predicate decision that were made to support the outcome there. In re Khouri, 397 B.R. 111, 117 (Bankr.D.Minn.2008). The plaintiff must then link those findings to the elements of its claim in the current proceeding. Id. The second court may not treat every bit and piece of evidence that supports the first tribunal’s decision as if every piece of evidence was itself a separate finding of fact. It is necessary to distinguish the issues of fact that were actually determined from mere evidence. HES fails to recognize this distinction.
The Fifth Circuit recognizes that under Texas law, collateral estoppel bars relitigation of any “ultimate issue of fact” actually litigated and essential to the judgment in a prior suit. Miller v. J.D. Abrams, Inc. (In re Miller), 156 F.3d 598, 601 (5th Cir.1998). Collateral estoppel applies only where the issue previously decided is identical to an issue necessarily under consideration in the second suit and where the issue was necessary to support the judgment in the prior case. Copeland v. Merrill Lynch & Co., Inc., 47 F.3d 1415, 1422 (5th Cir.1995). Collateral estoppel does not apply unless the issue presented was a “critical and necessary part” of the prior judgment. Id. at 1423. An issue is “necessarily decided” if its absence would have precluded the judgment. In re Woolley, 288 B.R. 294, 300 (Bankr.S.D.Ga.2001). If an issue has been determined, but the judgment is not dependent upon its determination, the issue may be relitigated in a subsequent action because findings on nonessential issues have the characteristics of dicta. Id. at 301.
In addition to ultimate facts, preclusive effect may be given to findings as to intermediate facts where necessary to the determination of an ultimate fact. In re Convertible Rowing Exerciser Patent Litigation, 814 F.Supp. 1197, 1208 (D.Del.1993). Issue preclusion may apply to evidentiary facts, but only if the parties in the previous litigation treated the fact as important and the previous court treated the fact as necessary to the judgment. Grisham v. Philip Morris, Inc., 670 F.Supp.2d 1014, 1032 (C.D.Cal.2009) (citing the Restatement (Seoond) of Judgments, § 27 (1980)). Collateral estoppel does not extend to matters not expressly adjudicated, that can be inferred only by argument from or construction of the judgment, unless the inferences were necessarily made in the sense that the judgment could not stand without them. See Carman v. South Carolina Alcoholic Beverage Control Com’n, 317 S.C. 1, 6, 451 S.E.2d 383, 386 (S.C.1994); Melikian v. Corradetti, 791 F.2d 274, 277 (3rd Cir.1986).
The claims asserted by HES that were litigated in the arbitration case include claims for return of HES property, claims for damages for breach of contract, and a claim for a permanent injunction. None of these claims are tort claims that require proof of a willful or malicious intent. HES was denied leave to assert a claim for the tort of misappropriation of trade secrets and was denied leave to add a claim for breach of fiduciary duty.
Under Texas law, the elements of a breach of contract claim are (1) the existence of a valid contract; (2) performance or tendered performance by the plaintiff; (3) breach of the contract by the defendant; and (4) damages sustained as a result of the breach. B & W Supply, Inc. v. *744Beckman, 305 S.W.3d 10, 16 (Tex.App. 1 Dist.) 2009. A breach of contract occurs when a party fails or refuses to do something he has promised to do. Id.
In a breach of contract action, the defendant’s state of mind is not an element of the cause of action that the plaintiff is required to prove. The arbitrator was not required to inquire into or make any finding about the DEBTOR’S scienter and she did not do so. HES argues that this Court could infer, from the arbitrator’s description of the factual background, that the DEBTOR intended to harm HES and that he acted maliciously. As indicated above, it is not an appropriate application of the doctrine of collateral estoppel for the second court to draw inferences not drawn by the first court. Neither is it appropriate to treat the arbitrator’s summary as evidence.
The arbitrator did not find that the DEBTOR acted with the intent to do harm to HES or that his conduct was without a valid excuse or justification. The DEBTOR is thus not precluded from defending the claim asserted by HES under section 523(a)(6).
Even if the Court were to treat the arbitrator’s Final Award as an evidentiary record from which original inferences and findings could be drawn and made, as HES suggests the Court should do, that record provides greater support to the DEBTOR than it does to HES. As described by the arbitrator, the DEBTOR, in his counterclaim, requested a declaration that he “is the rightful owner of the standard industry software program with the packer modifications.” The arbitrator states that the DEBTOR “contends that he is the owner of the software because he is the author of the work” and argues that the software is not a “work for hire” under the Copyright Act.
There was a substantial evidentiary basis for the DEBTOR’S position. The arbitrator found that the DEBTOR developed the original software program “on his own time in the evenings at his house.” She found that he never shared this program with HES, that HES instructed him not to work on the program, and that the work was, in fact, done on his own time and not as part of his job duties at HES. Only later did he begin to work on it as part of his job duties when he made “modifications” to it as instructed or requested by HES. The IPA signed by the DEBTOR gave HES the ownership right to any original work of authorship created as an HES employee. On this basis the arbitrator concluded that the “November 2004 software version was created by [the DEBTOR] as a company employee for purposes of the IPA.” She determined that HES, not the DEBTOR, is the rightful owner of the November 2004 software program.
These facts suggest that the DEBTOR’S actions about which HES complains were done with the legitimate, honest belief that he owned the disputed software and related information, and that his actions were intended to protect that interest, not to harm HES. Apart from this ownership dispute, nothing in the Final Award indicates that the DEBTOR held any ill-will or malice toward HES or that he had a motive or reason to harm HES. The record supports the conclusion that the DEBTOR acted with a valid justification or excuse, that being an honest claim of ownership of the disputed software.
A good faith belief and assertion of a property right takes a debtor’s actions outside the scope of section 523(a)(6). The fact that the arbitrator ultimately ruled for HES on the ownership issue, does not diminish the DEBTOR’S defense. As recognized by the Fifth Circuit, a misappropriation of a trade secret under an erroneous belief of entitlement, may be technically wrongful without being fraudu*745lent. Miller, 156 F.3d at 603. By all appearances, this is the kind of contract dispute that is outside of the ambit of section 523(a)(6).
Moreover, HES suffered no competitive harm from the DEBTOR’S actions. He delayed returning information, but there was no evidence that he sold or gave protected information to a competitor, or that he used it personally or in his capacity as a Caterpillar employee. The damages awarded to HES by the arbitrator consist entirely of litigation expenses, forensic costs and attorney fees. Damages in the nature of attorney fees and litigation expenses awarded in a breach of contract action do not constitute a debt “for” the conduct proscribed by section 523(a)(4) and (a)(6). In re Al-Suleiman, 2011 WL 5401875 (Bankr.M.D.Fla.2011). Section 523(a)(6) requires that the injury itself be intended, not merely that an injury was proximately caused by some intentional conduct. The Final Award would not support the conclusion that the DEBTOR, by his conduct, intended to harm HES by causing it to incur costs and fees.
Section 523(a)(4) excepts from discharge “any debt ... for ... embezzlement.” Embezzlement is the fraudulent appropriation of property by a person whose initial possession of it was lawful. Matter of Weber, 892 F.2d 534 (7th Cir.1989); Miller, 156 F.3d at 602. Embezzlement requires proof that the debtor wrongfully appropriated the property in order to use it for a purpose other than that for which it was entrusted. Miller, 156 F.3d at 602 (citing In re Brady, 101 F.3d 1165, 1173 (6th Cir.1996)). Fraudulent intent or scienter is a necessary element of embezzlement. Miller, 156 F.3d at 602-03; Weber, 892 F.2d at 538; In re Sherman, 603 F.3d 11, 13 (1st Cir.2010); In re Hyman, 502 F.3d 61, 68 (2nd Cir.2007). A wrongful appropriation of property under an erroneous belief of entitlement does not equate to the fraudulent intent necessary for embezzlement. In re Jones, 445 B.R. 677, 706 n. 106 (Bankr.N.D.Tex.2011); Miller, 156 F.3d at 603.
HES asserts that the DEBTOR’S misappropriation of proprietary information amounts to embezzlement, suggesting that even though the arbitrator made no finding of fraudulent intent, such intent could be inferred by this Court. For the reasons stated above, drawing original inferences is not appropriate when applying collateral estoppel. Also as indicated above, if inferences were to be drawn, they would be drawn in favor of the DEBTOR. There is no evidence in the record that the DEBTOR actually used or benefitted from his post-employment possession of the information that the arbitrator subsequently determined to be owned by HES, all of which was eventually returned. Furthermore, although it is hypothetically possible that the DEBTOR harbored malice or ill will toward HES or that he intended to embroil HES in litigation for the purpose of causing it to incur extensive attorney fees and litigation-related expenses, on the record before this Court, those inferences are far-fetched.
Accordingly, HES’s motion for summary judgment will be denied. This Opinion constitutes this Court’s findings of fact and conclusions of law in accordance with Federal Rule of Bankruptcy Procedure 7052. A separate Order will be entered.
. The record before the Court does not contain a transcript of the evidentiary hearing held by the arbitrator. In effect, HES wants this Court to draw inferences and make findings based not on the evidence heard by the arbitrator, but on her summary of it. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494432/ | SUMMARY JUDGMENT MEMORANDUM
DONALD MacDONALD IV, Bankruptcy Judge.
This is an action for recovery of damages of $150,000.00 based upon a variety of state and federal law theories. It is a core proceeding as to the plaintiffs’ counts which allege violations of federal bankruptcy law. The plaintiffs’ state law claims are not core proceedings, but the defendant has consented to the bankruptcy court’s jurisdiction to enter orders and judgments regarding such claims.1 Jurisdiction arises pursuant to 28 U.S.C. § 1334(b), the district court’s order of reference and the consent of the parties.
The plaintiffs’ amended complaint alleges nine causes of action: (1) professional negligence; (2) breach of fiduciary duty; (3) unjust enrichment; (4) conversion; (5) actual fraudulent conveyance— § 548(a)(1)(A); (6) actual fraudulent conveyance— § 34.40.010; (7) constructive fraudulent conveyance— § 548(a)(1)(B); (8) constructive fraudulent conveyance— § 548(a)(l)(B)(n)(IV);2 and (9) violation of automatic stay and avoidance of post-petition transfers— §§ 362 and 549. The plaintiffs have filed a motion for summary judgment as to the following counts: (1) breach of fiduciary duty, (2) unjust enrichment, (3) conversion, (4) constructive fraudulent conveyance, and (5) illegal post-petition transfers. I will grant partial summary judgment to the plaintiffs on their count for conversion and full summary judgment on their count for illegal post-petition transfers. The balance of the plaintiffs’ motion will be denied.
The defendant has filed a cross-motion for partial summary judgment as to the plaintiffs’ claim for unjust enrichment. The defendant’s cross-motion for partial summary judgment will be granted. Further, this court will grant summary judgment to the defendant on the plaintiffs’ second cause of action — breach of fiduciary duty.
Background
3
Debtor Mark Avery is the son of the late Luther Avery, a prominent San Francisco *803trust attorney. Luther was one of three named trustees for various trusts set up by Stanley Smith, a wealthy Australian mining magnate, and his wife, May Wong Smith. Stanley Smith died in 1968 but his wife continued to live long after his death. The trusts the Smiths established had substantial assets. The May and Stanley Smith Charitable Trust had assets of $850 million and the May Smith Trust had assets of $150 million.
When Luther Avery died in 2001, Mark Avery (“Avery”) succeeded to his position as trustee of the Smith trusts. Avery, an attorney and former prosecutor, earned $600,000.00 a year as a trustee. He was also entitled to bill the trusts for legal services. After becoming trustee, Avery bought an expensive home in Eagle River in 2004. Around the time of this purchase, he met Robert Kane through Kane’s mother, a real estate broker. With Kane’s assistance, Avery moved May Smith from the Island of Guernsey, off the coast of France, to the Bahamas. May Smith suffered from dementia and needed full-time care. Yet she remained a trustee of her trust along with Avery and two other trustees, John Collins and Dale Matheny. All of the assets of the May Smith Trust were held by Avenco Ltd., a Bahamian Corporation. Avery, Collins and Matheny were the sole shareholders of Avenco.
After May Smith was relocated to the Bahamas, Avery, Collins and Matheny began to investigate options for providing reliable air transportation services for May Smith in case she needed to be moved from the Bahamas for medical treatment or other emergencies. In early May of 2005, Avery approached his co-trustees about a prospective business arrangement with Douglas Gilliland and his company, World Air, Inc. Under the proposal, Gilli-land would use the assets of Avenco to secure a line of credit for the purchase of two to three long-range aircraft for use with a government contract. It was contemplated that the aircraft would also be available to provide any needed air transportation for May Smith.
On May 11, 2005, the trustees met in San Francisco and considered Avery’s proposal. They agreed to make $50 million in trust assets available to use as collateral for the purchase of the aircraft. Avery was put in charge of making all the arrangements. Instead of utilizing the trust assets for the Gilliland venture, however, Avery used the assets for his own purposes. He opened a margin account in Avenco’s name and immediately began taking massive draws on the account. On June 7, 2005, he directed $15 million from the margin account to an account belonging to one of his wholly owned businesses, Avery & Associates. From June 16 through October 5, 2005, he directed an additional $37.125 million from the margin account to an account belonging to Regional Protective Services, another entity he controlled.
Avery went on a wild spending spree with the trust money. He spent nearly $10 million to acquire Security Aviation, Medic Air, Premier Aviation and Medical Training Institute. These entities were all established businesses at the time of purchase. Avery purchased a wide variety of fixed and rotor-wing aircraft, including Czech L-39 fighters, with over $28.2 million in disbursements from the Avery & Associates and Regional Protective Services accounts. Avery also purchased numerous costly personal assets, including a $500,000.00 mooseboat, a yacht, several vehicles, and motorhomes for himself and Kane.
Around the same time the Czech fighters were purchased, Security Aviation bought some rocket launchers to install on these aircraft. The FBI raided Security Aviation’s offices and seized documents *804concerning the rocket launchers and the fighters. Federal criminal charges were filed against Robert Kane and Security Aviation for possession of unregistered destructive devices on February 22, 2006. Paul Stockier was retained as a criminal defense attorney for Kane. Wells Fargo pulled its line of credit for Security Aviation. Avery, after receiving $52 million from the May Smith Trust just months before, was broke. He had to liquidate aircraft to pay for the cost of defending against the criminal charges. Between April 17 and July 27, 2006, $8,442,351.05 of the proceeds from the sale of aircraft was transferred to Stockler’s trust and e-trade accounts.
Security Aviation retained the law firm of Dorsey & Whitney to represent it in the criminal case. Dorsey & Whitney received a retainer of $400,000.00 from Avery’s law firm, Avery and Associates, on February 2, 2006.4 Kane retained Kevin Fitzgerald, an attorney in the firm of defendant Ingald-son, Maasen & Fitzgerald (“IMF”), to assist Stockier during the criminal trial.5 Dorsey & Whitney transferred a portion of their retainer, $50,000.00, to IMF for IMF’s representation of Kane during the criminal trial. The payment was made on February 24, 2006.6
Shortly after the criminal charges were brought against Kane and Security Aviation, the May Smith Trust retained the California firm of Townsend, Townsend & Crew to represent it in its efforts to obtain an accounting and recovery of the $52 million from Avery and Security Aviation. On March 9, 2006, Maureen Sheehy, an attorney in this firm, wrote a letter to Security Aviation’s counsel, Robert Bundy at Dorsey & Whitney, to confirm recent phone conversations in which she had requested an accounting of trust assets from Avery and Security Aviation.7 Sheehy also advised that until such an accounting was made, none of the property purchased with funds from the trust was to be sold without the written consent of the trust. The letter was sent via facsimile to Dorsey & Whitney the same day it was written.
Five days after Sheehy’s letter was sent, on March 14, 2006, Security Aviation entered into an agreement for floor plan with Bell Aviation, Inc., for the sale of a S-550 Citation (N460-M).8 This agreement provided $1,450,000 to Security Aviation for interim financing. These funds went to Stockler’s trust account on March 22, 2006.9 IMF received $150,000.00 from Stockler’s trust account on April 13, 2006.10 Avery testified at his § 341 meeting that proceeds from the sale of Security Aviation’s aircraft were placed in StocMer’s accounts in order to protect them, and that he believed the funds were being held in trust for Security Aviation.11
The criminal trial ran from May 15 to 26, 2006. Fitzgerald and Stockier represented Kane at the trial, and Robert Bun-*805dy represented Security Aviation. The jury acquitted Kane and Security Aviation of all charges. At the conclusion of the trial, IMF applied a portion of its retainer against its fees and costs. A balance of $100,302.92 remained in its trust account as of June 11, 2006.12
Two days before the jury entered its verdict, Louise Ma, another attorney with the California firm representing the May Smith Trust, wrote a letter to Robert Bun-dy regarding several issues.13 First, she advised that the trust had decided it would oversee the care of May Smith, in place of Regional Protective Services, another Avery entity. Second, she noted that Avery had not yet responded to the firm’s earlier requests for an accounting, and demanded repayment of the $52.125 million that Avery had received from the trust. Finally, she informed Bundy that Avery would no longer serve as counsel to the trust, and demanded return of any trust files in Avery’s possession.
Ma wrote a second letter to Bundy on June 9, 2006.14 In this letter, she stated, “As you know, [Avery] personally committed to repay [the $52 million] by March 31, 2006. To date, none of the principal has been paid and [Avery] has continued to refuse- to address these issues.”15 Bundy wrote to Ma on June 29, 2006, to inform her that Dorsey & Whitney would no longer be representing Avery or his associated companies.16 He indicated that Ma should direct all future correspondence to Fitzgerald.
On July 11, 2006, Fitzgerald wrote a letter to both Avery and Kane to confirm the understanding reached between them regarding his representation of Avery “in the present misunderstanding and/or dispute with the other trustees [of the May Smith Trust].”17 Fitzgerald was to address the “problem of the deteriorating relationship between [Avery] and the other two trustees” of the May Smith Trust, an effort which he said “ultimately may serve in [Kane’s] best interests” as well.18 The next day, July 12, 2006, Fitzgerald sent a letter to Louise Ma in which he advised that he represented “Avery and his associated companies in a limited manner with regard to matters involving the May Smith Trust.”19 In the letter, Fitzgerald indicated that he was aware of the trust’s request for an accounting, but questioned whether the trust documents imposed any obligation upon Avery to provide one. He also indicated that Avery couldn’t perform an accounting because his records had been seized by the federal government. Fitzgerald suggested that a meeting be scheduled between the parties on August 11, 2006 to “discuss a variety of issues.”20
Ma responded to Fitzgerald’s letter on July 26, 2006.21 She confirmed that the May Smith Trust had made repeated requests of Avery for an accounting. She clarified for Fitzgerald that Avery, in his capacity as a trustee, had a fiduciary duty to provide an accounting of trust assets, and noted that Avery was well aware of these duties, as he had advertised himself as an attorney with expertise in representing trust fiduciaries. She reiterated that Avery was not to sell any property which he had purchased with trust assets, with*806out the trust’s written consent. Ma declined to schedule a meeting because she felt it would not be productive until Avery had supplied an accounting of the trust monies.
On July 27, 2006, the May Smith Trust filed suit against Avery in the California Superior Court in San Francisco.22 Ma filed the verified petition on behalf of Collins and Matheny, the other two trustees of the May Smith Trust. The petition sought to remove Avery as a trustee and recover the $52,125 million he had taken. Avery was served with a copy of the complaint on July 28, 2006.23 Fitzgerald was personally served with the complaint on the same date.24 The suit was filed just 16 days after Fitzgerald had informed Ma that he represented Avery. In its answer, IMF admits that it was served with a copy of the California petition, but says that to the extent it was listed as Avery’s counsel, this was done without its consent or authority.25 Ma states that IMF never informed her firm that it was no longer representing Avery.26
The California court entered an order granting the trustees’ petition and requiring the surrender of all trust property on August 2, 2006.27 Avery and all companies he directly or indirectly controlled, including Security Aviation, were prohibited from making any kind of transfer of property that had been acquired from assets belonging to the May Smith Trust. Copies of the August 2, 2006, order were sent to Avery’s California counsel, Armón Cooper, and Kevin Fitzgerald in Alaska on August 3, 2006.28
The May Smith Trust took the deposition of Dave Kurtz, Security Aviation’s chief mechanic, on August 16, 2006. Paul Stockier appeared on behalf of Security Aviation at the deposition. Kurtz testified that $7.7 million in proceeds from sales of Security Aviation aircraft had been deposited into accounts belonging to Stockier.29 $1,450,000.00 from the sale of one aircraft, an S-550 Citation (N460-M), was placed into Stockler’s trust account on March 22, 2006. The proceeds from this sale funded the $150,000.00 retainer to IMF, as will be discussed in more detail below.
IMF was not a named defendant in the California litigation. It ignored the order which the California Superior Court had issued. IMF continued to apply its fees against the funds in its trust account from September of 2006 through March of 2007.30 These fees were in excess of $43,000.00.31 IMF also paid Kane a total of $47,500.00 between September and December, 2006, from its trust account.32
Avery filed a chapter 7 petition on October 23, 2006.33 William Barstow was ap*807pointed chapter 7 trustee and, on December 11, 2006, he obtained court authority to operate Security Aviation.34 Barstow also initiated an adversary proceeding against Stockier to recover funds that Avery or any of his entities had placed into Stock-ler’s accounts.35 On December 22, 2006, Barstow obtained a preliminary injunction which prohibited Stockier from disposing of any funds received from Avery entities without court approval.36 The injunction also applied to Stockler’s transfers of cash or property received from Robert Kane and any Kane entity.37 Cam Rader, an attorney with IMF, attended the preliminary injunction hearings on behalf of Kane.
After assuming management of Security Aviation, Barstow placed this entity in chapter 11 on December 21, 2006.38 He sold most of Security Aviation’s assets to Stephen Kapper for $3.4 million on May 9, 2007.39 A liquidating plan of reorganization was confirmed on May 19, 2008. Under Security Aviation’s confirmed plan of liquidation, claims existing on the date of confirmation were transferred to the Avery bankruptcy estate.40
On March 5, 2007, the United States filed criminal charges against Mark Avery for five counts of wire fraud and ten counts of money laundering arising out of his transactions with the May Smith Trust. Avery immediately pled guilty to the charges. In his plea agreement, he stipulated that he had abused his position as trustee to acquire more than $52 million dollars “through an ambiguous arrangement which used the assets of the May Smith Trust as collateral,” that he placed his personal financial interests above those of the trust, and that he used the trust’s funds for his benefit and did not repay them.41 Avery also stipulated that he provided a fraudulent justification to acquire funds from the trust,42 and that the assets and businesses he acquired with those funds benefitted him, personally, and not the trust.43 On April 19, 2008, District Court Judge Ralph Beistline sentenced Avery to 102 months in prison followed by 36 months of supervised release.44 Resti*808tution of $52,125 million to the May Smith Trust was also imposed as a monetary penalty.45
Barstow initiated this adversary proceeding on October 22, 2008, in two capacities: as chapter 7 trustee of the Avery chapter 7 case and as successor in interest to Security Aviation, through the provisions of its confirmed chapter 11 plan. His motion for summary judgment was filed on October 5, 2010. IMF filed its motion for partial summary judgment on November 15, 2010. After oral argument on the motions, held December 13, 2010, the court permitted limited additional briefing. Both motions are now ripe for adjudication.
Summary Judgment
Fed.R.Civ.P. 56, which is applicable to adversary proceedings,46 provides, in part:
(a) Motion for Summary Judgment or Partial Summary Judgment. A party may move for summary judgment, identifying each claim or defense — or the part of each claim or defense — on which summary judgment is sought. The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law. The court should state on the record the reasons for granting or denying the motion.
(c) Procedures.
(1)Supporting Factual Positions. A party asserting that a fact cannot be or is genuinely disputed must support the assertion by:
(A) citing to the particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials; or
(B) showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact.
(2) Objection That a Fact Is Not Supported by Admissible Evidence. A party may object that the material cited to support or dispute a fact cannot be presented in a form that would be admissible in evidence.
(3) Materials Not Cited. The court need consider only the cited materials, but it may consider other materials in the record.
(4) Affidavits or Declarations. An affidavit or declaration used to support or oppose a motion must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant or declarant is competent to testify on the matters stated.
(e) Failing to Properly Support or Address a Fact. If a party fails to properly support an assertion of fact or fails to properly address another party’s assertion of fact as required by Rule 56(c), the court may:
(1) give an opportunity to properly support or address the fact;
(2) consider the fact undisputed for purposes of the motion;
(3) grant summary judgment if the motion and supporting materials — including the facts considered undisputed — -show the movant is entitled to it; or
(4) issue any other appropriate order.47
*809When considering a motion for summary judgment, all reasonable inferences supported by the evidence are drawn in favor of the party opposing a motion for summary judgment.48 But such inferences may be drawn “only if they are rational, reasonable and otherwise permissible in light of the governing substantive law and substantive evidentiary burden.”49 A mere scintilla of evidence will not create a genuine issue of material fact.50 “There must be evidence on which a jury could reasonably find for the plaintiff.”51 Finally, conclusory affidavits do not establish an issue of fact for purposes of opposing a motion for summary judgment.52 To defeat a motion for summary judgment, the non-moving party must establish the existence of material factual issues by producing evidence that would support a jury verdict in its favor.53
Summary judgment must be entered, “after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party’s case, and on which that party will bear the burden of proof at trial.”54 The Court may sua sponte enter summary judgment in favor of a nonmoving party when the moving party has had a full and fair opportunity to ventilate the issues and under the facts it appears that the moving party could not prevail even if a trial were held.55
State Law
When interpreting state law, this Court is bound by the decisions of the state’s highest court.56 In the absence of a decision by the highest state court, this Court “must predict how the highest state court would decide the issue using intermediate appellate court decisions, decisions from other jurisdictions, statutes, treatises, and restatements as guidance.”57
*810
Source of the Retainers
In his summary judgment motion, the trustee seeks to recover both the $50,000.00 and $150,000.00 retainers that IMF received. Both transfers were made indirectly to IMF. It received an initial retainer of $50,000.00 from Dorsey & Whitney’s trust account on February 24, 2006.58 The source of these funds was Avery and Associates, which had transferred $400,000.00 to Dorsey & Whitney on February 2, 2006 as a retainer for its representation of Security Aviation in the criminal trial.59 The trustee contends that payments from IMF’s trust account to its operating account in March, April and May of 2006, which practically consumed the entirety of the initial $50,000.00 retainer, were transfers within the broad meaning of § 101(54). In his pending motion, the trustee seeks to recover these funds under his constructive fraudulent conveyance count.
I agree that the $50,000.00 retainer was an indirect transfer from Avery and Associates to IMF. But the trustee never alleged that these funds were recoverable by the estate in the amended complaint.60 His fraudulent transfer counts are limited to the $150,000.00 retainer IMF received from Stockler’s trust account. His other counts request relief in a lesser sum, e.g., the $100,302.92 IMF held in its trust account as of June 11, 2006, or the $35,764.42 IMF held in its trust account as of the date Security Aviation filed its chapter 11 petition. The amended complaint asserts no claim whatsoever as to the $50,000.00 retainer.61 Summary judgment can only be made on a claim.62 Accordingly, the court will make no determination on the $50,000.00 retainer here.
As to the second retainer received by IMF, the trustee’s entire case rests upon his assertion that the $150,000.00 retainer was the property of Security Aviation. IMF disputes this, arguing that the funds belonged instead to Kane. IMF received $150,000.00 from Stockler’s trust account on May 10, 2006.63 The trustee contends these funds were proceeds from the sale of an S-550 Citation (N460-M) which belonged to Security Aviation. He supports this contention with two pieces of evidence: an accounting that IMF prepared in December of 2006 and the testimony and documentary evidence provided at the deposition of Dave Kurtz, taken August 16, 2006. The trustee says IMF’s accounting shows that “the only funds available to fund the $150,000 retainer were the $1,450,000 received from the sale of the Citation.”64 I agree with the trustee on this point. IMF’s accounting summarizes “the Avery entity transactions with Paul Stockier.”65 It reflects that a “Fedwire deposit” of $1,450,000.00 was made to Stockler’s trust account on March 22, 2006.66 The source of the deposit is not identified. The accounting also shows that a check from Stockler’s trust account to IMF, in the sum of $150,000.00, was written on April 13, 2006.67 There are no *811intervening deposits between March 22, 2006, and April 13, 2006, when the $150,000.00 check to IMF was issued. The trustee has established that the source of IMF’s retainer was the $1.45 million Fed-wire deposit into Stockler’s trust account.
But how did the trustee match the $1.45 million deposit with the sale of the Citation? Regional Protective Services, the Avery entity that received $37.125 million of the May Smith Trust’s monies, paid $1,850,565.00 for this aircraft on August 9, 2005.68 The trustee alleges that it was placed in the name of Security Aviation. Documents attached to the deposition of Dave Kurtz reflect one of the aircraft owned by Security Aviation was an S-550 Citation (N460-M).69 Security Aviation entered into an agreement for floor plan with Bell Aviation, Inc. on the Citation dated March 14, 2006.70 This agreement provided $1,450,000.00 to Security Aviation for interim financing. Within days of entering into the floor plan agreement, Stockler’s trust account was $1.45 million richer.71 As noted earlier, Kurtz had testified that $7.7 million in proceeds from sales of Security Aviation aircraft had been deposited into accounts belonging to Stockier.72
Given the trustee’s specific and meticulous documentation as to the source of the $150,000.00 retainer, IMF’s responsive affidavits are entirely inadequate. Fitz-, gerald asserts that he “was informed by both Mr. Kane and Mr. Stockier that these monies were Mr. Kane’s. This was consistent with Mr. Avery’s later testimony as well as my own independent due diligence.” 73 Fitzgerald doesn’t describe the steps he took to perform his own “due diligence,” and his assertions regarding Avery’s later testimony are inaccurate.74 His allegations as to statements made by Kane and Stockier are inadmissable hearsay under Rules 801 and 802 of the Fed. R.Evid. and Rule 56(c)(4) of the Fed. R.Civ.P. Further, Stockler’s own testimony conflicts with Fitzgerald’s statement as to Kane’s ownership of the money. On January 4, 2007, Stockier testified that he didn’t expect all the funds in his accounts were Kane’s money,75 that the money in his trust account was to fund the criminal trial,76 and that he didn’t know the source of the funds that were wired into his trust accounts, specifically, he didn’t know “whether they were transferred from Avery & Associates, RPS, or Security Aviation.” 77 However, Stockier confirmed that 99% of all the money placed into his *812accounts came from some “Avery entity.” 78
Fitzgerald’s affidavit fails to address the evidence the trustee has presented as to the true source of the funds. Simply put, he does not have personal knowledge of the facts surrounding the initial transfer of funds into Stockler’s account. He is not a competent witness on this point. His subjective and erroneous views as to the source of the retainer do not create a genuine dispute as to this material issue of fact.
The affidavit of Cam Rader also fails to rebut the evidence the trustee has presented. Rader supplies a copy of minutes purportedly from a meeting of the trustees of the May Smith Trust in which the trust authorized Avery to “employ a margin loan of up to 450,000” against certain trust investments “for purposes of acquiring and operating ‘Security Aviation.’ ”79 Further, Rader states that:
in addition to the trustee’s unanimous approval [that Avery purchase Security Aviation], we were informed by Mr. Kane, Mr. Avery and counsel such as Paul Stockier, that Mr. Kane was a legitimate employee of Security Aviation and that he was paid money for his services, and indeed, that he was owed compensation by the company. We had good reason to believe, in good faith, that the legal fees paid to IMF came from the lawful monies authorized to Security Aviation, and its employees, such as Mr. Kane.80
Rader’s affidavit has the same failings as Fitzgerald’s. Additionally, rather than supporting IMF’s contention that the source of the retainer was Kane’s property, his affidavit indicates that IMF may have known from the outset that its retainer came from “lawful monies authorized to Security Aviation.” Further, even assuming Kane was owed money by Avery or Security Aviation, the purpose of the funds placed into Stockler’s and then IMF’s trust accounts was not for repayment of a debt, but to cover Kane’s legal fees in the criminal trial.81 The plaintiffs have thoroughly rebutted IMF’s contentions to the contrary.82
Neither Fitzgerald’s nor Rader’s affidavit provides sufficient evidence to establish an issue of material fact as to the source of IMF’s $150,000.00 retainer. Accordingly, based upon the trustee’s evidence, and pursuant to Fed.R.Civ.P. 56(g), I find the following are material facts, not genuinely in dispute, which the court will treat as established in this case:
1) The S-550 Citation (N460-M) belonged to Security Aviation;
2) The source of the $1.45 million wired to Stockler’s trust account on March 22, 2006, was from the sale of the Citation;
3) IMF’s $150,000.00 retainer came out of the $1.45 million that had been wired to Stockler’s trust account and was, there*813fore, attributable to the sale funds received for the Citation; and
4) Security Aviation had an interest in the $1.45 million wired to Stockier and, consequently, IMF’s $150,000.00 retainer.83 Nature of Client Trust Account
Another issue that must be determined before reaching the meat of the plaintiffs’ motion is the nature of the $150,000.00 while it was held in IMF’s trust account. Resolution of this issue requires an analysis of the rights in an attorney’s client trust account under Alaska law, including the Alaska Rules of Professional Conduct. As does the Alaska Supreme Court,84 this Court will also look to the Restatement (Third) of the Law Governing Lawyers for guidance.
“A lawyer shall deposit funds received for future fees and expenses into a client trust account, to be withdrawn by the lawyer only as fees are earned or expenses are incurred.”85 Subject to specified exceptions, an attorney must deliver to the client or, as in this case, the nonclient so entitled, all funds in the attorney’s possession belonging to the client or nonclient.86 However, an attorney may retain the funds in his trust account if “there are substantial grounds for dispute as to the person entitled to the property,” or “delivering the property to the client or non-client would violate a court order or other legal obligation of the lawyer.”87 Finally,
[w]hen in the course of representation a lawyer is in possession of property in which both the lawyer and another person claim interests, the property shall be kept separate by the lawyer until there is an accounting and severance of their interests. If a dispute arises concerning their respective interests, the portion in dispute shall be kept separate by the lawyer until the dispute is resolved.88
The initial purpose of the retainers paid to IMF were to fund Kane’s defense in the criminal trial. Those funds were, however, subject to Security Aviation’s right to request that the unearned portion of the funds be refunded.89 By way of analogy, *814the transfer and deposit of funds into IMF’s client trust account was similar to the deposit of funds with a bank in a demand account, albeit with a somewhat different method of withdrawal by Security Aviation. As in a bank demand account, the funds on deposit in IMF’s client trust account remained the property of Security Aviation subject to disbursement at the direction of Security Aviation. Similarly, the right of IMF to withdraw the funds to pay its fees as earned and its expenses incurred in the defense of Kane is analogous to the right of a bank to debit a demand bank account for the agreed upon bank charges. Further, once IMF became aware that there was a dispute regarding who was entitled to receive the funds in its trust account, it was required to retain those funds until the dispute was resolved. These are the constraints under which IMF held the $150,000.00 in its trust account.
Breach of Fiduciary Duty
The trustee seeks summary judgment on the second cause of action stated in his amended complaint: breach of fiduciary duty. He argues that, once IMF agreed to represent Avery and his associated companies, the firm was in a sensitive position because it represented clients with conflicting claims: Avery and his companies on the one hand and Kane on the other. He says IMF knew or should have known, no later than August 16, 2006, that there were competing claims to the funds IMF held in its trust account. He pins IMF’s knowledge to this date because it is the date on which Security Aviation’s chief mechanic was deposed. Dave Kurtz’s deposition was taken on the morning of August 15, 2006, in connection with the civil action the May Smith Trust had initiated against Avery.90 Kurtz testified that he wired funds from the sale of Security Aviation aircraft, including the Citation, into Stockler’s trust account. Stockier attended this deposition on behalf of Avery.91 IMF’s itemized billing statements reflect that Fitzgerald had extended conferences with Stockier, Kane and Avery the same day to discuss a variety of matters, including the “civil lawsuit.”92 IMF also billed for conferences with Kane and Avery on August 18, 2006, regarding “trust matters,” and on August 23, 2006, IMF billed for a conference with Avery “regarding bankruptcy lawyers.”93
In support of his motion on the breach of fiduciary count, the trustee cites Willner’s Fuel Distributors, Inc. v. Noreen.94 In Willner’s, Fairbanks attorney Robert Noreen represented Thomas Rosson individually as well as Rosson’s solely owned corporation, Rosson, Inc. Noreen placed both in bankruptcy in 1986. Willner’s Fuel Distributors, Inc., was listed as a creditor in both bankruptcy cases.
Both bankruptcy petitions were dismissed on April 9, 1988. One day earlier, Rosson and his corporation filed suit against the Fairbanks North Star Borough and other entities for breach of contract and negligence. The claim arose from a contract that had been awarded to Rosson, Inc. On May 9, 1988, Willner’s filed suit against Rosson and Rosson, Inc., for $20,212.17. After learning that Rosson, Inc., had been involuntarily dissolved in 1985, it moved for default against the corporation. In March of 1989, Rosson’s claim against the Fairbanks North Star Borough was settled for $100,000.00. According to Noreen, Rosson settled in his *815individual capacity and as past president or assignee of the dissolved corporation. The settlement checks were made payable jointly to Rosson and Noreen, only. They were deposited in Noreen’s trust account on March 28, 1989. That same day, a default judgment was entered against Ros-son, Inc., in Willner’s civil action.
The timing of events thereafter was disputed. Noreen said he deposited the settlement funds in his trust account on the morning of March 28. He directed the bank to make a cashier’s check for $80,000.00 payable to Rosson individually. He then wrote a check to himself for $20,000.00 and deposited it in his business áecount. These two transactions spent the entirety of the settlement proceeds. Noreen alleged that Willners served him with a levy against his trust account on the afternoon of March 28, after the settlement funds had been disbursed. He responded to the levy by advising that he had no funds belonging to Rosson, Inc., under his control. Willners sued Noreen and Rosson, and alleged that Noreen had violated AS 09.40.040 for wrongfully disbursing funds of an insolvent, dissolved corporation. Willners moved for summary judgment and Noreen filed a cross-motion, contending that he owed no fiduciary duty to Willners.
The lower court granted Noreen’s motion, but the Alaska Supreme Court reversed and remanded the case, finding that there were disputed facts regarding the timing of the disbursals authorized by Noreen. The court discussed the fiduciary responsibilities arising upon the dissolution and insolvency of a corporation. It concluded that Rosson, in his capacity as director of a dissolved corporation, had a fiduciary responsibility to corporate creditors to preserve its assets for their benefit.95
The court also commented on the fiduciary responsibilities of Noreen. It noted that Noreen represented clients with conflicting interests—Rosson, who wanted to maximize his individual claim in the settlement proceeds, and Rosson, Inc., which wanted to maximize its share of the proceeds so it could disburse these funds to its creditors—and that an attorney in such a situation might be liable for breach of his fiduciary responsibilities to either client.96 The court also found that Noreen had a fiduciary duty to the creditors of the dissolved corporation. “Just as creditors may sue directors on behalf of a dissolved corporation, creditors may maintain similar actions against the attorney of the dissolved corporation for breach of the attorney’s fiduciary duties.”97
By way of summation, we hold that if an attorney represents both a dissolved or insolvent corporation and a director or officer of that firm, and if the attorney controls corporate assets, then the attorney must protect the financial rights of creditors to these assets, where he or she knows or should know that the director or officer intends to interfere with creditors’ claims through an improper distribution of these assets. To do otherwise would sanction a class of wrongs without a remedy.98
The trustee argues that Willner’s is applicable here and that he is entitled to the value of trust account funds held and disbursed by IMF following the Alaska criminal trial. I respectfully disagree. IMF did represent Avery “and his associated companies” for a limited period of time.99 *816However, when IMF agreed to this representation, Fitzgerald advised both Avery and Kane that the two of them had a “potential conflict” and if an actual conflict did arise, IMF would represent Kane, not Avery.100 In other words, the potential conflict was not between Avery and his corporate entity, Security Aviation, but between Avery and his related entities, on the one hand, and Kane, who purported to be a creditor of both.
IMF did control corporate assets, consisting of the $150,000.00 in Security Aviation proceeds placed in its trust account. IMF’s disbursal of these funds after August 16, 2006, preferred IMF and Kane over the rights of the May Smith Trust, which was the largest creditor of both Avery and his related entity, Security Aviation. Further, IMF knew about the May Smith Trust’s claims against Avery; the very purpose of its limited representation of Avery was to assist him “in the present misunderstanding and/or dispute with the other trustees” of the May Smith Trust.101 After receipt of an injunction which prohibited Avery and his related entities from making any transfer of property acquired through the disposition of trust property, IMF continued to disburse funds from its trust account to itself and to Kane without regard to the rights of the May Smith Trust.
There are a number of similarities between Willner’s and the case at bar. However, the May Smith Trust is not a party to this adversary proceeding. Bar-stow, as a chapter 7 trustee, has succeeded only to the rights of Avery, and his related entities, including Security Aviation. I conclude that the trustee and Security Aviation lack standing to assert a claim for breach of fiduciary duty against IMF under the rationale stated in Willner’s. As the court made clear, the creditor of a dissolved corporation may maintain an action against the corporation’s attorney for breach of fiduciary duty.102 The trustee simply does not stand in these shoes. Further, the trustee cannot pursue this claim on behalf of the trust on the theory that it is an asset of either Avery’s or Security Aviation’s bankruptcy estate. The May Smith Trust is a creditor in both bankruptcies.
For these reasons, the trustee’s motion for summary judgment on the issue of breach of fiduciary duty will be denied. Further, as noted above, the court may grant summary judgment sua sponte when, under the facts, it appears that the moving party could not prevail even if a trial were held.103 Because the plaintiffs are not entitled to summary judgment on their second cause of action as a matter of law, IMF is entitled to summary judgment in its favor.
Conversion and Unlawful PosT-Petition Transfer
The plaintiffs argue that IMF wrongfully converted funds remaining in its trust account after the conclusion of the criminal trial by paying Kane a total of $47,500.00 and paying its own legal bills for work it performed that was unrelated to the criminal trial.104 The plaintiffs conversion count is the fourth cause of action in the amend*817ed complaint. It alleges damages in the sum of $92,810.31 under this theory.105
Conversion is a common law remedy governed by otherwise applicable state law. “The tort of conversion is ‘an intentional exercise of dominion and control over a chattel which so seriously interferes with the right of another to control it that the actor may justly be required to pay the other the full value of the chattel.’ ”106 As the Alaska Supreme Court has noted:
To establish a claim for conversion, the plaintiff must prove (1) that she had a possessory interest in the property; (2) that the defendant interfered with the plaintiffs right to possess the property; (3) that the defendant intended to interfere with plaintiffs possession; and (4) that the defendant’s act was the legal cause of the plaintiffs loss of her property.107
Did Security Aviation have a pos-sessory interest in IMF’s trust account funds as of June 11, 2006? Many courts have adopted a view that a plaintiff must either be in possession or entitled to immediate possession of the property in question at the time of the wrongful act to maintain an action for conversion. The Alaska Supreme Court has, however, rejected that view, instead holding that a future possessory interest is sufficient to maintain an action for conversion.108
As noted above, the funds held in IMF’s client trust account were subject to the right of Security Aviation to request the unearned portion of the funds be refunded. Therefore, I find that Security Aviation had a sufficient future possessory interest in the funds transferred to IMF that were deposited in the IMF client trust account to support an action for conversion.
The second question is: did the post-June 11, 2006, disbursements by IMF interfere with Security Aviation’s future possessory interest? To answer this question requires that the transfers be broken into two groups—transfers to Kane and transfers to IMF. Further, the transfers to IMF must be broken down further into transfers made in payment of its fees before and after Security Aviation filed its chapter 11 petition.
As noted above, the mere retention by IMF of the funds in its client trust account did not in any way interfere with Security Aviation’s future possessory interest. The transfers, however, present an entirely different picture. Unless those transfers fell within one of the exceptions to the obligation of IMF to deliver the funds held in its trust account funds to Security Aviation upon its request, the transfers clearly interfered with Security Aviation’s future possessory interest. Here, the only exceptions that would be applicable would be transfers which were made with the con*818sent of Security Aviation or transfers made to satisfy a valid attorney’s lien.109 Under Alaska law, an attorney has a lien for compensation “upon money in the possession of the attorney belonging to the client.”110 Here, although the funds were subject to Security Aviation’s future pos-sessory interest, they were placed in IMF’s trust account for the purpose of providing legal services to Kane. Additionally, IMF also represented Avery for a limited period before his bankruptcy petition was filed, and the retainer was applied against Avery’s fees, as well. Thus, the transfer of funds from IMF’s trust account did not interfere with Security Aviation’s future possessory interest in those funds to the extent that IMF had a valid attorney’s lien for fees earned or expenses incurred representing Kane and/or Avery. With respect to the prepetition transfers made to pay IMF’s fees and expenses, I find that IMF had a valid, existing attorney’s lien for the fees it had earned or the expenses it had incurred.111 That lien extinguished Security Aviation’s extant pos-sessory interest and IMF was entitled to enforce its lien against the funds held in its client trust account for that purpose.
The post-petition transfers to IMF, however, present a different picture. A review of IMF’s fee itemizations from December, 2006, forward indicate that all its post-petition work was performed on behalf of Kane.112 After Security Aviation filed its chapter 11 petition, any attorney’s lien IMF might assert for such services could not trump Security Aviation’s pos-sessory interest in the remainder of IMF’s trust account.113 There are two reasons for this. First, after Security Aviation filed bankruptcy, the balance of IMF’s retainer become property of the bankruptcy estate. Prior approval from the court must be obtained before a creditor may acquire a post-petition security interest in property of the estate to secure obligations incurred by the debtor.114 Even if Security Aviation had consented to IMF’s post-petition representation of Kane, IMF could not assert a post-petition lien for such services against the funds in its trust account because it did not obtain prior approval from this court. Nor did IMF seek court approval of its employment as counsel for Security Aviation, which also required approval by this Court.115
Second, the filing of a petition in bankruptcy automatically stays “any act to create, perfect, or enforce any lien against property of the estate.”116 IMF did not obtain relief from the automatic stay before making the post-petition transfers to itself. Consequently, even if IMF might *819have otherwise held a lien, the post-petition transfers to itself in payment of its fees constituted acts to enforce a lien against property of the estate. Such acts violate the automatic stay and are void.117
The transfers to Kane present a different picture. Absent prior authorization or consent by Security Aviation, these transfers constituted conversion.118 IMF does not contend that the $13,500.00 transferred post-petition was authorized by Security Aviation as the debtor in possession. With respect to the $34,000.00 transferred to Kane pre-petition, IMF has proffered no evidence that Security Aviation authorized the transfer to Kane.119 And, as noted above, there is no evidence that these funds belonged to Kane. There being no triable issue of fact, the entire $47,500 transferred by IMF to Kane constituted conversion, for which IMF is liable, as a matter of law.
The third question goes to the intent of IMF in making the transfers. Under Alaska law, an “intentional act” is defined to encompass either an intent to interfere with property or an act done with knowledge on the part of the defendant “that the act or omission would result in such interference.”120 Furthermore, an act may be intentional even if the defendant mistakenly believed that he or she had a right to interfere with the property, or was unaware of the rights of the plaintiff in the property.121 In this case, the evidence supports but one logical, reasonable inference; IMF intended to deprive Security Aviation of the monies it held in its trust account. That the fourth element, that the conversion by IMF caused the loss to Security Aviation, is satisfied is self-evident and requires no further discussion.
I find that the following transfers by IMF from its client trust account constituted an intentional exercise of dominion or control over the funds that so seriously interfered with the rights of Security Aviation to control those funds that IMF may justly be required to repay those funds:
Date Transferee Amount
September 21, 2006 Robert Kane $ 9,000.00
September 25,2006 Robert Kane $ 6,000.00
October 8,2006 Robert Kane $ 9,500.00
October 3,2006 Robert Kane $ 9,500.00
January 12,2007 Robert Kane $13,500.00
January 17, 2007_IMF $ 6,328.08
February 8, 2007_IMF $10,530.84
March 9, 2007_IMF $ 1,110.25
April 10, 2007_IMF $ 4,295.25
Total $69,764.42
These are material facts, not genuinely in dispute, which the court will treat as established in this case.122 These transfers constituted a conversion of Security Aviation’s property. Further, although the plaintiffs are not entitled to full summary judgment on their conversion theory, as to all transfers made by IMF from its trust account after June 11, 2006, I will grant partial summary judgment on their conversion *820claim, to the extent of the $69,764.42 in transfers shown above.
Additionally, the plaintiffs will be granted summary judgment on their claim for unlawful post-petition transfers. As explained above, the transfers IMF made from its trust account after Security Aviation filed its bankruptcy petition were in violation of 11 U.S.C. §§ 364, 327, and 362(a)(4). Summary judgment will be entered on the plaintiffs’ ninth cause of action, in the sum of $35,764.42.
Fraudulent Transfers
The plaintiffs’ seventh cause of action seeks to recover $130,596.14 from IMF on a fraudulent transfer theory under 11 U.S.C. § 548(a)(1)(B).123 This figure represents the total of IMF’s transfers from its trust account to pay for its legal fees, and includes the initial three transfers from March 15, 2006, through May 10, 2006, which consumed the $50,000.00 retainer IMF received from Dorsey & Whitney. As noted above, the $50,000.00 retainer will not be considered in the context of the plaintiffs’ summary judgment motion because their amended complaint encompasses only the $150,000.00 retainer that IMF received from Stockier. Further, the plaintiffs’ motion does not seek to recover any of the transfers from IMF’s trust account to Kane as a fraudulent transfer.124
The transfers IMF made in payment of its fees, which arose after IMF’s receipt of the Security Aviation funds from Stockier but before the filing of Security Aviation’s chapter 11 petition, occurred from June 11, 2006, through December 14, 2006. In all, there were eight transfers, which totaled $80,909.05.125 These are the transfers which the court will evaluate here.
This court has already concluded that Security Aviation had an interest in the $150,000.00 IMF placed into its trust account. Under § 548(a)(1)(B), a trustee may avoid any transfer of an interest in property of the debtor which was incurred by the debtor within two years of the filing of the petition, if the debtor:
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii) (I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer or obligation[.]126
The term “transfer” includes “each mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property; or an interest in property.”127 “The Bankruptcy Code’s definition of ‘transfer’ is extremely broad.”128 Further, the plain language of § 101(54) “makes clear that the transfer need not be made directly by the debt- or » 129
Looking first to the issue of insolvency, the plaintiffs’ have presented credible evidence that Security Aviation was *821insolvent during the time the transfers to IMF were made. Mr. Minkemann, the trustee’s C.P.A., has established that Security Aviation was insolvent throughout 2006 on a balance sheet basis.130 IMF’s evidence to the contrary, consisting of the Rader affidavit, is wholly conjectural and has no evidentiary value on this issue. It fails to apply the balance sheet test for determining insolvency found in 11 U.S.C. § 101(32). I find that Security Aviation was insolvent in 2006 when the transfers were made from IMF’s trust account to pay for its legal fees.
Did Security Aviation receive reasonably equivalent value for the transfers made to IMF?
Whether value has been given for a transfer depends on all the circumstances surrounding the transaction. Thus, whether a release of rights under a contract or the surrender of a lease is made for value must depend upon whether a good bargain is being given up or a burdensome obligation is being discharged. Whether the transfer is for “reasonably equivalent value” in every case is largely a question of fact, as to which considerable latitude must be given the trier of the facts. In order to determine whether a fair economic exchange has occurred ... the bankruptcy court must analyze all the circumstances surrounding the transfer in question ... Because the ultimate issue is the impact of the transfer on the debtor’s estate, the court must thus determine whether the debtor, as opposed to some other entity, received such value.
The analysis in such cases is similar to that of cases under the UFCA which held that a debtor did not receive reasonably equivalent value if its transfer was in exchange for a benefit to a third party.131
The determination of “reasonably equivalent value” does not contain a good faith component.132
Both sides take broad strokes on the issue of reasonably equivalent value. The plaintiffs argue that all transfers from IMF’s trust account to pay fees incurred after the criminal trial were made in payment for the debt of another, Kane, and therefore such payments provided no value to Security Aviation. They say that these miscellaneous fees, including those incurred on Kane’s behalf in conjunction with the Avery bankruptcy, provided no value to Security Aviation. IMF argues that its fees did give value to Security Aviation, because Avery and Kane had identical interests and that its fees provided benefit to both. I feel there is a grey area in between these two positions. On the one hand, the interests of Kane, Avery and Security Aviation appear to have been so intertwined, with respect to the criminal charges, that IMF’s services in the criminal case arguably benefitted the interests of all three of these parties. Additionally, a review of IMF’s fee itemization for services rendered post-trial indicate that it dealt with residual issues related to the criminal charges after the trial concluded. Further, a portion of IMF’s post-trial fees were incurred on Avery’s behalf and paid out of the retainer. However, to the extent that fees were incurred exclusively for the benefit of Kane, particularly with regard to representing his interests in the Avery and Security Aviation bankruptcies, *822these fees would provide no value to Security Aviation.
These issues cannot be determined in the summary judgment context. There are disputed issues of fact that must be resolved by the trier of facts, the jury. Summary judgment for the plaintiffs on their seventh cause of action will therefore be denied.
Unjust Enrichment
The plaintiffs’ motion seeks summary judgment on their third cause of action: unjust enrichment. IMF filed a cross-motion for partial summary judgment on this count. To establish a claim for unjust enrichment, the plaintiffs must show:
(1) a benefit conferred upon the defendant by the plaintiff;
(2) appreciation by the defendant of such benefit; and
(3) acceptance and retention by the defendant of such benefit under such circumstances that it would be inequitable for him to retain it without paying the value thereof.133
The retainer received by IMF conferred a potential benefit of $150,000.00 to the firm. The plaintiffs only seek damages of $92,810.31, representing disbursements IMF made from its trust account after August 14, 2006.134 Of this sum, $47,500.00 was paid directly to Kane. IMF clearly appreciated no benefit from the funds transferred to Kane, and the plaintiffs’ unjust enrichment claim fails as to these transfers. That leaves at issue the sum of $45,310.31 which IMF charged for its attorney’s fees and expenses.
The Alaska Supreme Court has found that the doctrine of unjust enrichment is not, in itself, a theory of recovery, but is “a prerequisite for the enforcement of the doctrine of restitution; that is, if there is no unjust enrichment, there is no basis for restitution.”135 Further, restitution is not a cause of action but a remedy for various causes of action, including quasi-contract, or contracts implied in law.136
The courts are in accord in stressing that the most significant requirement for recovery in quasi-contract is that the enrichment of the defendant must be unjust; that is, the defendant must receive a true windfall or “something for nothing.” Where a defendant has given fair consideration or value to a third party in exchange for the benefits conferred by the plaintiff, there is no windfall and no recovery will lie.137
Here, IMF gave fair consideration or value to Robert Kane for the legal services it performed on his behalf. It did not receive a windfall. Neither the trustee nor Security Aviation have a valid claim for unjust enrichment.138 Partial summary judgment for IMF is warranted.
Conclusion
The court finds that the following material facts, not genuinely in dispute, are established in this case pursuant to Fed. R.Civ.P. 56(g):
1) The S-550 Citation (N460-M) belonged to Security Aviation;
*8232) The source of the $1.45 million wired to Stockler’s trust account on March 22, 2006, was from the sale of the Citation;
8) IMF’s $150,000.00 retainer came out of the $1.45 million that had been wired to Stockler’s trust account and was, therefore, attributable to the sale funds received for the Citation;
4) Security Aviation had an interest in the $1.45 million wired to Stockier and, consequently, IMF’s $150,000.00 retainer.
5) The following transfers by IMF from its client trust account constituted an intentional exercise of dominion or control over the funds that so seriously interfered with the rights of Security Aviation to control those funds that IMF may justly be required to repay those funds:
Date Transferee Amount
September 21, 2006 Robert Kane $ 9,000.00
September 25,2006 Robert Kane $ 6,000.00
October 3, 2006 Robert Kane $ 9,500.00
October 3,2006 Robert Kane $ 9,500.00
January 12,2007 Robert Kane $13,500.00
Januaryl7,2007 . IMF $ 6,328.08
February 8, 2007_IMF $10,530.84
March 9, 2007_IMF $ 1,110.25
April 10, 2007_IMF $ 4,295.25
Total $69,764.42
The plaintiffs’ motion for summary judgment will be granted, in part, and denied, in part, as follows:
1) Partial summary judgment is granted on the plaintiffs’ fourth cause of action, conversion, in the sum of $69,764.42.
2) Summary judgment is granted on the plaintiffs’ ninth cause of action, for violation of the automatic stay and unlawful post-petition transfers, in the sum of $35,764.42.
3) Summary judgment is denied as to the remainder of the counts encompassed in the plaintiffs’ motion (breach of fiduciary duty, unjust enrichment, and constructive fraudulent conveyance).
The defendant’s cross-motion for partial summary judgment on the issue of unjust enrichment will be granted and the plaintiffs’ third cause of action will be dismissed, with prejudice. Further, summary judgment will be entered in favor of IMF on the plaintiffs’ count for breach of fiduciary duty, and the plaintiffs’ second cause of action will be dismissed, with prejudice.
An order will be entered consistent with this memorandum.
. Def.'s Answer to Am. Compl., filed Dec. 3, 2008 (Docket No. 8), ¶ 2.
. This reference should probably be to § 548(a)( 1)(B)(ii)(IV).
.Some of the background facts in this memorandum are from this court's earlier Memorandum Regarding Substantive Consolidation, filed in the main case, In re Avery, Case No. A09-00455-DMD, on September 14, 2007 (Docket No. 136).
. Decl. of Russell Minkemann, filed Oct. 5, 2010 (Docket No. 25), ¶ 5.
. Deck of Gary Spraker, filed Oct. 5, 2010 (Docket No. 26), Ex. C.
. Id., Ex. B at 5.
. Spraker Deck (Docket No. 26), Ex. E.
. Spraker Deck (Docket No. 26), Ex. S (Kurtz Dep.). The “Agreement for Floor Plan” between Security Aviation and Bell Aviation is the first attachment to this deposition excerpt.
. Stockler’s receipt of this sum was established in a prior adversary proceeding. See Barstow v. Stockler, Adv. No. A06-90059-DMD (Docket No. 13-Mem. in Supp. of Mot. for Reconsid., Ex. 2).
. Def.’s Answer to Am. Compl. (Docket No. 8), ¶ 29; Def.'s Opp'n to Mot. for Partial Summ. J., filed Nov. 15, 2010 (Docket No. 36), Ex. G.
. Spraker Deck (Docket No. 26), Ex. D, 105:13-106:3, 223:24-224:4.
. Spraker Decl. (Docket No. 26), Ex. B.
. Id., Ex. H.
. Id., Ex. I.
. Id., Ex. I at 1.
. Spraker Decl. (Docket No. 26), Ex. J.
. Id., Ex. K.
. Id.
. Id., Ex. L.
. Id.
. Spraker Decl. (Docket No. 26), Ex. M.
. Id., Ex. N.
. Aff. of Louise Ma, filed Dec. 8, 2010 (Docket No. 48), Ex. D.
. Spraker Deck (Docket No. 26), Ex. P; Aff. of Louise Ma (Docket No. 48), Ex. D.
. Def.'s Answer to Am. Compl. (Docket No. 8), ¶ 37.
. Aff. of Louise Ma, filed Dec. 8, 2010 (Docket No. 48),
. Aff. of Louise Ma (Docket No. 48), ¶ 10.
. Spraker Decl. (Docket No. 26), Ex. O; Aff. of Louise Ma (Docket No. 48), ¶ 13 and Ex. G. The order was sent via Federal Express overnight courier to Mr. Fitzgerald.
. Spraker Deck (Docket No. 26), Ex. S.
. Id., Ex. B.
. Id.
. Id.
. In re Avery, Case No. A06-00455-DMD, Docket No. 1 (Petition). Nine entities associated with Avery were substantively consolidated with his bankruptcy individual case on September 14, 2007. Id., Docket No. 137 *807(Order Granting, in Part, and Denying, in Part, Trustee’s Mot. for Substantive Consolidation). The consolidation was nunc pro tunc to the date Avery's petition had been filed.
. Id., Docket No. 66 (Order Granting Trustee’s App. to Settle Preference Claims re: Security Aviation, Inc., and App. to Operate Business).
. Barstow v. Stockler, Adv. No. 06-90059-DMD.
. Id., Docket No. 10 (Prelim. Inj.). Kane moved for reconsideration. After a hearing, there were no material modifications of the original preliminary injunction. Id., Docket No. 19 (Order re: Mot. for Recons, and Mot. to Compel).
. Id.
. In re Security Aviation, Inc., Case No. A06-00559-DMD, filed Dec. 21, 2006, Docket No. 1 (Petition). IMF had $35,764.42 in its trust account at this time. Spraker Deck (Docket No. 26), Ex. B.
. In re Security Aviation, Inc., Case No. A06-00559-DMD, Docket No. 115 (Revised Order Granting Mot. for Authority to Sell Assets Free and Clear of Liens and Assume and Assign Exec. Contracts). A second revised order was entered on September 25, 2007 (Docket No. 198) solely for the purpose of attaching an exhibit which was omitted from the May 9th order.
. Id., Docket No. 289 (Order Confirming Debtor’s Plan of Liquidation).
. Spraker Decl. (Docket No. 26), Ex. R at 9-10.
. Id., Ex. Ratio.
. Id., Ex. R at 12-13.
. United States v. Avery, Case No. 3:07-CR-00028-RRB, Docket No. 71.
. Id.
. Fed. R. Bankr.P. 7056.
. Fed.R.Civ.P. 56 (effective Dec. 1, 2010)(emphasis in text). Although the plaintiffs' and defendant’s motions were filed prior *809to the effective date of amended Rule 56, under 28 U.S.C. § 2074(a) and the Order of the United States Supreme Court dated April 28, 2010, the amended rule applies to proceedings pending at the time the rule became effective, "insofar as just and practicable.” See Order of the Supreme Court of the United States, dated April 28, 2010, regarding amendments to the Federal Rules found at http://www.uscourts.gov/RulesAndPolicies/ FederalRulemaking/Overview/RulesForms 120110.aspx.
. Ballen v. City of Redmond, 466 F.3d 736, 741 (9th Cir.2006).
. Bathony v. Transamerica Occidental Life Ins. Co., 795 F.Supp. 296, 298 (D.Alaska 1992).
. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 252, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
. Id.
. Shane v. Greyhound Lines, Inc., 868 F.2d 1057, 1061 (9th Cir.1989) (conclusory affidavits not backed up by statements of fact cannot defeat a motion for summary judgment); see also Fed.R.Civ.P. 56(c)(4).
. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
. Cool Fuel, Inc. v. Connett, 685 F.2d 309, 311-12 (9th Cir.1982); Fed.R.Civ.P. 56(f).
. West v. Amer. Tel. & Tel. Co., 311 U.S. 223, 236, 61 S.Ct. 179, 85 L.Ed. 139 (1940) ("[T]he highest court of the state is the final arbiter of what is state law. When it has spoken, its pronouncement is to be accepted by federal courts as defining state law.”).
. S.D. Myers, Inc. v. City and County of San Francisco, 253 F.3d 461, 473 (9th Cir.2001); Paulman v. Gateway Venture Partners III, L.P. (In re Filtercorp, Inc.), 163 F.3d 570, 578 (9th Cir.1998).
. Spraker Deck (Docket No. 26), Ex. B.
. Minkemann Decl. (Docket No. 25), ¶ 5.
. Am. Complaint, filed Oct. 23, 2008 (Docket No. 2).
. Id.
. Fed.R.Civ.P. 56(a).
. Answer of Defendant IMF, paragraph 29, Docket No. 8.
. Pis.’ Reply to Def.'s Opp’n to Mot. for Summ. J., filed Dec. 8, 2010 (Docket No. 43), at 7.
. Second Deck of Spraker, filed Dec. 8, 2010 (Docket No. 44), Ex. DD at 2.
. Id., Ex. DD at Ex. 2, p. 1.
. Id.
. Second Decl. of Minkemann, filed Dec. 8, 2010 (Docket No. 45), ¶ 5.
. Spraker Decl. (Docket No. 26), Ex. S (Dep. of Dave Kurtz).
. Id. The "Agreement for Floor Plan” is the first documentary exhibit included with the excerpts of the Kurtz deposition found at Ex. S.
. Second Decl. of Spraker, filed Dec. 8, 2010 (Docket No. 44), Ex. DD at Ex. 2, p. 1.
. Spraker Decl. (Docket No. 26), Ex. S.
. Aff. of Kevin Fitzgerald, filed Dec. 17, 2010 (Docket No. 52), at 2, ¶ 3.
. Avery never testified that the $150,000.00 retainer was property of Kane. He stated that the money belonged to Security Aviation, the Mary C. Avery Trust or LACO. See Second Spraker Decl. (Docket No. 44), Ex. Z at 64:3-7. He also testified that the money which was put into Stockler's account belonged to Security Aviation and was placed with Stockier to protect it. Spraker Decl. (Docket No. 26), Ex. D at 105:13-106:3.
. Second Decl. of Gary Spraker, filed Dec. 8, 2010 (Docket No. 44), Ex. AA at 36:3. Cam Rader attended the hearing in which Stockier provided this testimony, on behalf of Kane.
. Id., Ex. AA at 36:25-37:1.
. Id., Ex. AA at 39:11-17.
. Id. at 39:20-24.
. Aff. of Stuart "Cam” Rader, filed Nov. 15, 2010 (Docket No. 37), Ex. 2. The affidavit of Louise Ma notes that Rader has never attended any trust meetings or spoken with the other trustees of the May Smith Trust and his statements on this point lack any foundational support. Ma Aff. (Docket No. 48), at 2, ¶ 4. Further, as noted above, Avery admitted, in his plea agreement, that he had defrauded the trust and that any businesses he acquired with trust money were for his own benefit, rather than the trust’s. Spraker Deck (Docket No. 26), Ex. R at 10.
. Rader Aff. (Docket No. 37), at 3, ¶ 4.
. Second Decl. of Gary Spraker, filed Dec. 8, 2010 (Docket No. 44), Ex. AA at 36:25-37:1.
. See Pis.' Reply to Def.’s Opp. to Mot. for Summ. J., filed Dec. 8, 2010 (Docket No. 43), at 5-13.
. Begier v. I.R.S., 496 U.S. 53, 58-59, 110 S.Ct 2258, 110 L.Ed.2d 46 (1990) ("property of the debtor" consists of “property that would have been part of the [bankruptcy estate] had it not been transferred before the commencement of bankruptcy proceedings.”)
. See, e.g., Weiner v. Burr, Pease & Kurtz, P. C., 221 P.3d 1, 8 (Alaska 2009); Compton v. Kittleson, 171 P.3d 172, 177 (Alaska 2007); Pederson v. Barnes, 139 P.3d 552, 557 (Alaska 2006).
. Rule 1.15(c), Alaska R. Prof. Conduct (in effect in 2006) (emphasis added). The current version of Rule 1.15(c) is identical.
. Restatement (Third) of Law Governing Lawyers § 45(1) ("Except as provided in Subsection (2), a lawyer must promptly deliver, to the client or nonclient so entitled, funds or other property in the lawyer's possession belonging to a client or nonclient.”).
. Restatement (Third) of Law Governing Lawyers § 45(2)(d), (e).
. Rule 1.15(c), Alaska R. Prof. Conduct (in effect in 2006). This requirement is now found in Rule 1.15(e), Alaska R. Prof. Conduct, but now clarifies that a lawyer must keep separate property in which “two or more persons (one of whom may be the lawyer), claim conflicting interests.” See also Restatement (Third) of Law Governing Lawyers § 44 cmt. g (if a lawyer is in possession of property of "a person claiming that property deposited with the lawyer by the client was taken or withheld unlawfully from that person,” the lawyer must safeguard the contested property until the dispute is resolved.)
. See Rule 1.16(d), Alaska R. Prof. Conduct (in effect in 2006) ("Upon termination of representation, a lawyer shall ... refund[ ] any advance payment of fee or expense that has not been earned or incurred.”). The current version of Rule 1.16(d) contains essentially the same provision.
. Spraker Decl. (Docket No. 26), Ex. S.
. Id.
. Def.'s Opp'n to Mot. for Summ. J„ filed Nov. 15, 2010 (Docket No. 36), Ex. O at 1.
. Spraker Deck (Docket No. 26), Ex. B-IMF’s Sept. 13, 2006 billing statement.
. 882 P.2d 399 (Alaska 1994).
. Id. at 404-05.
. Id. at 405.
. Id.
. Willner’s Fuel Distrib., 882 P.2d at 406.
. Spraker Deck (Docket No. 26), Ex. L (Fitzgerald's June 12, 2006, letter advising Ma that he represented "Avery and his associated *816companies in a limited manner with regard to matters involving the May Smith Trust.”)
. Spraker Decl. (Docket No. 26), Ex. J.
. Id.
. Willner’s Fuel Distrib., 882 P.2d at 405 (emphasis added).
. Cool Fuel, 685 F.2d at 311-12; Fed.R.Civ.P. 56(f).
. Pis.’ Mot. for Sunun. J., filed Oct. 5, 2010 (Docket No. 24), at 21-22.
. See Am. Complaint (Docket No. 2), at 15, ¶ 93. The plaintiffs’ amended complaint contains a discrepancy regarding the amount remaining in IMF’s trust account after the criminal trial. Their fourth cause of action states that this amount was $92,810.31, while ¶33 generally alleges that the balance after the trial concluded was $100,302.92. This discrepancy is not relevant to the court's analysis here.
. K & K Recycling, Inc. v. Alaska Gold, Co., 80 P.3d 702, 717 (Alaska 2003) (quoting Carver v. Quality Inspection & Testing, Inc., 946 P.2d 450, 456 (Alaska 1997)); see also Dressel v. Weeks, 779 P.2d 324, 328 (Alaska 1989) (conversion of specifically identified currency).
. Silvers v. Silvers, 999 P.2d 786, 793 (Alaska 2000) (footnote omitted); see also K & K Recycling, Inc., 80 P.3d at 717 (citing Silvers).
. McKibben v. Mohawk Oil Co., Ltd., 667 P.2d 1223, 1228-29 (Alaska 1983), overruled on other grounds by Wien Air Alaska v. Bubbel, 723 P.2d 627 (Alaska 1986).
. Restatement (Third) of Law Governing Lawyers § 45(2)(a), (c).
. AS § 34.35.430(a)(2).
. It is uncontested that Security Aviation authorized the payment of IMF's fees from the $150,000.00. The plaintiffs do not contend, nor have they shown, that IMF did not earn the fees or properly incurred the expenses for which IMF reimbursed itself from the client trust account. However, while IMF's attorney's lien negates the plaintiffs’ conversion claim, as to the pre-petition transfers, it does not affect the plaintiffs’ fraudulent conveyance claims, which are based upon different legal principles.
. Def.'s Mot. for Partial Summ. L, filed Nov. 15, 2010 (Docket No. 35), Ex. O, 9-12.
. IMF does not contend the post-petition payments were authorized by Security Aviation as debtor in possession. Consequently, Security Aviation is also entitled to recover the funds transferred from the IMF client trust account as unauthorized post-petition transfers. 11 U.S.C. §§ 549, 550.
. 11 U.S.C. § 364.
. 11 U.S.C. § 327.
. 11 U.S.C. § 362(a)(4).
. Kalb v. Feuerstein, 308 U.S. 433, 438-39, 60 S.Ct. 343, 84 L.Ed. 370 (1940); Gruntz v. County of Los Angeles (In re Gruntz), 202 F.3d 1074, 1082 (9th Cir.2000) (en banc); Schwartz v. United States (In re Schwartz), 954 F.2d 569, 571 (9th Cir.1992).
. Restatement (Second) of Torts § 228 ("One who is authorized to make a particular use of a chattel, and uses it in a manner exceeding the authorization, is subject to liability for conversion to another whose right to control the use of the chattel is thereby seriously violated.”).
. As noted above, this Court rejected IMF’s argument that the monies deposited were Kane’s property.
. Shields v. Cape Fox Corp., 42 P.3d 1083, 1088 n. 12 (Alaska 2002).
. Id.
. Fed.R.Civ.P. 56(g).
. The plaintiffs do not seek summary judgment on their other fraudulent conveyance counts, found in their fifth, sixth and eighth causes of action. The fifth count seeks relief under 11 U.S.C. § 548(A)(1)(A), the sixth under AS 34.40.010, and the eighth under § 548(a)(l)(B)(ii)(IV).
. See Pis.' Mot. for Summ. J. (Docket No. 24), at 22-23; Pis.' Response to Def.’s Sur-Reply, filed Jan. 10, 2011 (Docket No. 56), at 6.
. Spraker Deck (Docket No. 26), Ex. B.
. 11 U.S.C. § 548(a)(1)(B).
. 11 U.S.C. § 101(54)(D).
. Bernard v. Sheaffer (In re Bernard), 96 F.3d 1279, 1282 (9th Cir.1996) (emphasis in original).
. Fursman v. Ulrich (In re First Prot., Inc.), 440 B.R. 821, 828 (9th Cir. BAP 2010).
. See Second Minkemann Decl. (Docket No. 45) and Ex. D thereto, found at Docket No. 49 (Notice of Lodging Exs. to Second Minkemann Decl.).
. 5 Collier on Bankruptcy ¶ 548.05[l][b] (Alan N. Resnick and Henry J. Sommer eds., 16th ed.) (footnotes omitted).
. Id., ¶ 548.05[l][b],
. Beluga Mining Co. v. State Dept. of Natural Res., 973 P.2d 570, 579 (Alaska 1999) (footnote omitted).
. Am. Complaint (Docket No. 2), at 15.
. Alaska Sales and Serv., Inc. v. Millet, 735 P.2d 743, 746 (Alaska 1987).
. Id.
. Id. (citations omitted).
. As with the discussion on the conversion claim, because the legal principles differ, this holding does not affect the question of whether Security Aviation received reasonably equivalent value in the context of the fraudulent conveyance claims. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494433/ | Opinion On Motion to Dismiss
BRUCE A. MARKELL, Bankruptcy Judge.
I. Introduction
This case presents a simple issue: does a bankruptcy court have the power under 11 U.S.C. § 105 to stay creditor actions if the automatic stay has lapsed under 11 U.S.C. § 362(c)(3)? This court finds it does.
II. Background
The debtors filed their chapter 13 case on June 27, 2011. That filing followed the dismissal of an earlier chapter 13 case on June 16, 2011. The debtors’ first case was dismissed because the debtors’ previous attorneys did not file the schedules within the 45-day time limit imposed by Section 521(i). Following dismissal, debtors’ current attorneys filed the present case, but they did not seek to extend the automatic stay as permitted by Section 362(c)(3). One consequence of this failure to seek relief under Section 362(c)(3) was that the automatic stay terminated as to both the debtors’ property and the property of debtors’ estate thirty days after debtors filed their current case. Reswick v. Reswick (In re Reswick), 446 B.R. 362, 373 (9th Cir. BAP 2011).
On October 10, 2011, the debtors filed this adversary proceeding seeking to enjoin Midland Mortgage Co.,1 their mortgage lender, from foreclosing on their house. The primary basis for their claim for relief is 11 U.S.C. § 105, although debtors’ complaint also requests imposition of the automatic stay as to Midland. Debtors allege that retention of their house is necessary for their financial reorganization, and that their as-yet unconfirmed chapter 13 plan provides legally sufficient treatment of Midland’s secured claim.
On November 8, 2011, Midland moved to dismiss. Its motion labeled debtors’ request under Section 105 as not “appropriate” because “Section 105(a) empowers the Court to take actions necessary to effectuate other provisions of the Code, but does not empower the Court to rewrite Section 362(c)(3) in order to alter a harsh result.” After debtors filed their opposition, the matter was heard on December 13, 2011.
III.Analysis
No one disputes that the stay has terminated as to the debtors’ property and as to property of the debtors’ estate. What Midland disputes is this court’s power, in light of such termination, to enjoin it with respect to estate property.
A. Specific Relief Under Section 105(a) Versus Broad Relief Under Section 362(a)
Midland confuses debtors’ requested relief under Section 105(a) with *834the operation of the automatic stay under Section 362(a). As stated before, there is no doubt that the automatic stay of Section 362(a) has terminated not just as to Midland, but as to all creditors.2 It is also undoubted that debtors cannot seek reim-position of the stay; they acknowledged at oral argument that they must establish all requirements for traditional injunctive relief in order to prevail. As stated in Collier on Bankruptcy, “Unlike the automatic stay, however, a request for relief under section 105 must meet traditional requirements for an injunction, and must be presented and prosecuted in traditional formats.” 1 COLLIER ON BANKRUPTCY ¶ 105.03 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed. 2011).
The Ninth Circuit recognizes this distinction. “We have expressly recognized that ‘the bankruptcy automatic stay is differentiated from a bankruptcy court-ordered injunction, which issues under 11 U.S.C. § 105.”’ Canter v. Canter (In re Canter), 299 F.3d 1150, 1155 n. 1 (9th Cir.2002) (citing Andreiu v. Reno, 223 F.3d 1111, 1121 n. 4 (9th Cir.2000) (Thomas, J., dissenting)).
B. Availability of Section 105 Relief When the Automatic Stay Has Terminated
Indeed, many courts recognize that injunctions under Section 105 can be used to stay creditor activity even if that creditor had received relief from stay under Section 362(d). See Wedgewood Inv. Fund, Ltd. v. Wedgewood Realty Group, Ltd. (In re Wedgewood Realty Group, Ltd.), 878 F.2d 693, 699-701 (3d Cir.1989) (injunctive relief available under Section 105(a) when stay has lapsed and debtor has property applied for such relief). See also Collier supra, ¶ 105.04[3].
Similar authority permits a Section 105(a) injunction even if the activity was exempt from the stay under Section 362(b). See New Jersey v. W.R. Grace & Co. (In re W.R. Grace & Co.), 412 B.R. 657, 664-65 (D.Del.2009) (“Courts may apply § 105(a) on a case-by-case basis even if the ‘bankruptcy code is not operative.’ ”) (quoting Penn Terra Ltd. v. Pennsylvania Dep’t of Envtl. Res., 733 F.2d 267, 273 (3d Cir.1984)). See also Collier, supra, ¶ 105.04[2].3
C. Availability of Relief Under Section 105 After Expiration of Automatic Stay Under Section 362(c)(3)
Some cases reject this reasoning in the context of Section 362(c)(3). See, e.g., In re Garrett, 357 B.R. 128, 131 (Bankr.C.D.Ill.2006); In re Berry, 340 B.R. 636, 637 (Bankr.M.D.Ala.2006).4 These cases, however, tend to involve a debtor’s request to reimpose a broad stay against all creditors without any showing other than the debtor has filed a bankruptcy case.
*835In contrast, the complaint here seeks to impose a specific injunction, tailored to the facts of this case, against an identified creditor. That creditor, in turn, has all the procedural protections provided by an adversary proceeding as well as the ability to require that the debtors prove the traditional prerequisites of equitable relief. The exercise of this type of jurisdiction has always been within the bankruptcy court’s power, and remains so. See, e.g., In re Radson, 462 B.R. 911, 912 (Bankr.S.D.Fla.2011); In re Furlong, 426 B.R. 303, 308 (Bankr.C.D.Ill.2010); In re Aulicino, 400 B.R. 175, 180 n. 2 (Bankr.E.D.Pa.2008); Whitaker v. Baxter (In re Whitaker), 341 B.R. 336, 346 (Bankr.S.D.Ga.2006). See also Collier, supra, ¶ 105.04; Capital One Auto Finance v. Cowley, 374 B.R. 601, 605 (W.D.Tex.2006).
IV. Conclusion
Motion denied in part, granted in part.5
. Midland's response indicates that the proper party is Midfirst Bank.
. And to that extent, the court grants Midland’s motion to dismiss as to debtors' claim for relief based upon or involving the automatic stay provided for in Section 362(a).
. As stated in the legislative history: "The effect of an exception is not to make the action immune from injunction.... By excepting an act or action from the automatic stay, the bill simply requires that the trustee move the court into action, rather than requiring the stayed party to request relief from the stay” S.Rep. No. 95-989, at 51 (1978), 1978 U.S.C.C.A.N. 5787, 5837; H.R.Rep. No. 95-595, at 342 (1977), 1978 U.S.C.C.A.N. 5963, 6298.
.The bankruptcy court for the District of Massachusetts reached the same conclusion in In re Jumpp, 344 B.R. 21, 27 (Bankr.D.Mass.2006). That opinion, however, was later vacated, and its holding on Section 105 suspended. See Jumpp v. Chase Home Fin., Inc. (In re Jumpp), 356 B.R. 789, 797 (1st Cir. BAP 2006) ("we decline to comment on ... the bankruptcy court's conclusion that it lacked the power under section 105(a) to extend the automatic stay.”).
. The parties did not question whether the debtors have standing to bring their action seeking protection of property of the estate. Debtors in this circuit, however, can bring avoidance actions for the estate’s benefit, Houston v. Eiler (In re Cohen), 305 B.R. 886, 899 (9th Cir. BAP 2004), and thus there should be no impediment to the debtors bringing this action, especially when it seeks to protect estate property and the chapter 13 trustee has not taken action. In other similar contexts, the standing of a debtor bring actions for the estate's benefit is fairly well established. See Smith v. Rockett, 522 F.3d 1080, 1082 (10th Cir.2008) (Fair Debt Collection Practices Act case); Crosby v. Monroe County, 394 F.3d 1328, 1331 n. 2 (11th Cir.2004) (unlawful arrest case); Cable v. Ivy Tech State College, 200 F.3d 467, 472-74 (7th Cir.1999) (disabilities act case); Olick v. Parker & Parsley Petroleum Co., 145 F.3d 513, 515-16 (2d Cir.1998) (class action costs); Maritime Elec. Co. v. United Jersey Bank, 959 F.2d 1194, 1210 n. 2 (3d Cir.1992). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494434/ | DECISION
JOHN A. ROSSMEISSL, Bankruptcy Judge.
This matter comes before the Court upon Plaintiff ABC Sun Control’s “Complaint for Denial of Dischargeability of Debt” [AP# 1], ABC provided custom made awning and window covering materials to American Awning and Shade Inc., a business in which the Defendants Marsha K. McMahon-Jones and Tommy Jones held an interest. In the course of the parties’ dealings the Defendants guaranteed the obligation of American Awning to ABC. American Awning went out of business leaving a substantial obligation owing *839to ABC. The Defendants filed for bankruptcy relief under Chapter 7. ABC file this adversary complaint objecting to the Defendants’ discharge of their obligations to ABC pursuant to 11 U.S.C. § 523 and seeking denial of the Defendants’ discharge pursuant to 11 U.S.C. § 727(a).
JURISDICTION
This Court has jurisdiction of this matter pursuant to 28 U.S.C. § 157(a). This adversary proceeding is a core matter pursuant to 28 U.S.C. § 157(b)(2)(I) & (J).
FACTS
The facts and events that are the subject of this adversary proceeding are extensive and complex. The Court in its decision will make reference to documents in the Court’s main case docket (Doc_), adversary case docket (AP_), exhibits offered by the Plaintiff (¶ X_), and exhibits offered by the Defendants (A X_). The Court will start with a chronological review of the facts.
1. Marsha McMahon-Jones and Tommy Jones were husband and wife.
2. T. Jones Enterprises, LLC, was a Washington Limited Liability Company which was filed with the State on April 17, 2000. (¶ X23 p. 3) Its governing person/member was Tommy Jones. It was engaged in the retail shade and awning business. By 2004, it was operating four Budget Blinds franchises in the Seattle area.
3. Marsha McMahon-Jones wished to go into the high end custom shade business. Tommy Jones consulted with his franchiser Budget Blinds to ensure that his wife’s involvement in this custom high end business would not violate Tommy’s agreement with Budget Blinds. After he received such assurances, Marsha McMahon-Jones commenced doing business under the name of American Awnings & Shade. AA & S operated out of one of the Budget Blind franchise locations. Tommy Jones, was also employed by AA & S.
4. Marsha McMahon-Jones signed an application dated July 24, 2004, seeking credit from ABC Sun Control Inc., a manufacturer of custom made to order shades and window coverings. (¶ X17). This application included a personal guarantee. Mr. Jones did not sign this application or guarantee being concerned about violating the terms of his franchise agreement with Budget Blinds. AA & S placed its first order for merchandise from ABC on August 10, 2004. (¶ X21 p. 1).
5. During the year 2004, American Awning & Shades did $64,440.00 of business with ABC. At the end of 2004, AA & S owed ABC $24,674.00.
6. American Awnings & Shades Inc., was incorporated as a Washington Corporation filed on April 22, 2005. Its president and registered agent was Marsha McMahon-Jones. ^X23 p. 1). During the year 2005, American Awning did $263,259.00 of business with ABC. At the end of 2005, AA & S owed ABC $26,730.00.
7. During the year 2006, AA & S did $580,062.00 of business with ABC. At the end of 2006, AA & S owed ABC $39,487.00.
8. ■ During the year 2007, AA & S did $672,949.00 of business with ABC. During this year, the Defendants and AA & S were the focus of collection activities for a substantial obligation to the IRS. At the end of 2007, AA & S owed ABC $238,294.00.
9. ABC became concerned about the growing balance in July of 2007. ABC’s president, Mr. Smallwood met with the Jones during that month. After that discussion, Mr. Smallwood concluded that ABC needed security for the delinquent balance.
10. About this time Marsha McMahon-Jones got out of the day-to-day manage*840ment of AA & S which was taken over by Tommy Jones. She started a career as a realtor. 01X20). From about this time Marsha McMahon-Jones had little involvement in the operations and management of AA&S.
11. On October 8, 2007, the Jones listed their waterfront residence with relators specializing in high end waterfront realty. (A X19). The Defendants relied upon the advice of their experienced realtors in listing the residence for $2,395,000.00.
12. In the fall of 2007, Mr. Smallwood met with the Jones once again. At this meeting he presented them with a promissory note in the sum of $230,000.00 and a deed of trust on their waterfront residence securing said note. At the time of the preparation of the note and deed of trust, Mr. Smallwood was aware that the residence was listed for sale at about $2,500,000.00. He had visited the home and did not doubt its value. A note and deed of trust dated December 5, 2007 were executed by the Jones. (¶ X18 and ¶ X19). The deed of trust was recorded on December 6, 2007. The note by its terms provided for payment of $1,533.33 per month with balance of the note and all accrued interest due in full on November 30, 2008. The note bears interest at the rate of 8%. ($1,533.33 per month). Mr. Smallwood testified that it took a number of contacts with the Jones before they signed the documents.
13. In early 2008, three of the Budget Blinds franchises were sold. The Defendants deposited $215,000.00 of the purchase price in their personal account. (¶ X16 p. 7). A check for $100,000.00 was drawn on this account to pay off a Budget Blinds line of credit. (¶ X16 p. 8; AX p. 74). The remaining balance of the purchase price was to be paid in monthly installments of $3,794.39 per month with the first installment received June 3, 2008. (A Xll p. 74). T. Jones Enterprises, LLC, was administratively dissolved on April 30, 2008. (¶ X23 p. 3). There is mention that the T. Jones Enterprises, LLC, was “merged” with AA & S as of June 1, 2008. (¶ XI p. 29). There is no evidence that the merger was ever actually formally accomplished. Budget Blinds and AA & S continued to keep separate books and records thru August 31, 2009. (A X 2, 3, 5, 6, 8, 9, 11 & 12). The remaining Budget Blinds franchise continued operation at the business location which it shared with AA & S.
14. ABC continued to do business with AA & S after the execution of the note and deed of trust. During the year 2008 and early 2009, ABC sold to AA & S on essentially a cash basis. During the period December 18, 2007 thru April 2, 2009, ABC sold goods to AA & S invoiced at $410,383.74 and received payments from AA & S of $383,387.27. Based on these figures the debt of AA & S to ABC increased by the sum of $26,996.47, in the period from December 2008 to the beginning of April 2009. ABC also billed 13 charges of $1,533.33, the monthly payments due per the note during this period. (1X21 p. 33 top. 42).
15. AA & S’s bank account was the subject of a tax levy on April 7, 2009. fl!X10 p. 22). When AA & S’s checks were not honored, ABC ceased selling goods to AA & S. (¶ X 21 p. 42).
16. AA & S was administratively dissolved by the State of Washington on April 30,2009. (¶ X 23 p. 1).
17. Awnings by Design, LLC, was filed with the State of Washington on April 30, 2009. Its governing member and registered agent was Tommy Jones. Awnings by Design engaged in essentially the same business as AA & S and operated in the AA & S location. Awnings by Design was administratively dissolved by the State on April 30, 2010. OIX 23 p. 2). Tommy Jones continued conducting this business *841at the same location under the name Awnings by Design to the time of the trial of this matter. (¶ X 23 p. 2).
18. On August 6, 2009, Marsha Kay McMahon-Jones and Tommy Andrew Jones filed for relief under chapter 7 of the Bankruptcy Code.
19. ABC filed this adversary proceeding objecting to discharge of Defendants’ obligations to ABC and objecting to the granting to the Defendants of a discharge in this case.
DISCUSSION
I. 11 U.S.C. § 528(a)(2)(A)
ABC bases a cause of action against the Defendants on 11 U.S.C. § 523(a)(2)(A). It alleges that the Defendants’ obligation to it was as a result of “false pretenses, a false representation, or actual fraud.” This breaks down into two allegations: (1) the Defendants’ purchased goods from ABC with no intention to pay and; (2) that ABC’s decision to refinance was induced by Defendants’ fraud.
A. Incurring Debt With No Intent to Pay
The Defendants wanted to start a business selling custom shades and window coverings. Because of potential problems with an existing franchiser, Marsha McMahon-Jones was to be the owner of the business. Tommy Jones, who was involved in the business as well, negotiated a deal with ABC to manufacture product for the new business. ABC required that Marsha McMahon-Jones sign a guarantee of the obligations to ABC. Purchases began in August 2004. Marsha operated under the name American Awnings & Shade for a period of time prior to its incorporation on April 22, 2005.
AA & S dealings with ABC were within acceptable debt limits for the years 2004 thru 2006. AA & S began having trouble paying its obligations in 2007. The Defendants were dealing with a substantial IRS obligation by the end of June 2007. AA & S’ balance payable to ABC had risen to over $200,000.00. ABC’s President, Mr. Smallwood was nervous about the growing payable. Mr. Smallwood met with the Defendants and had a number of other contacts with them attempting to collateralize AA & S’s debt to ABC. On December 5, 2007, the Defendants signed a $230,000.00 note and deed of trust on their residence, collateralizing the outstanding balance owed to ABC. AA & S had done $672,949.00 of business with ABC during 2007.
In the period December 2007 to April 2009, the pattern of dealings between AA & S and ABC, suggest a cash in advance practice. A review of the parties transactions from that period indicates purchases of $410,383.74 with payments by AA & S of $383,387.27, purchases exceeding payments by $26,996.47. Although the account receivable balance on ABC’s books increased more than that amount that is the result of interest/note payments added to the account. ABC terminated its sales to AA & S when a number of checks were returned. This coincided with a'tax levy made on the AA & S bank account.
The dealings between the Defendants, AA & S and ABC for the periods 2004 thru 2006, and December 2007 thru April 2009, do not support ABC’s allegation that these debts were incurred with no intention of repayment.
The increase of the AA & S account payable balance during the year 2007, coincide with the Defendants’ IRS problems and the beginning of a general economic downturn. Upon ABC’s request, the Defendants collateralized the obligation and entered into terms to satisfy it. The Defendants’ performance post December 2007 supports their position that they were attempting to continue business operations *842and satisfy their obligations to ABC. Their failure in that regard is attributable to poor business judgment, poor personal judgment and adverse economic conditions, rather than fraudulent intent. The Plaintiff has not met its burden of proof on its contention that the Defendants incurred debt to ABC without intent to pay.
B. Refinance Based on Defendants’ Fraud
1. Misrepresentation of the Value of Collateral
ABC argues when it accepted the Defendants’ 12/5/07 note and mortgage, it relied upon the Defendants’ knowingly false representations as to the value of their residence.
ABC became concerned about AA & S’s large account payable by July of 2007, when Mr. Smallwood visited with the Defendants about the outstanding obligation. Mr. Smallwood concluded that ABC needed additional collateral to insure payment.
At about this time the Defendants were considering listing their residence for sale. The Jones sought the expertise of two experienced realtors specializing in high end waterfront homes. Relying on their realtors’ analysis, the Defendants’ residence was ultimately listed for sale at a price of $2,895,000.00 in the fall of 2007. (A X19). A price that the Defendants believed was reasonable in light of the then current real estate market.
Mr. Smallwood, who was evidently aware of the listing, requested the Defendants sign a note and deed of trust on their residence to secure ABC’s obligation. Mr. Smallwood had previously visited the Defendants’ home and did not find the listing price unreasonable. After some delay, on December 5, 2007, the Defendants ultimately decided to sign the note and mortgage presented to them by ABC’s lawyer.
The Defendants’ listed their residence at an asking price of $2,395,000.00 in reasonable reliance upon the expert advice of their relators. They believed that was a reasonable value at the time of their listing the property. In early 2008, the relators advised that in light of the dramatic downturn in the real estate market the home should be removed from the market. Accepting this advice the Defendants can-celled their listing.
The Defendants did not intentionally misrepresent the value of their home to ABC nor did they improperly remove the property from the market.
2. Representation that ABC Would be Paid From the Proceeds of the Sale of the Budget Blinds Franchise
ABC also contends in support of its § 523(a)(2)(A) contentions, that the Defendants should have used the proceeds of the sale of the Budget Blinds franchises to payoff ABC.
The Budget Blinds franchises were operated by T. Jones Enterprises, LLC, doing business as Budget Blinds of Seattle & the Eastside. Budget Blinds did not owe anything to ABC nor was ABC granted a security interest in the franchises. Budget Blinds’ December 31, 2007, balance sheet reveals that it was hopelessly insolvent, with total liabilities of $579,702.11, greatly exceeding its $81,371.52 of total assets. (A X p. 1).
Mr. Smallwood testified that the Defendants had promised to use the franchise proceeds to pay ABC. The Jones denied making any such promise. The existence of such a promise has not been proved.
ABC has failed to meet its burden of proof on its § 523(a)(2)(A) contentions.
II. 11 U.S.C. § 523(a)(Ip)
ABC bases one count of its complaint against the Defendants on § 523(a)(4). *843This provision bars discharge of a debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement or larceny;” ABC alleges the Defendants breached their fiduciary duties as corporate officers and employees of AA & S, by taking excess compensation, paying personal expenses with corporate funds, and preferring creditors while AA & S was insolvent.
A. Were Defendants “Fiduciaries? ”
The Court must examine the definition of fiduciary in § 523(a)(4). “... [T]he broad general definition of fiduciary relationship involving confidence, trust and good faith is inapplicable in the discharge-ability content, ordinary commercial relationships are excluded from the reach of § 523(a)(4).” In re Short, 818 F.2d 693, 695 (9th Cir.1987). The term “fiduciary” as used in § 523(a)(4) is a question of federal law and is narrowly construed. In re Kallmeyer, 242 B.R. 492, 495 (9th Cir. BAP 1999); Ragsdale v. Haller, 780 F.2d 794, 796 (9th Cir.1986). Only the fiduciary duties of a trustee fall within § 523(a)(4). In re Hultquist, 101 B.R. 180,185 (9th Cir. BAP 1989), where the Court, applying Washington law, found that although the debtor as a corporate officer owed a general fiduciary duty, § 523(a)(4) was not applicable to his actions because there was no trust. Corporate officers’ fiduciary duties are that of an agent, rather than that of a trustee of corporate assets. In re Cantrell, 329 F.3d 1119, 1127 (9th Cir.2003); In re Honkanen, 446 B.R. 373 (9th Cir. BAP2011); In re Gray, (9th Cir. BAP No. AZ-10-1304-MkMaD 07/07/11). Inclusion within the term “acting in a fiduciary capacity” requires a finding that one is a trustee of a trust, “express” or “statutory,” Hultquist, 101 B.R. at 185, or by common law rule. Kallmeyer, 242 B.R. at 496. All the above authorities agreed that state law is determinative as to whether corporate fiduciary duties are those of a trustee.
ABC must show as a condition requisite to prevailing under § 523(a)(4) that the Defendants violated their fiduciary duties as a trustee under Washington law.
B. Is There a Trust?
The evidence does not support the existence of either an express trust nor a trust created by statute. ABC contends that a trust exists under the common law trust fund doctrine.
1. The Trust Fund Doctrine-General
The Court starts its discussion of this topic with references to the authoritative treatise, 15A William Meade Fletcher, Fletcher Cyclopedia of the Law of Corporations (2011), which provides:
§ 7369 The trust fund doctrine in general
Perhaps no concept has created as much confusion in the field of corporate law as has the “trust fund doctrine.” A number of cases have stated that under the trust fund doctrine, the capital stock of a corporation, or the assets of an insolvent corporation representing its capital stock, is a trust fund for the benefit of the corporation’s creditors.
The doctrine has been widely criticized and, as defined above, has been repudiated. In no case applying the doctrine has an actual trust ever been impressed upon the specific assets of either a solvent or an insolvent corporation,
The theory of the trust fund doctrine is that all of the assets of a corporation, immediately on its becoming insolvent, exists for the benefit of all of its creditors and that thereafter no liens or rights can be created either voluntarily or by operation of law whereby one creditor is given an advantage over others.
*844Fletcher notes the doctrine is applied after a court of equity has taken jurisdiction of the property.
§ 7373 Modern Status of trust fund doctrine
Courts have noted that the trust fund doctrine is rather a trust in the administration of the assets after possession by a court of equity than a trust attaching to the property, as such, for the direct benefit of either creditor or stockholder.
2. Washington’s “Trust Fund Doctrine ”
The “trust fund doctrine” was first articulated by a Washington court in the case of Tompson v. Huron Lumber Co., 4 Wash. 600, 30 P. 741 (1892). In Tompson, the receiver of an insolvent corporation sought to set aside a preferential mortgage given just weeks before the initiation of the receivership. The holder of the mortgage argued it was permissible for insolvent corporations to make preferences. The court in voiding the mortgage said in part, “But we cannot lose sight of the settled rule concerning the property of insolvent corporations, that it is a trust fund for creditors, ...” 4 Wash. at 604-605, 30 P. at 742. This ruling became the law of the State of Washington as articulated in Benner v. Scandinavian American Bank, 73 Wash. 488, 497, 131 P. 1149, 1152 (1913);
In this state it is the rule that a domestic corporation cannot after insolvency prefer its creditors; but, on the contrary, its property is from thenceforth regarded as a trust fund for the benefit of all its creditors, and any transfers or mortgages thereof after insolvency, which have the effect of preferring one creditor over another, are void.
This trust fund doctrine was not part of the common law of England but nevertheless became the common law of Washington. Sterrett v. White Pine Sash Co., 176 Wash. 663, 665, 30 P.2d 665, 667 (1934). The Doctrine as articulated made good faith and lack of knowledge of insolvency immaterial to recovery of preferences. Ibid.
3. Statutory Modification of the Trust Fund Doctrine
This broad application of the “trust fund doctrine” began to be limited by legislation in important ways. The Washington Laws of 1931, c. 47 p. 160, limited the time in which a receiver could bring a preference action to 6 months post appointment, it limited the preferences recoverable to those which occurred within 4 months pri- or to the appointment of the receiver, and it required proof that the recipient had reasonable cause to believe it was receiving a preference. If the transfer met these criteria the resulting preference was voidable by the receiver.
In 1941, the Legislature once again visited this area and specifically made reference to the trust fund doctrine when it enacted ROW 23.72.030 (Laws of 1941, Ch. 103) which provided:
Any preference made or suffered within four months before the date of application for the appointment of a receiver may be avoided and the property or its value recovered by such a receiver, if the person receiving the preference or to be benefitted thereby or his agent acting therein shall then have reasonable cause to believe that the debtor corporation is insolvent. No preference made or suffered prior to such four months’ period may be recovered, and all provisions of law or of the trust fund doctrine permitting recovery of any preference made beyond such four months’ period are hereby specifically superseded, (emphasis added)
*845The court in Block v. Olympic Health Spa, Inc., 24 Wash.App. 938, 950 FN 5, 604 P.2d 1317, 1324 FN 5, (1979) said the trust fund doctrine had been abrogated.
ABC argues that RCW 23.72.030 has been repealed by the Laws of 2004 ch. 165, therefore the Washington common law trust fund doctrine was reinstated as the law of the state. The two Washington Courts that have referenced this argument are inconclusive. In re Underwood, 2004 WL 5607954 (Bkry.E.D.WA.2004); GMAC, LLC v. Hiatt Pontiac GMC Trucks Inc., 2009 WL 4730838 (Dist.Ct.W.D.WA.2009).
The legislation relied upon by ABC was part of a comprehensive rewriting of the Washington Receivership Statutes. The Court will examine the implications of that legislation for the trust fund doctrine.
4. The 2001 Receivership Legislation
The repeal of RCW 23.72.030 is part of Chapter 165 of the Laws of 2004, which rewrote the Washington Receivership Statute RCW 7.60.005-.300. As a result of Chapter 165 and its repeal of RCW 23.72.030 there is no statutory basis for receivers of insolvent corporations to recover preferences. Did the Legislature thereby intend to eliminate recovery of corporate preferences under state law entirely or did they intend to dramatically expand their use by returning to Washington’s common law trust fund doctrine as it existed prior to 1931?
The trust fund doctrine in Washington arose out of the desire by the courts to provide the receiver of an insolvent corporation means by which transfers which benefitted one party to the detriment of the remaining creditors could be recovered and distributed equitably. It did this by declaring that the corporate officers become trustees of the corporate assets when the corporation became insolvent. Transfers made in violation of the trust were void. The common law provided no defense to the receivers actions either in timeliness or the good faith of the recipient. This created injustices which the Legislature sought to remedy by limiting the harsh results of the common law rule. Accordingly in 1931 the preference law was greatly limited by providing time limitations and a good faith defense. Preferences became voidable as opposed to void. Preferences even to corporate officers could be upheld by the courts if they could withstand close scrutiny as fair and equitable. GMAC v. Hiatt: 2009 WL 4730838; Block v. Olympic Health Spa, 24 Wash. App at 948-49, 604 P.2d at 1324-25; Tacoma Ass’n of Credit Men v. Lester, 72 Wash.2d 453, 433 P.2d 901 (1967). The law thus became cognizant of these economic realities and softened the harsh consequences of the rule. Is it likely that Legislature intended to return to the harsh rule applicable a century ago when it repealed the corporate preference law as it revised the Receivership Statute?
The Receivership Statute was revised to encourage the use of state court receiver-ships. Secured creditors will now commonly seek to place a debtor in receivership so that they may use that forum to safely conduct realization on their collateral under the supervision of a court. The receivership now operates under specific statutory authority in areas which were previously undefined. As an incentive to make the Receivership Statute more attractive to secured creditors, the legislature repealed the corporate preference provision, which were often a disincentive for the secured creditor to institute a receivership as a result of the adverse impact the preference provisions might have on its position. Return to the harsh common law rule would be a great disincentive for use of the Receivership Statute by secured creditors. One suspects this would be a great surprise to the people *846that proposed the legislation and the legislature that passed it.
The Court must consider whether this rather illogical interpretation is consistent with the other provisions of Washington’s corporate law.
5. Washington’s Corporate Statutory Scheme
Washington has over the years enacted comprehensive legislation on the subject of corporations.
In 1965, the Washington legislature adopted the Washington Business Corporations Act (WBCA), Laws of 1965, ch. 53, which was based largely on the national Model Business Corporation Act.
In 1984, the national Model Business Corporation Act was revised in response to extensive comment throughout the country. In 1989, the Washington legislature substantially revised the WBCA, Laws of 1989, ch. 165, to incorporate many provisions of the national 1984 Revised Model Business Corporation Act (Model Act).
Ballard Square Condominium Owners Ass’n v. Dynasty Const. Co., 158 Wash.2d 603, 620-621, 146 P.3d 914, 923 (2006).
One must look to the extent the statutory provisions interpret the common law.
A statute abrogates the common law if the provisions of the statute are so inconsistent with and repugnant to the common law that both cannot simultaneously be in force. State ex rel. Madden v. Pub. Util. Dist., 83 Wash.2d 219, 222, 517 P.2d 585 (1973). “It is a general rule of interpretation to assume that the legislature was aware of the established common-law rules applicable to the subject matter of the statute when it was enacted.” Id. “A statute which is clearly designed as a substitute for the prior common** 924 law must be given effect.” Id. at 221, 517 P.2d 585. However, “ ‘[ajbsent an indication that the Legislature intended to overrule the common law, new legislation will be presumed to be consistent with prior judicial decisions.’ ” Ballard Sq. Condo. v. Dynasty Constr., 126 Wash.App. 285, 295-96 & n. 39, 108 P.3d 818 (2005) (quoting In re Marriage of Williams, 115 Wash.2d 202, 208, 796 P.2d 421 (1990)).
Ibid.
Applying these principles we look to the relevant corporate statute, in this case RCW 23B.14.050 Effects of Dissolution which provides in part:
(1) A dissolved corporation continues its corporate existence but may not carry on any business except that appropriate to wind up and liquidate its business and affairs, including:
(a) Collecting its assets;
(b) Disposing of its properties that will be applied toward satisfaction or making reasonable provision for satisfaction of its liabilities or will otherwise not be distributed in kind to its shareholders, but in any case subject to applicable liens and security interests as well as any applicable contractual restrictions on the disposition of its properties;
(c) Satisfying or making reasonable provision for satisfying its liabilities, in accordance with their priorities as established by law, and on a pro rata basis within each class of liabilities;
(d) Subject to the limitations imposed by RCW 23B.06.400, distributing its remaining property among its shareholders according to their interests; and
(e) Doing every other act necessary to wind up and liquidate its business and affairs.
*847(2) Except as otherwise provided in this chapter, dissolution of a corporation does not:
(a) Transfer title to the corporation’s property;
(b) Prevent transfer of its shares or securities, although the authorization to dissolve may provide for closing the corporation’s share transfer records;
(c) Subject its directors or officers to standards of conduct different from those prescribed in chapter 23B.08 RCW;
(d) Change quorum or voting requirements for its board of directors or shareholders; change provisions for selection, resignation, or removal of its directors or officers or both; or change provisions for amending its bylaws;
(e) Prevent commencement of a proceeding by or against the corporation in its corporate name;
(f) Abate or suspend a proceeding pending by or against the corporation on the effective date of dissolution; or
(g) Terminate the authority of the registered agent of the corporation.
(emphasis added)
The above underscored provisions are inconsistent with the common law trust fund doctrine. Section (2)(a) provides that there is no transfer of title of the corporation property. The corporation property remains its own, not transferred into a trust. Even more convincingly, section (2)(c) provides that the duties of its directors and officers remain those designated in 23B.08 RCW. These duties are not the enhanced duties of a trustee. The Washington Supreme Court recognized the statute is inconsistent with the common law trust fund doctrine in Ballard Square
The Official Comments to chapter 23B.14 RCW at the time of enactment explain that RCW 23B.14.050(2) makes clear that
chapter 14 dissolution does not have any of the characteristics of common law dissolution, which-treated corporate dissolution as analogous to the death of a natural person and abated lawsuits, vested equitable title to corporate property in the shareholders, imposed the fiduciary duty of the trustees on the directors, who had custody of corporate assets, and revoked the authority of the registered agent. [RCW 23B.14.050(2) ] expressly reverses all these common law attributes of dissolution and makes clear that the rights, powers, and duties of shareholders, the directors, and the registered agent are not affected at dissolution and that suits by or against the corporation are not affected in any way. Senate Journal, 51st Leg., Reg. Sess., app. At 3095 (Wash. 1989).
Ballard Square, 158 Wash.2d at 615, 146 P.3d at 920. The legislative history of RCW 23B.14.050 confirms the abolition of the common law trust fund doctrine by the statute.
ABC has failed to prove that the Defendants were fiduciaries under § 523(a)(4). The Defendants were not “trustees,” a prerequisite for violation of the statute. ABC has failed to prove its claim under § 523(a)(4).
III. 11 U.S.C. § 523(a)(6)
ABC bases a cause of action on 11 U.S.C. § 523(a)(6), alleging that the Defendants willfully and maliciously injured ABC. The leading case applying § 523(a)(6) requires the claimant to prove the actions complained of were “acts done with actual intent to cause injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). ABC must prove that the Defendants actually intended to harm ABC by their actions or *848that their actions were objectively certain to harm ABC. Miller v. J.D. Abrams, Inc. (In re Miller), 156 F.3d 598, 606 (5th Cir.1998).
ABC cites a litany of Defendants’ actions which it contends supports its allegations under § 523(a)(6). The Court has already discussed at some length ABC’s allegations that the Defendants incurred debt to ABC with no intention to pay. If proven these allegations might qualify under § 523(a)(6)(A). However, ABC has not proven that the Defendants incurred debt with no intention to pay.
ABC also cites dealings between South Park Holding, Ripley Lane, American Awning and the Defendants as grounds for relief under § 523(a)(6). It appears that South Park Holding and Ripley Lane d/b/a Closet Tailors, were limited liability companies in which Marsha McMahon Jones’ father held some interest. Based on the Moss Adams notes (¶ X 1 p. 19), it appears that a note payable to South Park by the Defendants was distributed to McMahons, and then gifted by them to the Jones as part of the liquidation of South Park. Ripley Lane d/b/a Closet Tailors was also being liquidated about this time. American Awning wrote off a $55,000.00 debt from Ripley Lane/Closet Tailors. There is no evidence that this receivable from Closet Tailors, which was going out of business, was collectible. There is no evidence to support the allegations that these actions were taken to intentionally harm ABC or that the natural consequences of the actions were certain to harm ABC.
Likewise ABC alleges that American Awning made loans to Budget Blinds which were not paid back. Admittedly these may have been unwise loans. Budget Blinds’ balance sheet of December 31, 2007 discloses assets of $81,371.52 with liabilities of $579,702.11. Unwise loans to Budget Blinds do not equate with actions taken with the intent to harm ABC. Budget Blinds owed nothing to ABC. The use of the proceeds from the sale of the three Budget Blinds franchises to pay other creditors of Budget Blinds does not support ABC allegations.
ABC placed much emphasis on the fact that Marsha McMahon-Jones is well educated, having received a MBA from a prestigious university. She was successful when working for a number of large companies in the field of marketing and advertising and therefore ABC argues she and her husband were knowledgeable and their business failures were part of a coordinated scheme to cheat ABC. Unfortunately the recipients of MBA degrees are not necessarily endowed with wise business judgment, the ability to manage organizations or the ability to keep coherent business records pristine in observance of the tax code. If they were, our country would not be in the present economic mess. The Defendants’ failure of business judgment in trying to keep their high end business afloat in a collapsing economy do not equate as acts taken with the intention to harm ABC and their other creditors. Rather Defendants appear as people desperately attempting to salvage their business and meet their numerous obligations. Unfortunately that is not always possible.
The Plaintiff has not proven its allegations that the Defendants intentionally harmed ABC in violation of § 523(a)(6).
IV. 11 U.S.C. § 727(a)(2)(A)
ABC seeks to bar the Defendants’ discharge relying on 11 U.S.C. § 727(a)(2)(A). ABC alleges that the Defendants, with intent to hinder, delay, or defraud ABC or the bankruptcy estate, transferred or concealed Defendants’ property within a year of their bankruptcy. As support of its allegations, ABC relies on two checks drawn on AA & S’s bank account and made payable to Awnings By *849Design, one cheek for $10,000.00 on 6/9/09 and a second check for $5,000.00 on 7/9/09. The problem with this allegation is that the monies transferred were the property of AA & S, the corporation, and not the property of the Defendants.
The Plaintiff in its approach to this case has treated Defendants’ various business enterprises as extensions of the Defendants themselves. It thus characterizes a transfer of AA & S’s assets as a transfer of Defendants’ property. By implication ABC argues that the Court should disregard the various different legal entities in which the Defendants have an interest while not specifically calling for the Court to pierce the various corporate veils. The Court will examine the factual history of the Defendants’ various enterprises to assist analysis of this position.
T. Jones Enterprises, LLC, (TJE) was a Washington Limited Liability Company initially filed with the state in 2000. Debt- or Tommy Jones was the governing member. TJE was in the retail shades and awning business and operated Budget Blind franchises at four different locations. Marsha McMahon-Jones started a companion business specializing in custom shades and awnings under the name American Awning and Shade. This business was incorporated in 2005. AA & S operated its business out of one of the Budget Blind locations. Besides sharing locations they occasionally shared in the use of employees and equipment. They kept separate books and bank accounts. Tommy Jones provided operational assistance to AA & S while Marsha McMahon-Jones focused on sales, her area of expertise. Both AA & S and the Budget Blinds operations ran into economic difficulties in 2007.
These difficulties produced a change in the operation of the two entities. In the summer of 2007, Marsha McMahon-Jones left active participation in the day to day business of AA & S to start a career as a realtor. Tommy Jones continued to run AA & S and the Budget Blind franchises. In the beginning of 2008, three of the franchises were sold. In April 2008, T. Jones Enterprises, LLC, was administratively dissolved. There is a suggestion in the working paper of Moss Adams that the remaining Budget Blind franchise was to have merged into AA & S. 0IX 1 p. 29). There is no evidence that this ever formally accomplished. However, AA & S and the remaining Budget Blind franchise continued to operate out of the remaining location. AA & S and Budget Blinds continued to have separate books and bank accounts.
In April of 2009, the State Department of Revenue placed a levy on AA & S’s bank account, AA & S’s checks to ABC bounced, ABC quit supplying AA & S, and AA & S was administratively dissolved. Budget Blinds continued to operate at the franchise location.
On April 30, 2009, Awnings By Design, LLC, (ABD), was filed with the State. It commenced doing a custom window covering business in the Budget Blinds location. Tommy Jones testified that because of difficulties involved in opening a bank account for ABD, for a time ABD used AA & S’s bank account to operate its business. Ultimately Tommy Jones transferred $10,000.00 out of the AA & S account to start an account for ABD. Subsequently another $5,000.00 was transferred from the AA & S account to ABD. It is these transfers that ABC complains of in support of their complaint. It is unclear whether this $15,000.00 was the product of ABD’s business activities or was from AA & S operations.
ABC argues that these dealings between the corporation AA & S and the limited liability companies evidence a scheme to hide assets in hindrance of Defendants’ *850creditors. Defendants failure to strictly comply with statutes concerning orderly winding down of dissolved entities is not commendable. Yet pristine compliance with those dissolution procedures is seldom found in the real world. Those procedures are costly. The dissolved entities liabilities greatly exceeded their limited assets which were not very liquid. The Defendants, with their own financial problems could ill afford to finance the liquidation. The whole point of limited liability for failed business entities would be lost if the officer, directors and owners had to individually finance the dissolution. The Defendants had to live and they chose to try to continue in the shade and awning business in which they were familiar and which hopefully might supply a living.
ABC sees Defendants’ actions as evidence of intent to hinder, delay and defraud their creditors and conceal their assets. The more probable explanation is that the Defendants were simply doing the best that they could to survive in difficult times. The evidence fails to show the requisite intent to support a violation of § 727(a)(2)(A), nor does it show that the property transferred was the property of the Defendants.
ABC also alleges Defendants had substantial assets in ABD and Budget Blinds which were not disclosed to the Court.
The Defendants’ bankruptcy schedules in Schedule B disclose an interest in “Awnings by Design NW, LLC, start up company in 5/2009,” which is valued at $10,000.00. flX 22 p. 12). The Defendants also list “Budget Blinds Inc., Debtor is franchisee. Debts exceed assets” and value this asset as “$0.00.” (¶ X 22 p. 13).
ABC asserts that the “Debtors have substantial assets in the business of Awnings By Design and Budget Blinds that have not been disclosed to the Court.” (Doc. 26 pg. 20). ABC alleges that Defendants have substantially undervalued the assets of these companies including their customer lists and intellectual property.
ABC has provided no evidence to support these allegations. Budget Blinds’ balance sheet of 12/31/2008 shows assets of $9,268.01 liabilities of $59,797.17. (A X 11 p. 1). Budget Blinds’ balance sheet of 8/31/09, the month Defendants filed bankruptcy shows assets of $12,877.11 and liabilities of $47,982.06. (A X 12 p. 1). Nor has ABC provided evidence as to actual value of the allegedly undervalued customer lists and intellectual property.
The evidence before the Court does not support ABC’s allegation against Defendants based on § 727(a)(2)(A).
V. 11 U.S.C. § 727(a)(3)
ABC bases its next cause of action on 11 U.S.C. § 727(a)(3), alleging Defendants concealed or failed to keep books and records from which their financial condition might be ascertained.
The tenor of ABC’s complaint, as most recently articulated in its post hearing brief (Dec 26 p. 20-27), is that the Defendants were slow and not forth right in responding to Plaintiffs discovery requests and their actions amount to intentional concealment. If proved, such action might support Plaintiffs complaint.
ABC complains that the Defendants did not produce all of the documents requested at their 11/4/09 2004 examination, that every other page was omitted from the Defendants’ personal bank statements, when this was remedied, the Defendants failed to provide copies of their personal bank statements for the months of March, April and May 2008, failed to adequately answer Plaintiffs August 10, 2010 interrogatories, and failed to timely produce bank records for AA & S and T. Jones Enterprises, LLC. (Budget Blinds), failed to produce *851the Moss Adams working papers related to the Defendants and to provide timely access to Defendants’ computers. ABC alleges that these failures by Defendants constitute evidence of Defendants’ intentional actions to conceal information regarding their financial condition in violation of § 727(a)(3).
Defendants respond that they thought they had produced everything requested, when advised of the missing papers they inadvertently missed in copying they produced them, the bank statements for the three months were inadvertently missed and ultimately supplied, the records of AA & S and Budget Blinds were made available by providing access to the applicable computer and delay in doing so was lack of competence to unlock the materials stored on the computer. They note that all this information was provided to the Plaintiff prior to the time of trial. Defendants contend that they in good faith attempted to comply with the discovery requests and the difficulties encountered were unintentional and innocent on their part.
ABC’s above set out grievances are discovery complaints. The Federal Rules of Civil Procedure Rules 26 thru 37 provides for the handling of discovery disputes. These disputes are generally best handled in the pretrial period as opposed asserted at time of trial. This gives the trial court the option of compelling compliance with the discovery rules, and fashioning any sanctions so as to appropriately remedy the breach. The Plaintiff has not availed itself of the opportunity to deal with these discovery matters pursuant to discovery rules. Rather it attempts to convert alleged procedural discovery infractions into statutory violations of § 727(a)(3) and bar Defendants’ discharge. Although that might be appropriate in some circumstances, it fails in the circumstances of this case.
The relevant information sought was provided in sufficient time prior to the trial to allow the Plaintiff to prepare its case, admittedly causing some stress and hardship in the process but not significantly restricting Plaintiffs ability to prove its case. The Defendants’ explanations of the reasons for their tardy performance are more probable than Plaintiffs contention Defendants’ performance is the result of intentional stonewalling. A review of the parties email correspondence on the matters (¶ X 29) reveals the typical difficulties of parties attempting to comply with discovery requests. It does not support a finding of intentional noncompliance by the Defendants.
ABC has failed to prove that the Defendants have concealed or falsified their books in violation of § 727(a)(3).1
VI. 11 U.S.C. § 727(a)a)(A)
ABC bases its final cause of action on 11 U.S.C. § 727(a)(4), alleging Defendants knowingly and fraudulently made a false oath or account in connection with the case. It alleges that the Defendants’ income figures reported in their “Statement of Financial Affairs,” (SOFA) (¶ X 22 p. 49), and in their “Statement of Monthly Income,” (SOMI) flX 22 p. 62), are fraudulently false.
A. SOFA 2007 and 2008 Figures
The figures included in the Defendants’ SOFA match the exact numbers reported for 2007 and 2008 in the books of AA & S *852(A X 4 p. 1 & p. 36, A X 5 p. 1 & p. 29) and of Budget Blinds (A X 7 p. 1 & p. 63; AX 8 p. 1 & p. 24). The Plaintiff argues these figures should be higher, because income was improperly characterized as reimbursement of business expense. This argument is based on the testimony of Mr. Hutching, an accountant. The Defendants dispute his analysis claiming that the characterization as reimbursement of business expenses was proper. This is a legitimate dispute between the parties. It does not support the Plaintiffs position that the Defendants fraudulently misrepresented these numbers.
B. Defendants ’ SOFA 2009 Figures
1. Budget Blinds
The evidence concerning the 2009 Budget Blinds figures present a different case. The Defendants’ figures do not exactly coincide with the figures contained in the Budget Blinds’ books.
Defendants’ “Statement of Financial Affairs” (SOFA) disclosed the Defendants received $14,700.00 from Budget Blinds in the period January 2009 thru July 31, 2009. ^X 22 p. 49). Budget Blinds’ “Profit and Loss Detail” for January 2009 thru August 2009, reflects $11,700.00 paid to Marsha McMahon-Jones under the category “Owner’s Draw.” (A X9 p. 10). This same document reflects a number of deductions to this accounting category identified as “offsets ...” The result is that as of the end of the period the “Owner’s Draw” account showed a negative balance Of “-1893.12.” Budget Blinds’ “Balance Sheet Detail” for the same period shows withdraws designated as “Owner’s Draws” totally $13,500.00 (A 12 pgs. 1-9). Neither the Budget Blinds Profit and Loss Figures nor its Balance Sheet agree with the Defendants’ SOFA figure, yet the Court can not find that this is the result of fraudulent misstatement.
2. American Awnings and Shade
The Defendants’ SOFA discloses Defendants’ income from AA & S for the period January 2009 thru July 31, 2009, at $16,476.69. (¶ X 22 p. 49). AA & S’“Profit & Loss” and “Profit and Loss Detail” show “owner’s draws” for the period of $61,369.88. (A X 6 p. 1 & p. 12). These figures differ from the figures in the SOFA.
AA & S “Profit & Loss Detail” dealing with the period January through August 2009 is a confusing document. (A X 6 p. 11-12). It is clear that the Defendants did not have access to it when they were preparing their bankruptcy. The document refers to the transactions which took place after August 6, 2009, the date Defendants filed the SOFA along with their other initial bankruptcy pleadings. It bears the notation “8:20pm 01/23/11,” presumably referring to the date it was prepared.
The information contained in the “Profit & Loss Detail” is also confusing. It references checks to Marsha McMahon-Jones in the period of January 14, 2009, through June 10, 2009, of $41,395.00, including an item dated June 10, 2009, for $2000.00 with the memo entry “void.” It also contains June 9, 2009, to Tommy Jones for $10,000.00 with the memo entry “open abd acc ...” Arguably this references money which was generated by the operations of Awning By Design since April 30, 2009, and which accumulated in the AA & S account prior to opening of ABD’s own account. The Detail also includes numerous adjustments to this “owner draw” account marked “offset to mov ...” and “Accounts Rec ...” which reduced the balance in “owner’s draw” account. This balance was enhanced by an entry with the memo notations “adj for xfr of c ...” and “Capital Stock” 77,386.95 and another in the 34,754.98 with notations “adj for xfrs fr ...” and “Capital Stock.” As a result of *853these last referenced entries the “owner’s draw” account showed a positive balance of $61,369.88. But for those entries the account would have shown a negative balance in the range of $51,000.00. ABC would have the Court simply consider the withdrawals as Defendants’ income and disregard all of the negative adjustments to the account. The Court declines to do this.
AA & S accounting during the last months of its existence is understandably chaotic. AA & S suffered a tax levy on its bank account, it lost its principal supplier, it was administratively dissolved by the State and its bank account was used as a vehicle to provide banking for the start up ABD. The Court can not on the basis of this confusing record find that they fraudulently misrepresented their income from, AA&S.
C. Statement of Monthly Net Income
Defendants’ “Statement of Monthly Net Income” (¶ X 22 p. 62) reflects that Marsha McMahon-Jones received no net income in the six months prior to the filing of bankruptcy. This is consistent with her testimony that she was working as a realtor at the time and that she had no income. Tommy Jones, the joint debtor lists income of $24,141.16. The Debtors’ SOFA reports gross income from AA & S of $16,476.69, and from Budget Blinds of $14,700.00. (¶ X 22 p. 49). These figures are consistent with the evidence in the case and not fraudulent misstatements of the facts.
ABC has not proven that the Defendants have knowingly and fraudulently made a false oath in this case.
CONCLUSION
The Plaintiff ABC has failed to meet its burden of proof that the Defendants Marsha McMahon-Jones and Tommy Jones violated the provisions of 11 U.S.C. § 523(a)(2),(4) and (6). Upon entry of a discharge in the Defendants’ case, their obligations to ABC will be discharged.
The Plaintiff ABC has failed to meet is burden of proof that the Defendants Marsha McMahon-Jones and Tommy Jones violated the provisions of 11 U.S.C. § 727(a)(2)(A); § 727(a)(3); and § 727(a)(4)(A). The Defendants are entitled to a discharge in their case.
A judgment will be entered in this adversary proceeding in favor of the Defendants Marsha McMahon-Jones and Tommy Jones and dismissing Plaintiffs complaint.
Pursuant to the terms of the Federal Rules of Bankruptcy Procedure, Rule 7052, and the F.R. Civ. P. Rule 52, this written decision constitutes the findings of fact and conclusions of law in this adversary proceeding.
. In support of its § 727(a)(3) allegations, ABC also challenged the accuracy of AA & S’ and Budget Blinds' books. It asserts that the payment of some of the Defendants’ personal expenses by AA & S and Budget Blinds should have characterized as personal income of the Defendants rather than as reimbursement for business expenses. These allegations will be treated in the next section of this opinion dealing with § 727(a)(4). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494438/ | ORDER DENYING DEFENDANTS’ MOTION TO DISMISS
MARY GRACE DIEHL, Bankruptcy Judge.
In this adversary proceeding, the Chapter 7 Trustee sued Debtor’s officers and directors, seeking recovery from alleged constructive fraudulent transfers, illegal distributions, breach of fiduciary duty, and unjust enrichment. Debtor is the holding company of an FDIC-insured bank, and the FDIC was acting as receiver of the bank, which ultimately closed just prior to Debtor’s Chapter 7 filing. Defendants filed a motion to dismiss, arguing that the Trustee had failed to state a claim. Oral argument was heard on Defendants’ motion, and, at the close of the hearing, the Court announced its ruling. This Order memorializes the Court’s ruling.
Cathy L. Scarver, Chapter 7 Trustee for the estate of Haven Trust Bancorp, Inc. (“Trustee”) initiated the above-styled adversary on February 22, 2011. Defendants 1 filed a Motion to Dismiss for failure *912to state a claim. (Docket No. 13). Trustee filed a Response and Defendants filed a Reply. (Docket Nos. 16 & 19). Oral argument was held on Defendants’ Motion on October 4, 2011 with the following legal issues identified by the Court: (l)With respect to the insolvency element in a constructive fraudulent transfer claim under 11 U.S.C. § 544 and O.C.G.A. § 18-2-75(a) or § 548(a)(1)(B), what factual allegations satisfy Iqbal/Twombly’s plausibility standard; (2)What authorizes dismissal of this action with prejudice; (3) If an amended complaint is necessary and allowed, would the amended pleading relate back to the date of the original pleading. Both parties submitted supplemental briefs. (Docket Nos. 23 & 24).
Jurisdiction over this action is set forth in 28 U.S.C. §§ 157(b) and 1334(b). The matter is a core proceeding under 28 U.S.C. § 157(b)(2) and venue is proper.
1. Motion to Dismiss Standard
A complaint should be dismissed under Rule 12(b)(6) only where it appears that the facts alleged fail to state a “plausible claim for relief.” Ashcroft v. Iqbal, 556 U.S. 662,129 S.Ct. 1937,1949,173 L.Ed.2d 868 (2009); Fed.R.CivP. 12(b)(6). Under Federal Rule of Civil Procedure 8(a)(2), a pleading must contain a “short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.CivP. 8(a)(2). In ruling on a motion to dismiss, the court must accept factual allegations as true and construe them in the light most favorable to the plaintiff. Ashcroft v. Iqbal, 129 S.Ct. at 1949. However, “[tjhreadbare recitals of the elements of a cause of action, supported by mere conclu-sory statements, do not suffice.” Id. at 1949-1950.
“A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. at 1949. The rule “does not impose a probability requirement at the pleading stage,” but instead “simply calls for enough fact to raise a reasonable expectation that discovery will reveal evidence of’ the necessary element. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). A complaint may survive a motion to dismiss for failure to state a claim, however, even if it is “improbable” that a plaintiff would be able to prove those facts; even if the possibility of recovery is extremely “remote and unlikely.” Id. “Specific facts are not necessary; the statement need only give the defendant fair notice of what the ... claim is and the grounds upon which it rests.” Erickson v. Pardus, 551 U.S. 89, 93, 127 S.Ct. 2197, 167 L.Ed.2d 1081 (2007) (citing Bell Atlantic Corp. v. Twombly, 550 U.S. at 555, 127 S.Ct. 1955). “Determining whether a complaint states a plausible claim for relief will ... be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense.” Ashcroft v. Iqbal, 129 S.Ct. at 1950 (citation omitted).
Discussion
Defendants assert that dismissal of the action with prejudice is required because the complaint fails to provide factual allegations to make out each of the claims included in the complaint.2 Defendants argue that after disregarding the bare legal conclusions, the well-plead factual allegations are insufficient to state a plausible claim for relief. Specifically, Defendants posit that dismissal is proper for the con*913structive fraudulent transfer counts because Debtor’s insolvency at the time of the transfers or that Debtor was rendered insolvent because of the transfers is not supported by factual allegations. In Defendants’ view, the purported failure to plead facts in support of insolvency at the time of the transfers also renders the breach of fiduciary duty claim insufficient. Lastly, Defendants assert that Trustee’s unjust enrichment claim should be dismissed because Trustee has an adequate remedy at law.
Defendants also assert that the heightened pleading standard provided by Rule 9 of the Federal Rule of Civil Procedure is applicable here. Yet, numerous cases have held that when pleading a constructive fraudulent conveyance, the pleading standard falls under Federal Rule of Civil Procedure 8(a) and not Rule 9. A “constructive fraudulent transfer claims are governed by Rules 8 and 12(b)(6) and not the heightened Rule 9(b) pleading standard.” E.g., Charys Liquidating Trust v. McMahan Sec. Co., L.P. (In re Charys Holding Co.), 443 B.R. 628, 632 n. 2 (Bankr.D.Del.2010).
With regard to the allegations of Debt- or’s insolvency, Trustee counters that insolvency is a fact, not a legal conclusion. Although it is also an element of the constructive fraudulent transfer claims, it is also serves as an ultimate fact to be proved by Trustee. Trustee asserts that Defendants seek to raise the standard required at the pleading stage. Trustee argues that Defendants are confusing proof and evidence for factual allegations.
1. Trustee has sufficiently alleged insolvency to make out plausible constructive fraudulent transfer claims and the breach of fiduciary duty claim.
Trustee’s complaint alleges sufficient facts to support a plausible constructive fraudulent transfer claim. This determination is made based on the actual factual allegations in the complaint and the context in which this action arises. First, the complaint explicitly alleges in paragraph 27 of her complaint that “[a]t the time of the Transfers, Debtor was insolvent or became insolvent as a result of the Transfers.... ” Although this language mirrors the statutory language in 11 U.S.C. § 548(a)(1)(B), Debtor’s insolvency at the time of the transfers remains a fact to be established at. trial or at another juncture.
Trustee’s complaint also includes factual allegations that lend support to its factual statement that Debtor was insolvent at the time of the transfers or rendered insolvent as a result of such transfers. For example, paragraphs 10 and 17 provide factual support to create a plausible constructive fraudulent transfer claim. The relevant transfers are identified as occurring in January and May of 2008. Paragraph 10 states that in December of 2008, the Georgia Department of Banking and Finance closed Haven Trust Bank and named the FDIC as receiver. Paragraph 17 references the schedules assets and liabilities on Debtor’s petition date, February 23, 2009. Debtor scheduled over $9 million in liabilities and $0 in assets.
These factual allegations together state a plausible claim for constructive fraudulent transfers. There are sufficient factual allegations to allow the Court to reasonably infer that these transfers could be avoidable. Debtor’s financial position after the transfer provides a basis to infer Debtor’s financial position at the time of the transfer. E.g., In re Saba Enters., Inc. 421 B.R. 626, 646-47 (Bankr.S.D.N.Y.2009) (the petition, filed ten months after the transfers, sufficiently alleged a plausible pleading that the debtor was insolvent at the time of the transfer). The proximi*914ty of the transfers to Debtor’s bankruptcy filing and the extent that Debtor’s liabilities exceeded its assets on the petition date bolster the plausibility of Debtor’s insolvency at the time of the transfer. Although, as Defendants argued, Trustee could have alleged a specific value of liabilities and assets in the relevant transfer period, that level of specificity is not required to state a plausible claim. The supporting facts provided in the complaint make the insolvency allegation more than mere speculation. Similarly, the facts alleged in the complaint are more than threadbare recitals and are sufficient to defeat Defendants’ motion to dismiss.
The context of this action and the transfers at issue were also considered in making this determination. Here, the transfers occurred before Trustee had any involvement with Debtor and the very Defendants named in this action were in a position to know Debtor’s financial position. This context also fulfills the purpose of the federal notice-pleading requirements because Defendants have sufficient notice based on the allegations in the complaint to know the claims sought against them and the grounds for each claim. Bell Atlantic Corp. v. Twombly, 550 at 555, 550 U.S. 544, 127 S.Ct. 1955, 167 L.Ed.2d 929 (quoting Conley v. Gibson, 355 U.S. 41, 47, 78 S.Ct. 99, 2 L.Ed.2d 80 (1957) (“fair notice of what the ... claim is and the grounds upon which it rests.”)). The complaint, common sense, and the context of the alleged transfers — separately and collectively — provide enough facts to provide Defendants meaningful notice and to allow Defendants to raise all their available defenses.
Based on this determination as to the constructive fraudulent transfer actions, Trustee similarly adequately pleads a plausible breach of fiduciary duty claim.
2. The unjust enrichment claim survives.
Defendants argue that the unjust enrichment claim is unavailable to Trustee because she has an adequate remedy at law. Rule 8(e) of the Federal Rules of Civil Procedure, applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7008, permits alternative pleading. The complaint is sufficient and this count remains against Defendants.
For the above reasons, Trustee has alleged sufficient facts that the counts alleged are plausible. Accordingly, it is
ORDERED that Defendants’ Motion to Dismiss is DENIED.
It is FURTHER ORDERED that pursuant to Federal Rule of Civil Procedure 12(a)(4)(A), Defendants have 14 days to serve their answer.
. Three originally named Defendants have been voluntarily dismissed by Trustee. (Docket Nos. 5, 18 & 20).
. Defendants move to dismiss the action with prejudice based on the theory that Trustee's ability to amend the complaint would be futile. Based on the Court’s denial of the motion to dismiss, there is no need to address the merits of the "with prejudice" portion of Defendants’ motion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494439/ | ORDER
W. HOMER DRAKE, Bankruptcy Judge.
Before the Court is the Motion for Reconsideration, filed by Theo D. Mann (hereinafter the “Trustee”), in his capacity as the trustee of the Chapter 7 Bankruptcy Estate of MCB Financial Group, Inc. (herein after the “Debtor”). The motion arises in connection with a motion for relief from the automatic stay, filed by Independent Bankers’ Bank of Florida (hereinafter “IBB”). Accordingly, this matter constitutes a core proceeding, over which this Court has subject matter jurisdiction. See 28 U.S.C. § 157(b)(2)(G).
BackgRound
In March 2008, MCB Financial Group, Inc. (hereinafter the “Debtor”) obtained a revolving line of credit from IBB. The Debtor executed a promissory note (hereinafter the “Promissory Note”) dated March 7, 2008 in the amount of $2,750,000 in favor of IBB. The Promissory Note states as follows:
—Borrower will pay this loan in full immediately upon Lender’s demand. If no demand is made, ... Borrower will pay this loan in ... principal payments and one final principal and interest payment. ...
—Upon default, Lender may declare the entire unpaid principal balance under this Note and all accrued unpaid interest immediately due, and then Borrower will pay that amount.
—To the extent permitted by applicable law, Lender reserves the right of setoff in all Borrower’s accounts with Lender (whether checking, savings, or some other account). Borrower authorizes Lender, to the extent permitted by applicable law, to charge or setoff all sums owing on the indebtedness against any and all such accounts.
The Debtor also pledged its stock in McIntosh Commercial Bank (hereinafter “MCB”) to IBB to secure this indebtedness, and Movant took possession of the MCB stock certificates. By May 2008, the Debtor had fully exercised the $2,750,000 line of credit.
In July 2008, IBB became concerned about the Debtor’s financial status and became aware that the Debtor was experiencing financial difficulties. IBB asked the Debtor to open a $1 million certificate of deposit with IBB. On August 29, 2008, the Debtor used $1 million of its funds to open a certificate of deposit (hereinafter the “CD”) with IBB.
On December 10, 2009, the Debtor missed an interest payment of $34,756.94 on the debt owed to IBB. The Debtor and IBB discussed potential options for resolving the missed interest payment, but did not come to an agreement. The Debtor also failed to make the interest payment due on March 10, 2010. After the Debtor made the September 2009 payment, nei*917ther the Debtor nor any other party made farther payments on the debt to IBB.
The Debtor and IBB executed an assignment with regard to the Debtor’s rights in the CD (the “Assignment”). The Assignment is dated December 29, 2009, but it was signed by representatives of the Debtor and IBB on January 14, 2010. The Assignment grants IBB a security interest in the CD and also grants IBB a right of setoff, to the extent permitted by applicable law.1 Additionally, the Assignment provides:
Rights and Remedies Upon Default: Upon Default, or at any time thereafter, Lender may exercise any one or more of the following rights or remedies, in addition to any rights or remedies that may be available at law, in equity, or otherwise.
Default: Default will occur if payment in full is not made immediately when due. Accelerate Indebtedness: Lender may declare indebtedness of Grantor immediately due and payable, without notice of any kind to Grantor.
Application of Account Proceeds: Lender may take directly all funds in the Account and apply them to the indebtedness.
On March 17, 2010, IBB sent the Debtor a “soft demand letter,” the purpose of which was to get the Debtor to pay the accrued, unpaid interest owing in the amount of $70,869.79. IBB did not demand payment in full of the entire debt. The Debtor failed to make these interest payments by March 29, 2010, the date identified in the letter from IBB. As of March 29, 2010, the Debtor owed IBB $2,880,227.43.
The Federal Deposit Insurance Corporation seized MCB, Debtor’s subsidiary bank, on Friday, March 26, 2010. On Sunday, March 28, 2010, the Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code. IBB initiated a setoff of its debt against the CD on March 29, 2010 by way of a verbal instruction, and the setoff was completed on March 30, 2010. On April 6, 2010, counsel for the Trustee communicated her concern to IBB that IBB may have liquidated the CD. IBB filed the instant motion to annul and terminate the automatic stay on April 19, 2010. Because the Trustee opposed the motion, the parties negotiated the terms of a consent order, which provided for IBB to implead the CD funds with this Court, pending the resolution of the motion. Following a period of discovery, IBB and the Trustee filed a stipulation as to certain facts and the admissibility of certain documents and requested the Court consider the legal arguments of the parties to determine whether the motion should be granted or whether factual disputes remained that would require an evidentiary hearing.
On March 31, 2011, the Court issued a written order in which it found that: 1) although IBB violated the automatic stay in setting off funds prior to obtaining relief from the stay, such action did not warrant a refusal by this Court of its request for prospective relief from the stay; 2) depending on the facts as they pertained to IBB’s knowledge of the filing of the bankruptcy case, retroactive relief from the stay may not be warranted, in which case, the Trustee may be able to assert a claim under section 105 for damages arising from that stay violation; 3) under applicable Florida law, IBB had a valid right of setoff as of the date of the filing of the case; 4) IBB’s right of setoff was not *918subject to section 553(a)(3); and 5) the Trustee had established no reason why IBB should not be granted prospective relief from the automatic stay. The Order, accordingly, granted IBB relief from the automatic stay and invited IBB to file a further request for retroactive annulment of the stay and the trustee to file a motion seeking damages arising from IBB’s stay violation in the event the Court denied the request for retroactive annulment.
On April 7, 2011, the Trustee filed a timely motion for reconsideration of the Court’s March 31st Order. In the Motion, the Trustee asserts that the Court erred in its conclusion that IBB had carried its burden of proof to establish “cause” for relief from the automatic stay. Specifically, the Trustee urges the Court to reconsider its decision that Florida law permitted IBB to setoff its debt against that owed by the Debtor.
Discussion
Rule 59(e) of the Federal Rules of Civil Procedure grants bankruptcy courts license to alter or amend an order or a judgment after its entry. See Fed. R.CivP. 59(e) (made applicable to bankruptcy proceedings by Rule 9023 of the Federal Rules of Bankruptcy Procedure); see also In re International Fibercom, Inc., 503 F.3d 933, 946 (9th Cir.2007) (9th Cir.2007) (“Under Rule 59(a), made applicable to bankruptcy proceedings by Federal Rule of Bankruptcy Procedure 9023, a court has the discretion to reopen a judgment if one has been entered, take additional testimony, amend findings of fact and conclusions of law, or make new findings and conclusions.”). “The rule permits a court to correct its own errors, ‘sparing the parties and the appellate courts the burden of unnecessary appellate proceedings.’ ” In re E-Z Serve Convenience Stores, Inc., 2004 WL 3095842 (Bankr.M.D.N.C.2004) (citing Russell v. Delco Remy Div. of Gen. Motors Corp., 51 F.3d 746, 749 (7th Cir.1995)). This provision is limited, however, to the correction of any manifest errors of law or misapprehension of fact. See In re Kellogg, 197 F.3d 1116, 1120 (11th Cir.1999); Hutchinson v. Staton, 994 F.2d 1076, 1081 (4th Cir.1993); Lux v. Spotswood Constr. Loans, 176 B.R. 416, 420 (E.D.Va.), aff'd, 43 F.3d 1467 (4th Cir.1994).
The Trustee argues against the Order on several different bases. First, the Trustee disagrees with the Court’s conclusion that the parties agreed to allow IBB to setoff its entire debt, regardless of its maturity. Second, the Trustee asserts that the Court impermissibly relied on an exception to the maturity requirement applicable when the depositor is insolvent. Finally, the Trustee argues against the Court’s conclusion that the debt was mature because the Promissory Note was a demand note.
As IBB noted during the course of the hearing on the Trustee’s Motion to Reconsider, the Court may not alter or amend its previous order unless the Court finds that IBB was not entitled to relief from the automatic stay. In the prior order, the Court did not need to reach IBB’s alternative argument that the Assignment also provided it with a valid right of setoff. If IBB had a valid right of setoff under the Assignment, IBB would be entitled to prospective relief from the automatic stay, regardless of whether the Court’s prior conclusions of law regarding the maturity of the debt under state law were correct.
The Court, having considered the language of the Assignment, has determined that IBB also had a right of setoff under the Assignment. In the Assignment, IBB and the Debtor agreed that IBB could apply the CD to the debt upon the Debt- or’s default. There is no dispute that, on the petition date, the Debtor was in default, as defined in the Assignment, having *919missed two interest payments under the terms of the Promissory Note. Therefore, IBB had a right to exercise its setoff against the entire indebtedness without making a demand for full payment or accelerating the debt.
In the prior order, the Court correctly noted that “[s]etoff is an established creditor’s right to cancel out mutual debts against one another in full or in part,” the purpose of setoff being “to avoid ‘the absurdity of making A pay B when B owes A.’ ” In re Patterson, 967 F.2d 505, 508 (11th Cir.1992) (quoting Studley v. Boylston Nat’l Bank, 229 U.S. 523, 528, 33 S.Ct. 806, 57 L.Ed. 1313 (1913)). The Court also found that section 553(a) of the Code preserves otherwise valid setoff rights, while limiting those rights in certain ways, but does not expand or create a right of setoff when no right would have existed outside of the bankruptcy context. See 11 U.S.C. § 553(a); see also Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 116 S.Ct. 286, 133 L.Ed.2d 258 (1995); Patterson, 967 F.2d at 509. The question of whether a creditor has a valid right of setoff must be determined by reference to applicable nonbankruptcy law. Patterson, 967 F.2d at 509. In this case, the parties agreed Florida law applies.
As the Court previously held, under Florida law the parties to a note can agree to grant a lender the right to setoff against a debt that is not mature. See, e.g., Barsco, Inc. v. H. W.W., Inc., 346 So.2d 134 (Fla.Dist.Ct.App.1977) (finding the bank’s right to setoff had priority over the right of a judgment creditor despite a lack of maturity because the note permitted setoff upon default and the debt was in default); see also American Alternative Ins. Corp. v. South Florida Glazing, Inc., 904 So.2d 656 (Fla.App. 4 Dist.2005) (same).
In the Assignment, IBB and the Debtor agreed to allow IBB to apply the funds in the “Account” to the “indebtedness” upon “default” or at any time thereafter. The “Account” is defined as the “deposit accounts described in the Collateral Description section” of the Assignment. The Collateral Description section in turn references the CD. “Indebtedness” is defined in the Assignment to include “all principal and interest.” A “default” includes the failure to make payment in full immediately when due.
Accordingly, under the Assignment, IBB had the right to apply the CD to payment of the principal and interest owed on the Promissory Note once the Debtor failed to make a payment when due. As there is no dispute that the Debt- or missed two interest payments under the Promissory Note, the Debtor was in default and IBB had the right to apply the entire CD to the payment of the debt, prior to the commencement of the Debtor’s bankruptcy case. Under Florida law, IBB had no obligation to take any affirmative action to accelerate the debt prior to exercising its remedy under the Assignment. IBB’s setoff right was preserved by section 553(a), and section 506(a) rendered IBB the holder of a claim secured by the CD.
The Trustee might oppose this conclusion due to the fact that the Assignment was not made until December 29, 2009, which was less than 90 days before the Debtor filed its bankruptcy petition. For this reason, the Trustee has filed a complaint to avoid the security interest that the Debtor transferred to IBB by way of the Assignment. For the reasons stated below, however, unlike the security interest created by the Assignment, the right of setoff created by the Assignment is not subject to avoidance as a preferential transfer pursuant to section 547.
Section 553(a) provides:
*920Except as otherwise provided in this section and in sections 362 and 363 of this title, this title does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debt- or that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case, except to the extent that—
(1) the claim of such creditor against the debtor is disallowed;
(2) such claim was transferred, by an entity other than the debtor, to such creditor—
(A) after the commencement of the case; or
(B)(i) after 90 days before the date of the filing of the petition; and
(ii) while the debtor was insolvent (except for a setoff of a kind described in section 362(b)(6), 362(b)(7), 362(b)(17), 362(b)(27), 555, 556, 559, 560, or 561); or
(3) the debt owed to the debtor by such creditor was incurred by such creditor—
(A) after 90 days before the date of the filing of the petition;
(B) while the debtor was insolvent; and
(C) for the purpose of obtaining a right of setoff against the debtor (except for a setoff of a kind described in section 362(b)(6), 362(b)(7), 362(b)(17), 362(b)(27), 555, 556, 559, 560, or 561).
11 U.S.C. § 553(a).
First, section 553(a) clearly states that, other than as stated in section 553 and sections 362 and 363, the Bankruptcy Code does not affect a creditor’s setoff right. Consequently, the commencement of the case stays the exercise of the right of setoff, but no other provisions of the Code, including sections 547 or 548, can be used to avoid or otherwise destroy the right of setoff. See Kaye v. Carlisle Tire & Wheel Co., 2008 WL 821521 (M.D.Tenn.2008). This is not to say that the exercise of certain types of setoff rights are not impaired or restricted by the bankruptcy filing.
Specifically, section 553(a) provides that a creditor shall not be permitted to exercise its right of setoff postpetition if: (1) the creditor’s claim is disallowed; (2) the claim was transferred to the creditor by a third party after the petition date or within 90 days of the petition date and the debtor was insolvent; or (3) “the debt owed to the debtor by such creditor was incurred by such creditor—(A) after 90 days before the date of the filing of the petition; (B) while the debtor was insolvent; and (C) for the purpose of obtaining a right of setoff against the debtor” (except for certain setoffs concerning securities contracts). 11 U.S.C. § 553(a). In this manner, the Code prevents a creditor from incurring a debt during the preference period for the purpose of obtaining a right of setoff and essentially bypassing section 547.2 Otherwise, however, the plain language of section 553(a) provides that section 547 is not applicable to setoff rights.
None of the restrictions on setoff rights contained in section 553(a) apply to the right of setoff created by the Assignment. IBB’s claim for over $2.8 million has not been disallowed and the Trustee has asserted no basis upon which it could be disallowed. IBB did not receive its *921claim by transfer from a third party during the prepetition preference period. Finally, IBB did not incur the debt owed to the Debtor within the preference period. For the reasons stated by the Court in the prior order, IBB incurred the debt owed to the Debtor in August 2008, more than 90 days prior to the petition date.
There is no question that IBB and the Debtor held mutual, prepetition debts. On the petition date, the Debtor owed IBB a debt of $2,880,227.43, and IBB owed the Debtor $1 million plus accrued interest. IBB attempted to work with the Debtor to allow it to survive in a bad economic climate by not demanding full payment of the entire debt when it had the complete right to do so. The Debtor’s obligation to IBB was in default, as the Debtor had missed several interest payments. IBB had a setoff right, as provided for in the Assignment and recognized by Florida law. Section 553(a) of the Bankruptcy Code preserved that setoff right. Under section 506(a)(1), IBB is the holder of a secured claim to the extent of the amount subject to setoff, which, since the debt owed to IBB exceeded the amount of the CD and its accrued interest, is the full amount of the CD. Consequently, IBB is an undersecured creditor, with a substantial unsecured claim. No equity remains in the CD for the benefit of the Debtor’s estate, and the CD is not necessary for an effective reorganization, as this is a liquidation case. Relief from the automatic stay to allow IBB to exercise its setoff right is appropriate, pursuant to section 362(d)(2). Additionally, the Court finds that the goals and policies of section 553(a) and general equitable principles are best served by granting relief to IBB. Therefore, the Court finds that granting stay relief “for cause,” pursuant to section 362(d)(1), is also warranted.
Further, the Court finds no manifest error in its prior conclusion that, at the time of the filing, the entire debt was mature due to the demand nature of the Promissory Note. The Promissory Note expressly states that it is a demand note. The Trustee questions this conclusion because the Note also provides a payment schedule, which includes a specific final maturity date, an acceleration clause, and provisions for default interest and the collection of a late charge. Thus, the Trustee asserts, the Note has certain characteristics of a fixed payment note which would be unnecessary ■ if the Promissory Note were a true demand note.
As discussed below, under Florida law, a demand note may convert to an instrument payable at a definite time if the lender fails to make a demand by a particular date. In such cases, payment terms and additional provisions to deal with any default, such as the default provision in the Promissory Note, would be necessary to clarify “how the debt should be paid, assuming no demand is made.” Rogers v. Security Bank of Manchester, 658 F.2d 638, 639 (8th Cir.1981); see also Simon v. New Hampshire Sav. Bank, 112 N.H. 372, 296 A.2d 913 (N.H.1972) (“In the face of these explicit agreements, we cannot accept the plaintiffs’ contention that the provisions for installment payment of the debt converted the mortgage note from a demand note to an installment note, so that payment in full could be demanded only under the acceleration provisions of the mortgage, upon default in the payment of monthly installments.”). Therefore, their inclusion is not inconsistent with a demand note that is intended to convert to an instrument payable at a definite time when no demand is made.
Florida Statute Section 673.108 provides
(1) A promise or order is “payable on demand” if it:
*922(a) States that it is payable on demand or at sight, or otherwise indicates that it is payable at the will of the holder; or
(b) Does not state any time of payment.
(2) A promise or order is “payable at a definite time” if it is payable on elapse of a definite period of time after sight or acceptance or at a fixed date or dates or at a time or times readily ascertainable at the time the promise or order is issued, subject to rights of prepayment, acceleration, extension at the option of the holder, or extension to a further definite time at the option of the maker or acceptor or automatically upon or after a specified act or event.
(3) If an instrument, payable at a fixed date, is also payable upon demand made before the fixed date, the instrument is payable on demand until the fixed date and, if demand for payment is not made before that date, becomes payable at a definite time on the fixed date.
Fla. St. § 673.1081(3).
The Promissory Note remained a demand note at the time the Debtor filed its petition, as it states that it is payable upon the lender’s demand, or, if no demand is made, is payable in installment payments that were not scheduled to begin until June 10, 2010, which was prior to the Debtor’s petition date. The parties included the clear statement that the “Borrower will pay this loan in full immediately upon Lender’s demand” and “[i]f no demand is made, ... Borrower will pay this loan in ... principal payments and one final principal and interest payment.” The Trustee’s position would render this language surplusage, while IBB’s characterization of the note gives effect to both the demand language and the provisions for payments and default.
As IBB made no demand, and the event that would have triggered the Promissory Note to convert to an instrument payable at a definite time was not scheduled to occur until after the Debtor filed its petition, the Court concludes that the Promissory Note remained a demand note on the petition date. Accordingly, the entire debt owed by the Debtor to IBB was mature on the petition date. For this reason, the Court finds no manifest error of law or any other reason to reconsider the prior order.
Conclusion
For the reasons stated above, the Court’s prior order is amended to incorporate the additional findings of fact and conclusions of law stated above. Further, the Court finds no basis upon which to alter or amend the holding of the prior order. Accordingly, the Trustee’s Motion to Reconsider is DENIED.
During the course of the hearing on the Trustee’s Motion, IBB made an oral request for the immediate release of the funds being held in the registry of the Court. The consent order, dated June 14, 2010, pursuant to which the parties deposited the funds into the registry of the Court provided the funds would not be released other than by the agreement of the parties or following the entry of a final order on the dispute between the parties.
The Court’s March 31st Order granting IBB relief from the automatic stay, however, was not a final order within the meaning of Rule 54, as the order did not adjudicate the issue of whether the automatic stay should be annulled retroactively and the Court made no finding that there was no just reason for delay.
IT IS FURTHER ORDERED that the March 31st Order is amended to provide that the findings of fact, conclusions of law, and holding, as stated in the March 31st Order and amended by the instant order, constitute a final order, as the Court finds no just reason for the further delay of IBB’s rights. Any other matters that re*923main pending shall be disposed of in a subsequent order.
The Clerk of Court is DIRECTED to release to IBB’s counsel the funds originally deposited by the parties into the registry of the Court, including all accrued interest.
. The Trustee filed a complaint to avoid the transfer of the security interest granted by the Assignment as either a preferential transfer, pursuant to section 547, or a constructively fraudulent conveyance, pursuant to section 548. That matter has been stayed pending the resolution of IBB’s motion for relief.
. Under section 553(b), a trustee may also recover certain setoffs made during the pre-petition preference period. In this case, the Trustee has not asserted that IBB actually exercised its right of setoff during the prepetition period. To the contrary, the Trustee asserts that IBB violated the automatic stay by exercising its setoff right after the commencement of the Debtor’s case. Accordingly, section 553(b) does not apply. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494441/ | MEMORANDUM AND ORDER ON DEFENDANT’S MOTION FOR SUMMARY JUDGMENT
MELVIN S. HOFFMAN, Bankruptcy Judge.
The debtor, Robert E. Cogswell, and John Dotson, one of his creditors, have been battling for several years, first in state court and now in bankruptcy court, over what should have been a routine real estate transaction. Litigation began in 2004 in the Palmer District Court Department of the Massachusetts Trial Court and proceeded from there to the Massachusetts Appellate Division of the District Court Department.1 The relevant facts set forth below are gleaned to some extent from the pleadings and answers to interrogatories filed by the parties in this case but for the most part are derived from the rulings of the Massachusetts district court and its appellate division.
In December 2003 Mr. Dotson contracted with Mr. Cogswell and his associate, Lloyd E. Shelton, who were doing business as S.C. Construction, to purchase Lot 1, Jewett Road in Barre, Massachusetts. At the time of the purchase and sale agreement, a substantially completed house had been built on the lot and it was anticipated that completion would occur prior to closing. By the time of the closing, in January 2004, only the landscaping remained to be completed. At the closing, the parties entered into a holdback agreement in which the sellers agreed to complete the landscaping work by June 1, 2004 and, in order to indemnify Mr. Dotson for their failure to do so, to place $3,000 of Mr. Dotson’s purchase money in escrow to be applied toward the cost of completion of the work by a third party or toward legal fees incurred by him. The landscaping was not completed by June 1, 2004 and, for reasons which remain unclear, the $3,000 escrow fund was not applied toward completion.
In September 2004 Mr. Dotson filed suit in the Massachusetts district court against Mr. Cogswell, claiming breach of contract and violation of Mass. Gen. Laws ch. 93A (“Chapter 93A”). Mr. Dotson later amended his complaint to add Mr. Shelton and S.C. Construction as defendants and to include a fraudulent conveyance claim. Before trial, the district court dismissed Mr. Dotson’s fraudulent conveyance claim.
In June 2007 the Massachusetts district court ruled in Mr. Dotson’s favor on the breach of contract claim but ruled in favor of the defendants on the Chapter 93A claim in light of Mr. Dotson’s failure to provide the defendants with a timely demand letter. The court found that Mr. Cogswell and his co-defendants had failed to properly complete the grading, raking, seeding, or haying of the property, which caused water to pool in Mr. Dotson’s backyard and accordingly entered judgment in favor of Mr. Dotson for $35,200 plus interest and costs.
On November 28, 2007, Mr. Cogswell sent Mr. Dotson a letter offering to settle the district court judgment for the original $3,000 escrow amount plus an additional $7,000 in cash, and informing Mr. Dotson that if he chose not to accept the offer Mr. Cogswell would use the funds to file for bankruptcy as his business partner Mr. Shelton had already done.
*31On December 10, 2007, Mr. Cogswell appealed the Massachusetts district court judgment to the appellate division of the district court. The appellate division issued its ruling affirming the trial court judgment on February 4, 2010 and thereafter Mr. Dotson obtained a judgment lien against Mr. Cogswell’s residence at 972 West Street, Barre, Massachusetts. On July 7, 2010, five months after the appellate division ruling, Mr. Cogswell filed his bankruptcy petition under chapter 7 of the Bankruptcy Code (11 U.S.C. § 101 et seq.) commencing the main case.
Mr. Dotson, acting without an attorney, instituted this adversary proceeding on August 17, 2010 with a two-count complaint against Mr. Cogswell, Mr. Shelton, and S.C. Construction: count one seeking a determination that the debt owed by Mr. Cogswell to Mr. Dotson be excepted from Mr. Cogswell’s discharge and count two seeking a denial of Mr. Dotson’s discharge generally. Mr. Cogswell initially moved to dismiss the adversary proceeding for untimely service under Federal Rule of Bankruptcy Procedure 7004(e), which I denied. On December 7, 2010 Mr. Cogswell again moved to dismiss the adversary proceeding, this time for failure to state a claim and for the court’s lack of subject-matter jurisdiction over the non-debtor defendants, Mr. Shelton and S.C. Construction. On January 14, 2011 I granted Mr. Cogswell’s second motion to dismiss but delayed dismissal for two weeks to permit Mr. Dotson to file a new complaint.
Mr. Dotson filed an amended complaint on January 28, 2011, in which he named Mr. Cogswell as the sole defendant. Mr. Cogswell again moved to dismiss. Before the hearing on the motion to dismiss, Mr. Dotson moved to further amend the complaint to add a third count for bankruptcy fraud under 18 U.S.C. §§ 1001 and 152. On March 24, 2011 I granted Mr. Cogs-well’s motion to dismiss but only as to the count of Mr. Dotson’s complaint seeking to except his debt from discharge. I then granted Mr. Dotson’s motion to amend his complaint to include a bankruptcy fraud count, but issued an order limiting the surviving claims in the adversary proceeding exclusively to claims for the general denial of discharge under Bankruptcy Code § 727(a)(2), (a)(3), and (a)(4).2 On April 1, 2011 Mr. Cogswell filed an answer to the amended complaint and the parties undertook discovery. Mr. Cogswell filed a motion for summary judgment on July 18, 2011. His summary judgment motion is the subject of this memorandum and order.
Summary judgment is appropriate “if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue of material fact and that the movant is entitled to judgment as a matter of law.” Fed. R.Civ.P. 65(c), made applicable by Fed. R. Bankr.P. 7065. A “genuine” issue is one supported by such evidence that “a reasonable jury, drawing favorable inferences,” could resolve in favor of the nonmoving party. Triangle Trading Co. v. Robroy Indus., Inc., 200 F.3d 1, 2 (1st Cir.1999) (quoting Smith v. F.W. Morse & Co., Inc., 76 F.3d 413, 427 (1st Cir.1996)). A fact is “material” if it has “the potential to change *32the outcome of the suit” under governing law if such fact is found in favor of the nonmovant. McCarthy v. Nw. Airlines, Inc., 56 F.3d 313, 314-15 (1st Cir.1995).
Mr. Cogswell bears the initial responsibility to inform the court of the basis for his motion and to identify “those portions of the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,” which he believes demonstrate the absence of a genuine issue of material fact. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). When, as in this case, Mr. Dotson has the burden of proof on the underlying complaint, Mr. Cogswell need do no more than aver an absence of factual support for Mr. Dotson’s case. The burden of production then shifts to Mr. Dotson, who, to avoid summary judgment, must establish the existence of at least one question of fact that is both “genuine” and “material.” Desmond v. Varrasso, 37 F.3d 760, 763 n. 1 (1st Cir.1994) (citations omitted).
Mr. Dotson points to his answers to interrogatories and to the facts set forth in his amended complaint as sufficient to establish the existence of genuine and material facts in dispute. The relevant allegations include:
• When asked by the Chapter 7 trustee at the meeting of creditors under Bankruptcy Code § 341 whether he was paying a mortgage on property on Jewett Road in Barre, Mr. Cogswell, who was under oath, answered “yes,” but did not list such payment as an expense on schedule J to his bankruptcy petition.
• Mr. Cogswell did not list any Jewett Road property as owned by him on the list of real estate owned in schedule A to his petition and he failed to list his boat trailer, tools, van, or car on the list of personal property in schedule B to his petition.
*33• On schedule D to the bankruptcy petition and in the debtor’s statement of intention, Mr. Cogswell Usted a debt owed to Athol-Clinton Co-op secured by “0 Jewett Road” when that property is not owned by Mr. Cogswell.
• Mr. Cogswell’s reference to “0 Jewett Road” in the schedules to his bankruptcy petition should have been to “2 Jewett Road.”
According to Mr. Dotson, the foregoing acts and omissions constitute grounds under Bankruptcy Code § 727(a)(2), (a)(3), and (a)(4) for denying Mr. Cogswell the benefit of a discharge.
Under Bankruptcy Code § 727(a)(2), a debtor may be denied a discharge if the debtor transferred, removed, destroyed, mutilated, or concealed property belonging to the debtor, or caused the same, within one year of the bankruptcy petition (§ 727(a)(2)(A)) or after the date of the petition (§ 727(a)(2)(B)) with the intent to hinder, delay, or defraud a creditor.4 As intent is rarely ascertainable by direct evidence, fraudulent intent may be inferred from circumstantial evidence. In re Bartel, 2009 WL 2461727, at *1 (Bankr. D.Mass.2009) (citing Devers v. Bank of Sheridan (In re Devers), 759 F.2d 751, 754 (9th Cir.1985)).
The specific factual and legal arguments offered by Mr. Dotson in opposition to Mr. Cogswell’s motion for summary judgment with respect to his § 727(a)(2) claim are addressed in his answers to Mr. Cogswell’s interrogatories. In interrogatory question 10, Mr. Cogswell asked Mr. Dotson to support his claim as to § 727(a)(2)(A):
If you contend that Robert E. Cogswell, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under the Bankruptcy Code, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated or concealed property of the debtor, within one year before the date of the filing of the petition; then set forth in complete detail each fact, item of evidence, document, writing, electronically stored information or other information that would support this contention.
Mr. Dotson responded by stating, “Robert E. Cogswell and his Attorney did not list [L]ot 2 Jewett Road but list[ed] the property as [L]ot 0 Jewett Road.”
In interrogatory question 11, Mr. Cogs-well asked Mr. Dotson to support his claim as to § 727(a)(2)(B):
If you contend that Robert E. Cogswell, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under the Bankruptcy Code, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated or concealed property of the estate, after the date of the filing of the petition, then set forth in complete detail each fact, item of evidence, document, writing, electronically stored information or oth-
*32• Mr. Cogswell failed to disclose his affiliation with S.C. Construction in response to question 18 of his statement of financial affairs filed in the main case, which requires disclosure of all business affiliations within six years of bankruptcy, nor did he disclose this affiliation in response to a similar question by the Chapter 7 trustee at the 341 meeting.
• In response to question 1 of his statement of financial affairs, Mr. Cogswell disclosed gross income of “+/$12,000” for the year 2009, yet he told the Chapter 7 trustee at the 341 meeting that his income for 2009 was $120,000.
• Mr. Cogswell listed a 1976 seventeen-foot Manatee boat with outboard motor on schedule B to his bankruptcy petition when, according to Mr. Dotson, the boat is a 1969 model.
• Mr. Cogswell identified on the list of his unsecured creditors set forth in schedule F to his bankruptcy petition a credit card debt to JPMorgan Chase in the amount of $15,425 as of the July 7, 2010 bankruptcy petition date, when a credit card statement from JPMor-gan Chase dated June 4, 2010 indicates a balance due of $15,216.98.
• In response to question 17 of the statement of financial affairs (Environmental Information), Mr. Cogswell failed to disclose the identities of two governmental units that provided him with notice of potential environmental liability.3 *34er information that would support this contention.
Mr. Dotson responded as follows: “Robert E. Cogswell and his Attorney listfed] in his petition Lot 0 Jewett Road but not Lot 2 Jewett Road. All documents sent to Attorney O’Connor on May 6, 2011.”
Mr. Dotson’s answers to interrogatory questions 10 and 11 reflect as grounds for his § 727(a)(2) claim Mr. Cogswell’s listing on his petition and supporting schedules Lot 0, Jewett Road but not Lot 2, Jewett Road. Yet it is undisputed that Mr. Cogswell and his partner Mr. Shelton transferred Lot 2, Jewett Road to a Cogs-well affiliate, L.B. Builders, Inc., more than five years before Mr. Cogswell filed his bankruptcy petition. Mr. Dotson attached to his amended complaint a copy of a deed dated February 8, 2005 by which Mr. Dotson and Mr. Shelton effected this transfer. Further, Mr. Dotson has offered no factual support for a claim that Mr. Cogswell transferred property at any point after the petition date. As Mr. Dotson has made no showing that Mr. Cogswell transferred property either in the one year prior to his filing bankruptcy (§ 727(a)(2)(A)) or at any time following his filing (§ 727(a)(2)(B)), Mr. Dotson’s claim for denial of discharge under § 727(a)(2) cannot withstand a motion for summary judgment.
Bankruptcy Code § 727(a)(3) calls for a denial of discharge when “the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information ... from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the ease.”5 In interrogatory question 12, Mr. Cogswell asked Mr. Dotson to support his claim as to § 727(a)(3):
If you contend that Robert E. Cogswell has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which his financial condition or business transactions might be ascertained unless the act or failure to act was justified under all of the circumstances of the case, then set forth in complete detail each fact, item of evidence, document, writing, electronically stored information or other information that would support this contention.
Mr. Dotson responded by stating, “All documents sent to Attorney O’Connor on May 6, 2011.” The list of documents provided by Mr. Dotson to Mr. O’Connor includes thirty-nine separate items, none of which supports a claim that the debtor concealed, destroyed, mutilated, falsified, or failed to keep any documents. Further, none of Mr. Dotson’s other allegations would support a § 727(a)(3) claim. At a hearing on March 24, 2011, Mr. Dotson suggested that Mr. Cogswell failed to provide him with the tax returns of L.B. Builders, Inc., a company with which Mr. Cogswell was affiliated. As noted at the hearing, however, Mr. Dotson could have subpoenaed L.B. Builders, Inc. or any of Mr. Cogs-well’s other affiliates to obtain their tax returns or business records pursuant to Rule 7034 of the Federal Rules of Bankruptcy Procedure. Mr. Cogswell’s non-*35production of L.B. Builders, Inc.’s tax returns cannot be considered a factor in concluding that he ran afoul of § 727(a)(3). As Mr. Dotson has raised no genuine issue of material fact or viable legal argument as to his § 727(a)(3) claim, Mr. Cogswell is entitled to summary judgment on that claim as well.
Under § 727(a)(4), a debtor may be denied a discharge if the debtor “knowingly and fraudulently, in or in connection with the case ... made a false oath or account [or] presented or used a false claim.”6 A material fact under § 727(a)(4) (not to be confused with a material fact under the summary judgment standard) is one that has a non-trivial effect upon the estate and creditors. In re Sullivan, 444 B.R. 1, 8 (Bankr.D.Mass.2011) (citing Gordon v. Mukerjee (In re Mukerjee), 98 B.R. 627, 629 (Bankr.D.N.H.1989)). The requirement that a false oath be “knowingly and fraudulently” made is met “if the debt- or ‘knows the truth and nonetheless willfully and intentionally swears to what is false.’ ” In re Sullivan, 444 B.R. at 8 (Bankr.D.Mass.2011) (quoting Mukerjee, 98 B.R. at 629). As the Court of Appeals for the First Circuit has observed, “reckless indifference to the truth ... has consistently been treated as the functional equivalent of fraud for purposes of § 727(a)(4)(A).” In re Sullivan, 444 B.R. at 8 (quoting Boroff v. Tully, (In re Tully), 818 F.2d 106, 112 (1st Cir.1987)).
In his amended complaint and answers to interrogatories, Mr. Dotson set forth allegations of false oaths made by Mr. Cogswell either on the schedules or statement of financial affairs supporting his bankruptcy petition or at the creditor’s meeting under Bankruptcy Code § 341. Several of these alleged false oaths do not rise to the level of materiality. Mr. Cogs-well’s listing on schedule B to his bankruptcy petition a 1976 Manatee boat when Mr. Dotson has provided an email suggesting the boat is in fact a 1969 model, or Mr. Cogswell’s listing on schedule F a credit card debt to JPMorgan Chase in the amount of $15,425 when a prior billing statement from JPMorgan Chase indicated a balance due of $15,216.98, are examples of technical but harmless errors.
However, several representations made by Mr. Cogswell in his sworn filings and testimony before the chapter 7 trustee would, if proven false by Mr. Dotson, be material to the case and relevant in determining whether Mr. Cogswell is entitled to a discharge under Chapter 7 of the Bankruptcy Code. Mr. Dotson alleges that Mr. Cogswell did not list S.C. Construction as a business affiliation in response to question 18 of his statement of financial affairs. Mr. Dotson contends that Mr. Cogswell failed to accurately report his gross income in 2009 in response to question 1 on the statement of financial affairs and that Mr. Cogswell indicated to the trustee at the § 341 meeting that his gross income for 2009 was $120,000 rather than the “+/- $12,000” contained in his answer to question 1. Mr. Dotson also alleges that Mr. Cogswell listed on schedule D to his petition that Athol-Clinton Co-op held a mortgage on 0 Jewett Road when it is Mr. Dotson’s contention that Mr. Cogswell did not own property at 0 Jewett Road on the date of his bankruptcy petition. Finally, Mr. Dotson asserts that Mr. Cogswell failed to list in response to question 17 on *36the statement of financial affairs the name of any governmental entity that provided him with notice of potential environmental liability. Mr. Dotson attached as an exhibit to his answers to interrogatories a copy of a letter from the Barre Board of Health addressed to Mr. Cogswell demanding that Mr. Cogswell excavate around the septic system on Mr. Dotson’s property to ensure that decomposition of tree stumps adjacent to the septic system would not cause environmental damage.
Mr. Dotson has raised genuine issues of material fact as to the veracity of sworn statements by Mr. Cogswell in his schedules, statement of financial affairs, and at the 341 meeting, and whether the statements, if determined to be untrue, were made knowingly and fraudulently. I thus find a trial is necessary to determine these questions of fact. Therefore, Mr. Dotson’s claims under § 727(a)(4) will survive summary judgment.
Based on the foregoing, I grant Mr. Cogswell’s motion for summary judgment as to the claims under § 727(a)(2) and (3) and deny the motion as to § 727(a)(4).
SO ORDERED.
. The Appellate Division’s decision may be found at Dotson v. Cogswell, 2010 Mass.App. Div. 17, 2010 WL 437983 (Mass.App.Div. 2010).
. I do not have jurisdiction over Mr. Dotson’s claims under 18 U.S.C. §§ 1001 and 152. Title 18 deals with federal crimes and sentencing guidelines and “[t]he Bankruptcy Court’s authority extends to civil matters only.” In re Wood, 341 B.R. 804, 812 (Bankr. S.D.Fla.2006). However, the factual allegations within count three of Mr. Dotson's complaint, particularly the false statement allegations, are relevant to § 727(a)(4). In limiting adversary proceeding to claims under 727(a)(2), (a)(3), and (a)(4), Mr. Dotson's justiciable claims have been preserved.
. In his answers to Mr. Cogswell's interrogatories, Mr. Dotson states that Mr. Cogswell failed to list the names of two separate agencies. However, the exhibits offered by Mr. Dotson indicate only that the Barre Board of *33Health issued notice of potential environmental liability.
. Bankruptcy Code § 727(a)(2) states:
The court shall grant the debtor a discharge, unless—
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—
(A) property of the debtor, within one year before the date of the filing of the petition; or
(B) property of the estate, after the date of the filing of the petition.
. Bankruptcy Code § 727(a)(3) states:
The court shall grant the debtor a discharge, unless—
(3) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, in-eluding books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case.
. Bankruptcy Code § 727(a)(4), in pertinent part, provides:
The court shall grant the debtor a discharge, unless—
(4) the debtor knowingly and fraudulently, in or in connection with the case—
(A) made a false oath or account;
(B) presented or used a false claim | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494442/ | MEMORANDUM OPINION AND ORDER DENYING MOTION FOR ORDER AUTHORIZING THE APPOINTMENT OF AN OFFICIAL COMMITTEE OF COMMODITY BROKER CUSTOMERS AND APPROVING COMPENSATION OF ALLOWED FEES AND EXPENSES OF COMMITTEE PROFESSIONALS
MARTIN GLENN, Bankruptcy Judge.
Pending before the Court is the motion of certain commodity broker customers of MF Global Inc. (“MFGI”), requesting an Order Authorizing the Appointment of an Official Committee of Commodity Broker Customers and Approving Compensation of Allowed Fees and Expenses of Committee Professionals (“Steering Committee Motion,” ECF # 161).1 The Steering *38Committee Motion is opposed by (1) James W. Giddens (the “Trustee ”), as Trustee for the liquidation of the business of MFGI under the Securities Investor Protection Act of 1970, as amended (“SIPA”), 15 U.S.C. §§ 78aaa-78111 (2006) (“MFGI Liquidation”) (ECF Doc. #357); (2) the Securities Investor Protection Corporation (“SIPC”) (ECF Doc. #358); and (3) the Statutory Creditors’ Committee of MF Global Holdings Ltd., et al.2 (ECF Doc. # 359). The United States Trustee (“UST”) also filed the Comments of the United States Trustee, as Amicus Curiae, on Motion for Order Authorizing Appointment of an Official Committee of Commodity Brokers and Approving Compensation of Allowed Fees and Expenses of Committee Professionals (ECF Doc. # 371). While the UST acknowledges that she has no official role in the administration of a SIPA liquidation — that role instead is played by SIPC — the UST is interested in the outcome of the Steering Committee Motion “because it seeks the formation of a creditors’ committee by a means not permitted by 11 U.S.C. § 705 and seeks an order improperly providing that the fees and expenses of such a committee’s professionals would be entitled to payment from the estate as administrative expenses under 11 U.S.C. §§ 503(b) and 105(a).” Id. 1-2.
The concerns expressed by customers in the MFGI Liquidation are real and substantial. The collapse of MFGI has given rise to a commodities broker liquidation of immense scope and complexity. Since this case was filed the Trustee (with the required approval from SIPC and the Commodity Futures Trading Commission (“CFTC ”)), after obtaining approval of the Court, has transferred (or is in the process of doing so) to other futures commissions merchants approximately 40,000 customer accounts containing close to $2 billion in customer cash or collateral, (ECF Doc. #14 & # 316), giving those customers access to at least some of the value that had been in their MFGI accounts. Other customers have not yet been able to gain access to their funds or property.
While it was initially widely reported that approximately $600 million of customer collateral held with MFGI — which should have been maintained in segregated accounts — has not been located, the Trustee reported on November 22, 2011 that the actual shortfall may be in excess of $1.2 billion.3 Although SIPC replaces missing stocks and other securities — that is, “money, stocks and other securities that are stolen by a broker or put at risk when a brokerage fails for other reasons”— where it is possible to do so, SIPC does not protect commodity futures contracts. How SIPC Protects You, Securities Investor PROTECTION Corporation, 3 (2011), http://www.sipc.org/pdf/HSPY_English_ 2011.pdf; see also What SIPC Covers ... What It Does Not, http://www.sip.org/how/ covers.cfm (last visited Nov. 22, 2011). The Trustee is required by section 766(h) of the Bankruptcy Code “to distribute property ratably to customers on the basis and to the extent of such customers’ allowed net equity claim....” 11 U.S.C. § 766(h). Unless the Trustee is able to *39recover the missing cash or property, MFGI’s commodity broker customers face the prospect of very substantial losses. The Trustee’s reluctance to distribute a larger percentage of customer property until the magnitude of .losses is known is understandable, even if it prolongs the financial distress of MFGI’s customers.
MFGI’s customers have been very vocal in this case, and appropriately so-many joining together to retain counsel for ad hoc groups, others separately represented by counsel and many others acting pro se. The customers have played a useful role. Despite customers’ frustration, the Trustee has demonstrated that he is responsive to customers’ concerns. The issue before the Court, however, is whether SIPA or the Bankruptcy Code authorizes the appointment of an official committee in a SIPA liquidation, with compensation for a committee’s professionals from estate property. For the reasons explained below, the Court concludes that no such authority exists. In the absence of statutory authority, the Court concludes that it does not have the power to grant the requested relief. Furthermore, even if the Court had the discretion to authorize the appointment of an official committee in these circumstances, I would not do so. Therefore, the Steering Committee Motion (and other motions seeking similar relief) is DENIED.
BACKGROUND
On October 31, 2011, the Honorable Paul A. Engelmayer of the United States District Court for the Southern District of New York entered an Order Commencing Liquidation of MFGI pursuant to the provisions of SIPA, 15 U.S.C. § 78aaa-78III. That Order (i) appointed James W. Gid-dens as Trustee for the liquidation of the business of MFGI pursuant to section 78eee(b)(3) of SIPA, (ii) appointed the law firm of Hughes Hubbard & Reed LLP as counsel to the Trustee pursuant to section 78eee(b)(3) of SIPA, and (iii) removed the case to this Court as required by section 78eee(b)(4) of SIPA.
On November 2, 2011, this Court approved the transfer by the Trustee of certain segregated customer commodity positions and authorized the Trustee to operate the business of MFGI in the ordinary course. (ECF Doc. # 14). On November 4, 2011, the Court granted the Trustee the authority to issue subpoenas for the production of documents and the examination of MFGI’s current and former officers, directors, employees and other related persons to facilitate its investigation into the alleged shortfall in customer-segregated property. (ECF Doc. #34). On November 17, 2011, the Court approved a second partial transfer of certain customers’ cash-only accounts. (ECF Doc. # 316). The Trustee has indicated that he hopes soon to make one or more additional motions to transfer cash or other customer property, with the goal of equalizing the distribution of customer property to all MFGI customers.
DISCUSSION
The Steering Committee Motion asks the Court to authorize the appointment of an official committee comprised of commodity broker customers and to approve compensation of fees and expenses of committee professional as administrative expenses of the commodity customer property estate. The motion claims many potential benefits of such a committee during the MFGI Liquidation, including (i) ensuring that the commodity customer priority is properly and fairly applied, (ii) representing the interests of commodity customers in any issues that may arise between the commodity customer and securities customer estates, (iii) and assisting *40in expediting distributions of commodity customer property. See Steering Committee Motion ¶¶ 9-13. Whether these supposed benefits are real or ephemeral is uncertain at best. Each of these is clearly the responsibility of the Trustee, with oversight by SIPC and the CFTC, subject to approval of the Court. There is no role to be played by an official committee.
What is principally lacking in the Steering Committee Motion is any legal authority supporting the requested relief. The motion relies on sections 105 and 705 of the Bankruptcy Code. But a plain reading of SIPA and the Bankruptcy Code shows a complete absence of authority for appointment of a customers’ committee in a SIPA liquidation, and even more clearly the absence of authority for compensation from estate assets of committee professionals of a committee properly elected in a chapter 7 case.
The motion is premised upon the argument that the MFGI Liquidation is comprised of two separate matters: (1) a SIPA liquidation of a securities broker-dealer and (2) a liquidation of a commodity broker under chapter 7 of the Bankruptcy Code.4 The customers argue that the dual-track nature of the proceedings means that provisions of chapter 7 apply and authorize a creditors’ committee under chapter 7 to assist in the liquidation of the commodity broker arm of MFGI. According to the motion, “[njothing in SIPA prevents the appointment of an official committee in such a dual-track proceeding.” Id. ¶ 1.
Section 705 of the Bankruptcy Code provides:
(a) At the meeting under section 341(a) of this title, creditors that may vote for a trustee under section 702(a) of this title may elect a committee of not fewer than three, and not more than eleven, creditors, each of whom holds an allowable unsecured claim of a kind entitled to distribution under section 726(a)(2) of this title.
(b) A committee elected under subsection (a) of this section may consult with the trustee or the United States trustee in connection with the administration of the estate, make recommendation to the trustee or the United States trustee respecting the performance of the trustee’s duties, and submit the court or the United States trustee any question affecting the administration of the estate.
11 U.S.C. § 705 (emphasis added). Relying on section 705 and also citing section 702 (addressing the characteristics a creditor must possess to be eligible to vote for a trustee), the motion concludes: “Thus, commodity broker customers are entitled to elect a committee pursuant to section 705 of the Bankruptcy Code.” Steering Committee Motion ¶ 8 n. 8.
A. Election of Committees in a SIPA Proceeding
The motion glosses over the actual language of section 705 and the interplay between the Bankruptcy Code and SIPA. See 15 U.S.C. § 78fff(b) (“[T]o the extent consistent with the provisions of this chapter, a liquidation proceeding shall be conducted in accordance with, and as though it were being conducted under chapters 1, 3 and 5 of subchapters I and II of chapter 7 of title 11.”). Section 705 provides that “creditors that may vote for a trustee ... may elect a committee.... ” 11 U.S.C. § 705(a). In a SIPA liquidation, *41however, no creditors may vote for a trustee; rather, selection of the SIPA Trustee is solely at the discretion of SIPC. See 15 U.S.C. § 78eee(b)(3); see also 6 Collier on Bankruptcy ¶ 760.08 (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2011) (“[I]n the event of the bankruptcy of a commodity broker that becomes the subject of a SIPA proceeding, there is a single bankruptcy trustee who is selected by the Securities Investor Protection Corporation.”). The provisions of the Bankruptcy Code are only applicable in a SIPA proceeding to the extent that they are consistent with the provisions of SIPA. See 15 U.S.C. § 78fff(b). Therefore, the Court concludes that section 705 of the Bankruptcy Code is not applicable in a SIPA liquidation and does not provide a basis for the election or appointment of a creditors’ committee in this case.
Alternatively, the Steering Committee Motion argues that section 105(a) of the Bankruptcy Code provides the Court with equitable power to appoint a commodity customer committee. But section 105 cannot be used to expand the powers not otherwise provided in the Bankruptcy Code. See In re Dairy Mart Convenience Stores, Inc., 351 F.3d 86, 91-92 (2d Cir. 2003) (“This Court has long recognized that [sjeetion 105(a) limits the bankruptcy court’s equitable powers, which must and can only be exercised within the confínes of the Bankruptcy Code.” (internal quotations and citation omitted)).
B. Compensation of Committees in a SIPA Proceeding
Even if this Court could authorize election or appointment of a commodity customers creditors’ committee in this case, the Court could not authorize compensation for the committee’s professionals from estate property. In those chapter 7 cases where a creditors’ committee is elected, section 705 does not contemplate the payment of fees and expenses of committee professionals as administrative expenses. See In re Dominelli, 788 F.2d 584, 586 (9th Cir.1986); 6 Collier on BANKRUPTCY ¶ 705.03[3] (“Section 705 does not provide for compensation or reimbursement to counsel to a chapter 7 creditors’ committee. Legislative history accompanying section 705 confirms that the absence of any such provision was intentional.”).
The Steering Committee Motion points to two cases in which compensation to creditors’ committee professionals was approved. See Sable, Makoroff & Gusky, P.C. v. White (In re Lyons Transp. Lines, Inc.), 162 B.R. 460 (Bankr.W.D.Pa.1994); In re Wonder Corp. of Am., 72 B.R. 580, 583 n. 3 (Bankr.D.Conn.1987). The result in Lyons is questionable, but the case is in any event distinguishable. The committee in that case was formed while the debtor was attempting to reorganize under chapter 11. Upon conversion to chapter 7, the court found that committee participation and assistance in the case was necessary due to the complexities of the case and approved the continuance of fee payments pursuant to its discretionary authority under section 105(a). Id. at 463. An objection to counsel fees was pressed, arguably in bad faith, only after substantial services were performed in reliance on the order. Lyons can therefore be read as a case involving judicial estoppel.
Wonder Corp. is also distinguishable. A chapter 7 case was converted to chapter 11, and a chapter 11 plan was confirmed. Counsel for the chapter 11 creditors’ committee, that was initially created when the case was administered under chapter 7, was awarded fees mostly for his work representing the chapter 11 creditors’ committee, but also including a smaller amount for his work representing the committee *42when the case was under chapter 7. The court stated in a footnote that “[a]lthough the Code does not specifically provide for the employment of counsel by a creditors’ committee elected pursuant to Code § 705(a), ... upon application of the creditors’ committee, this court authorized such employment in this case in accordance with Code § 105(a).” Wonder Corp., 72 B.R. at 583 n. 3. There is no indication whether anyone objected to the authorization to employ counsel for the chapter 7 committee. No objection was made and no analysis was provided for approving the payment of counsel’s fees for work for the pre- or post-conversion committee. Id. at 586.
The Lyons court also acknowledged contrary authority. See In re Dominelli, 788 F.2d 584 (9th Cir.1986); In re Willbet Enters., Inc., 43 B.R. 90 (Bankr.E.D.Pa. 1984) (finding that court did not have authority under section 105 to authorize committee professional fees, an issue which Congress had specifically considered and limited). The Dominelli court squarely rejected the argument made here, concluding that nothing in the Bankruptcy Code provides for payment of a chapter 7 creditors’ committee’s counsel, and pointing to the legislative history of section 705 as demonstrating that this omission was not an oversight. Id. at 586 (citing S. REP. NO. 95-989, 95th Cong., 2d Sess. 94 (1978), 1978 U.S.C.C.A.N. 5963, 6336 (“There is no provision for compensation or reimbursement of [committee] counsel.”)). The Dominelli court held that a court could not use its general equitable power to authorize something that Congress considered and rejected. Id. The effort in the Steering Committee Motion to distinguish or explain those contrary authorities is unconvincing.
But even if the Court could authorize election or appointment of a creditors’ committee, and further approve compensation for such a committee’s professionals from estate property, I would not do so in the circumstances present in this case. Mr. Giddens is a very experienced SIPA Trustee, represented by very experienced counsel, with mandated oversight provided by SIPC and the CFTC, and, of course, by this Court. MFGI’s customers can continue to participate actively in this case, as they have to date, with or without the assistance of counsel. There is no demonstrated need or justification to saddle this already heavily burdened estate with the expenses attendant to an official committee.
For all of these reasons, the Motion requesting the appointment of a commodity customer committee is DENIED.
. The reference is to the first of several similar motions — this one filed by a self-identified "Steering Committee” of 66 MFGI customers — seeking the appointment of an official committee of commodities customers and approval of compensation. Other similar motions, statements in support of the motion and letters from customers of MFGI seeking similar relief were also filed. See, e.g., ECF Doc. #354; ECF Doc. #362, ECF Doc. #363. The arguments in support of the motions and requests for authorization of an official committee are the same. This opinion addresses the Steering Committee Motion, but in so *38doing it disposes of all similar motions and letter requests.
. MF Global Holdings Ltd. and one of its unregulated affiliates are debtors in chapter 11 cases also filed in this Court. See In re MF Global Holdings Ltd., Case No. 11-15059(MG), filed on October 31, 2011.
. Tiffany Kary & Linda Sandler, MF Global’s Shortfall May Exceed $1.2 Billion, Trustee Says, Bloomberg Businessweek, Nov. 22, 2011, http.www.businessweek.com/news/2011-11-22/mf-global-s-shortfall-may-exceed-1 -2-billion-trustee-says.html.
. Because MFGI deals in both securities and commodities, it is known as a "joint broker-dealer.” | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494443/ | MEMORANDUM DECISION AND ORDER DENYING MOTION FOR PARTIAL SUMMARY JUDGMENT
STUART M. BERNSTEIN, Bankruptcy Judge.
The debtor The Musicland Group (“TMG”) paid the defendant Best Buy Co., Inc. (“Best Buy”) $35 million (the “Transfer”) prior to the petition date allegedly on account of an antecedent debt, and is now seeking to avoid and recover the Transfer under Minnesota’s version of the Uniform Fraudulent Transfer Act (“UFTA”). Best Buy contends that any recovery must be reduced by subsequent new value provided by its affiliate, and has moved for partial summary judgment on this issue. Best Buy’s motion is denied for the reasons that follow.
BACKGROUND
The material facts as they relate to the new value issue are not disputed. At all relevant times prior to June 16, 2003, TMG was a wholly-owned subsidiary of the Mu-sicland Stores Corp., and the latter was a wholly-owned subsidiary of Best Buy. On June 16, 2003, Musicland Holding Corp. (“Musicland Holding”) purchased all of TMG’s shares from Musicland Stores Corp.
Two other transactions occurred on June 16, 2003 that bear on the pending motion. First, TMG paid Best Buy the $35 million Transfer. (¶ 24.)1 Second, Musicland Holding and Best Buy Enterprise Services (“BBE”), a wholly-owned subsidiary of Best Buy, entered into a Transitional Services Agreement (“TSA”).2 In general, BBE agreed for one year to provide Musicland Holding and its subsidiaries with the same administrative and support services that it had provided to Musicland when it was owned by Best Buy. (TSA at 1 (fifth “WHEREAS” clause).) The services included, among other things, cash management, inventory and accounting control, expense accounts payable, consumer credit, sales audit and bank reconciliation, employee benefits, tax services, payroll services, merchandise accounts payable, storage and handling, transportation, home order processing and product returns. (¶ 26.) Best Buy executed a Parent Undertaking pursuant to which it agreed to be “jointly and severally liable with [BBE] for the performance of all of the obligations of [BBE] in favor of [Musicland Holding] and its Subsidiar*69ies pursuant to the Transition Services Agreement.” (Lockner Declaration, Ex. Q.)
The TSA required BBE to send monthly invoices for services rendered in the preceding month. (TSA § 3.2.) In addition, Musicland Holding was required to pay a $5 million deposit to be credited against the fees payable for the last month in which Musicland Holding or its subsidiaries received services. (TSA § 3.2.) Best Buy or BBE generated invoices totaling $84,163,000, (see ¶29; Lockner Declaration, Ex. T (“TSA Invoices”)), and TMG ultimately paid $75,543,000, (¶ 29), an amount the parties agree was the value of the services rendered. (¶ 30.)
Musicland Holding, TMG, and their other affiliates filed for chapter 11 relief on January 12, 2006, and confirmed a liquidating plan on January 18, 2008. Prior to confirmation, the Official Committee of Unsecured Creditors filed this adversary proceeding, and the plaintiff, the liquidating trustee under the plan, was substituted for the Committee upon confirmation. The Amended Adversary Proceeding Complaint, dated Mar. 11, 2008 (“Amended Complaint ”) (ECF Doc. # 11), seeks, inter alia, to recover the Transfer on the ground that it constituted an insider preference under § 513.45(b) of the Minnesota Statutes, Minn.Stat. § 513.45(b) (2010) (the “Minnesota Act”). (See Amended Complaint at ¶¶ 121-128.)
Best Buy moved for partial summary judgment, and all but one of the issues was disposed of from the bench. The only remaining question is whether Best Buy is entitled to assert a new value defense in the amount of no less than $19.01 million under § 513.48(f)(1) of the Minnesota Act based on the transitional services provided by BBE under the TSA.3 (Best Buy Defendants’ Memorandum of Law in Support of Their Motion for Partial Summary Judgment, dated June 24, 2011 (“Best Buy Memo of Law ”), at 20 (ECF Doc. # 179).)
DISCUSSION
A. Summary Judgment Standards
Rule 56 of the Federal Rules of Civil Procedure, made applicable to this adversary proceeding by Fed. R. BankR.P. 7056, governs summary judgment motions. “The court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to a judgment as a matter of law.” Fed.R.Civ.P. 56(a).4 The moving party bears the initial burden of showing that the undisputed facts entitle him to judgment as a matter of law. Rodriguez v. City of New York, 72 F.3d 1051, 1060-61 (2d Cir.1995). If the movant carries this initial burden, the nonmoving party must set forth specific facts that show triable issues, and cannot rely on pleadings *70containing mere allegations or denials. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); see Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). In deciding whether material factual issues exist, all ambiguities must be resolved and all inferences must be drawn in favor of the nonmoving party. Matsushita, 475 U.S. at 587, 106 S.Ct. 1348. The court may grant summary judgment for the non-moving party “[ajfter giving notice and a reasonable time to respond.” Fed.R.Civ.P. 56(f)(1).
B. The Bankruptcy Code
The Minnesota Act was adopted verbatim from the UFTA which, in turn, was derived from the Bankruptcy Code. Consequently, we begin the discussion there. Section 547(b) of the Bankruptcy Code allows a trustee to avoid preferences, and § 547(c) provides certain defenses to the transferee. Under § 547(c)(4), the trustee may not avoid a transfer under § 547(b)
to or for the benefit of a creditor, to the extent that, after such transfer, such creditor gave new value to or for the benefit of the debtor—
(A) not secured by an otherwise unavoidable security interest; and
(B) on account of which new value the debtor did not make an otherwise unavoidable transfer to or for the benefit of such creditor.
The “new value” exception encourages creditors to deal with troubled businesses, Jones Truck Lines, Inc. v. Central States, Southeast and Southwest Areas Pension Fund (In re Jones Truck Lines), 130 F.3d 323, 326 (8th Cir.1997); Southern Technical Coll., Inc. v. Hood, 89 F.3d 1381, 1384 (8th Cir.1996) (quoting Kroh Bros. Dev. Co. v. Cont’l Constr. Eng’rs, Inc. (In re Kroh Bros. Dev. Co.), 930 F.2d 648, 651 (8th Cir.1991)); Charisma Inv. Co., N.V. v. Airport Sys., Inc. (In re Jet Florida Sys., Inc.), 841 F.2d 1082, 1083 (11th Cir.1988); see Laker v. Vallette (In re Toyota of Jefferson, Inc.), 14 F.3d 1088, 1091 (5th Cir.1994); see generally 5 Alan N. Resnick & Henry J. Sommer, Collier on Bankruptcy ¶ 547.04[4][b], at 547-65 (16th ed. 2011), and promotes equality of treatment among creditors. Jet Florida Sys., Inc., 841 F.2d at 1083-84. It recognizes that the new value effectively repays the earlier preference, and offsets the harm to the debtor’s other creditors. See Toyota of Jefferson, Inc., 14 F.3d at 1091; Kroh Bros., 930 F.2d at 652; Jet Florida Sys., Inc., 841 F.2d at 1084. Accordingly, “the relevant inquiry under section 547(c)(4) is whether the new value replenishes the estate.” . Kroh Bros., 930 F.2d at 652; accord Southern Technical Coll, Inc., 89 F.3d at 1384; Toyota of Jefferson, Inc., 14 F.3d at 1091-92; Savage & Assocs., P.S. v. Level(S) Commc’ns (In re Teligent, Inc.), 315 B.R. 308, 315 (Bankr.S.D.N.Y. 2004).
The party relying on the defense must show that it gave unsecured new value after the preferential transfer. Mosier v. Ever-Fresh Food Co. (In re IRFM, Inc.), 52 F.3d 228, 231 (9th Cir.1995). This much is clear. It is also said to be the “majority rule” that the new value must remain unpaid. E.g., id. (discussing the majority rule and emerging trend). The rationale for the majority rule is that if the debtor pays for the new value, the estate has not been replenished and the creditor receives the double benefit of a new value defense and the payment for the new value. Id.; Kroh Bros., 930 F.2d at 652 (“If the new value advanced has been paid for by the debtor, the estate is not replenished and the preference unfairly benefits a creditor.”).
The error in reading the so-called majority rule too broadly was explained by *71Judge Tina L. Brozman of this Court in Official Committee of Unsecured Creditors of Maxwell Newspapers v. Travelers Indemnity Co., (In re Maxwell Newspapers), 192 B.R. 633 (Bankr.S.D.N.Y.1996). First, most of these courts that identified the majority rule did so in dicta. Id. at 639. Second, the majority rule ignores § 547(c)(4)(B) which states that the defense is available if the debtor “did not make an otherwise unavoidable transfer to or for the benefit of such creditor.” Id. Obviously, this phrase implies some payments will not deprive the transferee of the new value defense. The double negative in § 547(c)(4)(B) is unnecessarily confusing, but the statute means that the new value defense is available, despite payment, if the payment was an avoidable transfer, i.e., a preference or fraudulent transfer. Under those circumstances, the creditor must return the second payment, and “[tjhere is no logical reason to distinguish between a creditor that was paid by an avoidable transfer and one that was never paid at all.” Maxwell Newspapers, 192 B.R. at 639; accord Jones Truck Lines, 130 F.3d at 329; Bogdanov v. Avnet, Inc., 10-CV-543-SM, 2011 WL 4625698, at *5 (D.N.H. Sept. 30, 2011) (same).
This interpretation is consistent with the underlying policies of the new value exception to encourage creditors to continue to deal with a financially shaky debtor, but replenish an estate diminished by a preference. The creditor is entitled to only one credit for goods and services it later supplied. Vern Countryman, The Concept of a Voidable Preference in Bankruptcy, 38 Vand. L.Rev. 713, 788 (1985). The new value and the second payment are a “wash,” and if the creditor is allowed to assert the new value defense and also keep the second payment for the new value, the estate will still be diminished to the extent of the original transfer. If, on the other hand, the estate can defeat the new value defense and also recover the payment for the new value as a second preference, the creditor will pay twice — once with new value and once by returning the second payment — for what amounts to a single injury. The same rationale applies to the requirement that the debt arising in connection with the new value must be unsecured. If the debtor gives a lien to secure the obligation to pay for the new value, the lien will have the same diminishing effect on the estate as if the debtor simply paid for the new value outright.
Here, TMG paid for the new value with an “otherwise unavoidable transfer,”5 and Best Buy would be barred from asserting the new value defense under the Bankruptcy Code.6 However, the plaintiff is suing under the Minnesota Act which commands a different result.
C. The Minnesota Act
1. Payment for New Value
Section 513.45(b) of the Minnesota Act, which is identical to UFTA § 5(b), *72condemns insider preferences by an insolvent debtor:
A transfer made by a debtor is fraudulent as to a creditor whose claim arose before the transfer was made if the transfer was made to an insider for an antecedent debt, the debtor was insolvent at that time, and the insider had reasonable cause to believe that the debtor was insolvent.
Best Buy concedes for the purpose of its motion that the Transfer meets the definition of an insider preference under this provision. Instead, it relies on the new value defense under the Minnesota Act. Pursuant to § 513.48(f)(1), “[a] transfer is not voidable under section 513.45(b) ... to the extent the insider gave new value to or for the benefit of the debtor after the transfer was made unless the new value was secured by a valid lien.” Section 513.48, which is identical to section 8 of the UFTA, is derived from § 547(c)(4) of the Bankruptcy Code. Unif. FRaudulent Transfer Act prefatory note, 7A U.L.A. 6-7 (2006); see also id. § 8 cmt. 6, 7A U.L.A. at 181. While UFTA § 8(f)(1), like Bankruptcy Code § 547(c)(4), requires that the credit arising from the delivery of new value be unsecured, it omits the limitation in § 547(c)(4)(B) that the new value cannot be paid for with an “otherwise unavoidable transfer.” In other words, the payment for the new value does not affect the availability of the defense.
Elliot & Callan, Inc. v. Crofton, 615 F.Supp.2d 963 (D.Minn.2009), the only reported case to address the question, is directly on point. There, the debtor’s president (Crofton) loaned roughly $630,000 to the debtor in stages over a period of several years. 615 F.Supp. at 967. During the same period, and while insolvent, the debtor repaid $334,358.62 also in stages to the insider. Id. at 967, 976-80. Consequently, Crofton made subsequent advances after receiving repayments, and the debtor thereafter repaid some of those subsequent advances. A judgment creditor (E & C) of the debtor sued Crofton under the insider preference provision of the Minnesota Act to avoid and recover the transfers that the debtor had made. Id. at 967. Crofton argued, inter alia, that he was entitled to assert the new value defense to the extent of a subsequent advance even though the debt- or had eventually repaid that advance.
The District Court agreed. After reviewing the analogous issue under § 547(c)(4) of the Bankruptcy Code, id. at 973, the court ultimately relied on the unambiguous language of § 513.48(f)(1) of the Minnesota Act:
Although the “new value” defense under UFTA is not identical to the “new value” defense under the Bankruptcy Code, the language of UFTA similarly does not require that the “new value” remain unpaid. Instead, the only requirement under UFTA is that the “new value” not be “secured by a valid lien.” Minn.Stat. § 513.48(f)(1). E & C has never argued that any of the loans or advances that Crofton made were secured by valid liens. The Court therefore concludes that Crofton is entitled to set-offs for any “new value” in the form of loans or advances, whether or not SCC later repaid or reimbursed Crofton for that “new value.”
Id.
Applying the Minnesota law to the present case, I conclude that TMG’s payment for the new value provided by BBE does not limit Best Buy’s new value defense. The result is difficult to justify in light of the purpose of preference law in general and the new value exception in particular. The Transfer diminished TMG by $35 million. Permitting Best Buy to assert the new value defense to the Transfer and *73keep the payments gives it a double credit for the new value, and leaves the estate unreplenished.
Furthermore, the Minnesota Act, like the Bankruptcy Code, requires that the new value be unsecured. The official Comment to UFTA § 8(f)(1) explains the reason for this limitation:
If the insider receiving the preference thereafter extends new credit to the debtor but also takes security from the debtor, the injury to the other creditors resulting from the preference remains undiminished by the new credit. On the other hand, if a lien taken to secure the new credit is itself voidable by a judicial lien creditor of the debtor, the new value received by the debtor may appropriately be treated as unsecured and applied to reduce the liability of the insider for the preferential transfer.
Unif. Fraudulent Transfer Act § 8 cmt. 6, 7A U.L.A. at 181. Thus, new value secured by an unavoidable lien does not replenish the diminution caused by the original preference. The same logic applies when the debtor pays for the new value with cash instead of a secured IOU.
The Court’s research has not revealed a reason why the payment limitation incorporated in § 547(c)(4)(B) was omitted from UFTA § 8(f)(1), particularly given the inclusion of the limitation relating to secured credit. Nevertheless, the Minnesota Act unambiguously excludes a limitation on the new value defense resulting from payment for the new value, and the Court cannot rewrite the statute to add it. See Genin v.1996 Mercury Marquis, 622 N.W.2d 114, 117 (Minn.2001) (“The rules of construction forbid adding words or meaning to a statute that were intentionally or inadvertently left out.”); State v. Moseng, 254 Minn. 268, 95 N.W.2d 6, 11-12 (1959) (“Where failure of expression rather than ambiguity of expression concerning the elements of the statutory standard is the vice of the enactment, courts are not free to substitute amendment for construction and thereby supply the omissions of the legislature.”). Any necessary fix resides with the Minnesota legislature. Accordingly, I reach the same conclusion as the District Court in Elliot & Callan, and hold that the payment for the new value does not limit Best Buy’s new value defense under § 513.48(f)(1) of the Minnesota Act.
2. Third Party New Value
The foregoing assumed that the new value provided by BBE was available to Best Buy as a defense.7 This assumption, however, does not withstand analysis. In this case, Best Buy was the creditor that received the Transfer in satisfaction of the $35 million debt that was owed by TMG. Best Buy did not provide any new value, BBE did. Yet sections 513.45(b) and 513.48(f)(1), read together, state in relevant part that “[a] transfer made by an [insolvent] debtor is fraudulent ... if the transfer was made to an insider ... [but] [a] transfer is not voidable ... to the extent the insider gave [unsecured] new value to or for the benefit of the debtor.” (Emphasis added.) The unambiguous language means that the insider who received the preference must be the same person who provided the new value, and cases construing the comparable provision of the Bankruptcy Code support this interpretation.
Bankruptcy Code § 547(c)(4) states that the trustee may not avoid a transfer “to or for the benefit of a creditor, to the extent *74that, after such transfer, such creditor gave new value to or for the benefit of the debtor.” (Emphasis added.) Section 547(c)(4) requires that the person who received or benefited from the transfer must be the one that provided the new value. First Sec.-Bank, N.A. v. Davis (In re Telsave Corp.), 116 Fed.Appx. 91, 92 (9th Cir.2004); Bakst v. Sawran (In re Sawran), 359 B.R. 348, 353 n. 2 (Bankr. S.D.N.Y.2007); see Jones Truck Lines, 130 F.3d at 327 (contrasting § 547(c)(1), which allows a third party to deliver contemporaneous new value, with § 547(c)(4), which expressly requires the transferee-creditor to provide the subsequent new value); Manchester v. First Bank & Trust Co. (In re Moses), 256 B.R. 641, 652 (10th Cir. BAP 2000) (same).
Best Buy’s only contrary authority is distinguishable. In CareerCom, Corp. v. U.S. Dep’t of Educ. (In re CareerCom, Corp.), 215 B.R. 674 (Bankr.M.D.Pa.1997), the affiliated debtors ran educational institutions and trade schools, funded with grants from the Department of Education (“DOE”). Id. at 675. The affiliated debtors maintained a single, co-mingled bank account, but separately accounted for each affiliate. Id. at 676. If an affiliate’s sub-account fell below zero, its debts were paid from the solvent subaccounts of other affiliates. Id. Three arguably insolvent affiliates owed approximately $79,000 to the DOE in connection with certain fines and repayment obligations. Id. This amount was paid from the co-mingled account to the DOE who thereafter advanced the aggregate amount of $3.3 million in grant money to the affiliated debtors. Id.
The bankruptcy court concluded that each affiliate received new value directly or indirectly as a result of the continued DOE funding. Id. at 677 (citing Rubin v. Mfrs. Hanover Trust Co., 661 F.2d 979, 991 (2d Cir.1981) and Klein v. Tabatchnick, 610 F.2d 1043, 1047 (2d Cir.1979)). Unlike here, that case did not involve third-party new value; the DOE was the creditor that received the preference and also paid the new value. In addition, the defendant raised the contemporaneous new value defense under § 547(c)(1) and not the subsequent new value defense under § 547(c)(4). See id. at 676. As noted earlier, the language of the former is different from the latter, and under § 547(e)(1), a third party can deliver the contemporaneous new value.
Although the language in Bankruptcy Code § 547(c)(4) and § 513.48(f)(1) of the Minnesota Act differ, the differences are immaterial. The Minnesota Act, like its bankruptcy analog, requires the transferee to provide the new value, i.e., third-party new value does not count. Best Buy cannot base a subsequent new value defense on the services provided by its affiliate, BBE, under the TSA, and its motion for partial summary judgment on this issue is, therefore, denied.
This conclusion appears to dispose of Best Buy’s new value defense to the Transfer, but the plaintiff did not move for summary judgment. Best Buy is, therefore, directed to show cause why the Court should not grant partial summary judgment to the plaintiff dismissing the new value defense. It may submit a memorandum within fourteen days of this order, not exceeding fifteen pages, explaining why the Court should not grant this relief. The plaintiff may submit an opposition memorandum not exceeding fifteen pages within fourteen days of the service and filing of Best Buy memorandum, and the issue will be deemed submitted. No further submissions will be permitted absent an order of this Court.
So Ordered.
. Citations to "¶ ” followed by a number refer to correspondingly numbered paragraphs in the Best Buy Defendants’ Statement of Undisputed Facts in Support of Their Motion for Partial Summary Judgment, dated June 24, 2011 (“Best Buy Statement of Facts’’) (ECF Doc. #182), Plaintiff’s Counter-Statement of Disputed Facts in Opposition to the Best Buy Defendants’ Motion for Partial Summary Judgment, dated Sept. 2, 2011 ("Plaintiff Statement of Facts ’’) (ECF Doc. # 196) and Best Buy Defendants’ Response to Plaintiffs Counter-Statement of Disputed Facts, dated Sept. 30, 2011 (“Best Buy Reply Statement of Facts ") (ECF Doc. # 199). "ECF” refers to the electronic docket in this adversary proceeding.
. The TSA is attached as Exhibit R to the Declaration of Anne M. Loclcner in Support of the Best Buy Defendants’ Motion for Partial Summary Judgment, dated June 24, 2011 (“Lockner Declaration") (ECF Doc. #184).
. The $19.01 million figure results from a dispute regarding the $5' million deposit and its effect on the new value defense discussed in the succeeding text. The plaintiff contends that the deposit secured the payment of each monthly invoice, and hence, only the portion of the monthly bill exceeding $5 million was unsecured and eligible for treatment as new value. In fact, the plaintiff argues that the unsecured portion was less than $19.01 million, while Best Buy contends that the unsecured portion was much greater. The dispute is immaterial. Finally, Best Buy has not argued that its Parent Undertaking constituted new value.
. Best Buy’s motion is governed by the amendments to Rule 56 that became effective on December 1, 2010. Although some language has changed, the standard for granting summary judgment remains unchanged and the amendments will not “affect continuing development of the decisional law construing and applying these phrases.” Fed.R.Civ.P. 56 advisory committee’s note (2010).
. Although the plaintiff argues that TMG did not receive any benefit from the transition services, he has never contended that the payments for those services were avoidable as a fraudulent or preferential transfer.
. The plaintiff correctly observes that this Court and other courts in this district have stated that the new value must remain unpaid. (Plaintiffs Memorandum of Law in Opposition to the Best Buy Defendants' Motion for Partial Summary Judgment, dated Sept. 2, 2011, at 39 (citing Official Comm. of Unsecured Creditors. v. Whalen (In re Enron Corp.), 357 B.R. 32, 49 n. 21 (Bankr.S.D.N.Y.2006); In re Pameco Corp., 356 B.R. 327, 341 (Bankr. S.D.N.Y.2006); Teligent, 315 B.R. at 315) (ECF Doc. # 194).) Saying that the new value must remain "unpaid” is merely a shorthand method of describing § 547(c)(4)(B). Jones Truck Lines, 130 F.3d at 329; Toyota of Jefferson, 14 F.3d at 1093 n. 2; Maxwell Newspapers, 192 B.R. at 640.
. Best Buy concedes that BBE is the entity that rendered the transitional services under the TSA. (Best Buy Statement of Facts at ¶ 25 ("After the sale of TMG to Musicland Holding Corporation, Best Buy Enterprise Services provided transitional services to TMG at cost under a negotiated Transition Services Agreement.”).) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494444/ | MEMORANDUM DECISION (I) GRANTING THE CITY OF CLARE-MONT’S MOTION TO RECONSIDER AND VACATE PURSUANT TO 11 U.S.C. §§ 105, 502(j) AND BANKRUPTCY RULE 9024 AND (II) DENYING FAIRPOINT’S FIRST OMNIBUS MOTION TO ESTIMATE THE MAXIMUM ALLOWED AMOUNT OF PROOFS OF CLAIM PURSUANT TO BANKRUPTCY CODE SECTIONS 105(a) AND 502(c) WITH REGARD TO THE CITIES OF CLAREMONT AND CONCORD
BURTON R. LIFLAND, Bankruptcy Judge.
Before the Court is (i) the City of Clare-mont’s Motion to Reconsider and Vacate the Court’s First Estimation Order as to Claremont Pursuant to 11 U.S.C. §§ 105, 502(j) and Bankruptcy Rule 9024 (the “Motion for Reconsideration”) and (ii) Fair-Point’s First Omnibus Motion to Estimate the Maximum Allowed Amount of Proofs of Claim Pursuant to Bankruptcy Code Sections 105(a) and 502(c) (the “First Estimation Motion”) with regard to the City of Concord (“Concord”) and the City of Claremont (“Claremont,” and together with Concord, the “Cities”). Upon consideration of the parties’ submissions and oral arguments, the Motion for Reconsideration is GRANTED and the First Estimation Motion is DENIED with regard to the Cities.
I. CLAREMONT’S MOTION FOR RECONSIDERATION
a. Factual History
Claremont acknowledges that on November 6, 2009, it received timely notice of FairPoint Communications, Inc.’s (“Fair-Point”) chapter 11 filing, as well as instructions for filing a proof of claim. See Declaration of Jane F. Taylor in Support of Creditor City of Claremont’s Motion for Reconsideration and Vacate (“Taylor Declaration”) (Dkt. No. 1701), Ex. 1, ¶ 4. On December 7, 2009, Claremont timely filed a proof of claim against FairPoint in the amount of $423,066.18.1 Claremont asserts that $422,003.88 of this total amount represented a priority claim for taxes or penalties owed to a governmental unit, of which $381,156.24 is secured by a property tax lien. The remaining $1,062.30 represented an unsecured claim against Fair-Point for property damage to city-owned property. See id., ¶¶ 5-6.
*78On June 15, 2010, FairPoint filed its First Estimation Motion seeking to, among other things, estimate the claims filed by-certain New Hampshire municipalities for property taxes allegedly owed on account of FairPoint’s use and occupation of public right-of-ways. With regard to Claremont, FairPoint objected to its proof of claim in the full amount of $423,066.18, arguing that it should be estimated only at $1,062.30, the unsecured amount based on property damage. Specifically, FairPoint argues that Claremont’s secured tax claim in the amount of $422,003.88 should be estimated at zero on the basis of, inter alia, equal protection issues pursuant to the New Hampshire State Constitution.
FairPoint’s claims agent, BMC Group, Inc. (“BMC”), filed an affidavit of service dated June 16, 2010 (“BMC Affidavit of Service”) (Dkt. No. 1486), indicating that the First Estimation Motion was served on all of the relevant New Hampshire municipalities, including Claremont. While the towns of Hinsdale, Newmarket, Raymond, Salem, Seabrook (collectively, the “Five Towns”), Conway and Concord all filed timely objections to FairPoint’s First Estimation Motion, Claremont failed to file a response before the July 8, 2010 deadline. On July 15, 2010, the Court held a hearing on the First Estimation Motion2 and on July 21, 2010, the Court entered an order that, inter alia, estimated Claremont’s claim in the unsecured amount of $1,062.30. See Order Granting FairPoint’s First Omnibus Motion to Estimate the Maximum Allowed Amount of Proofs of Claim Pursuant to Bankruptcy Code Sections 105(a) and 502(c) [hereinafter the “First Estimation Order”] (Dkt. No. 1679).
Claremont submits that it never received notice of the First Estimation Motion. See Taylor Deck, ¶ 10. The City Attorney for Claremont, Jane F. Taylor (“Taylor”) allegedly became aware of the First Estimation Motion only after counsel for another New Hampshire municipality forwarded a copy of the First Estimation Order to her by email on July 22, 2010, the day after the First Estimation Order was entered. See id., ¶ 11. Taylor declared that:
Upon receiving a copy of the [First Estimation Order], [she] undertook a diligent search of the files within Claremont’s possession related to the FairPoint bankruptcy.... and made inquiry of Ms. Pam Dyer, the city employee who sorts and distributes all mail received by Claremont.... and discovered no evidence of FairPoint’s First [Estimation] Motion having been received by Claremont.
Id., ¶ 12. In addition, Donald J. Kravet, Esq. of Kravet & Vogel, LLP, counsel for Claremont, declared that he promptly contacted counsel for FairPoint in order to reach an agreement to permit Claremont to submit its objection to FairPoint’s First Estimation Motion, though apparently such an agreement could not be reached. See Declaration of Donald J. Kravet, Esq. in Support of Creditor City of Claremont’s Motion for Reconsideration and Vacate (“Kravet Declaration”) (Dkt. No. 1701), Ex. 4, ¶ 2.
Therefore, on August 2, 2010, just 11 days after receiving notice of FairPoint’s First Estimation Motion and Order, Clare-mont filed its Motion for Reconsideration in the form of three declarations: (i) the Taylor Declaration; (ii) a declaration from Pamela Dyer,3 a clerk for the city of Clare-*79mont responsible for handling incoming mail; and the Kravet Declaration. Clare-mont attached its objection4 to the First Estimation Motion as Exhibit 1 to the Taylor Declaration. At the time that Claremont filed its objection, FairPoint had not yet filed its Omnibus Reply5 to timely-filed objections from other similarly situated New Hampshire municipalities, and a hearing on these objections had not been scheduled. In fact, FairPoint only filed its Omnibus Reply addressing the various objections of the New Hampshire municipalities on October 13, 2010, almost two and a half months after receiving the Claremont Objection.
On October 20, 2010, the Court held a hearing to consider the New Hampshire municipalities’ objections to FairPoint’s First Estimation Motion, as well as Clare-mont’s Motion for Reconsideration. Since the hearing, the dispute between Conway and FairPoint was resolved by stipulation dated January 3, 2011, as was the dispute between the Five Towns and FairPoint in a stipulation dated August 30, 2011. See Stipulation and Agreed Order Between FairPoint and Town of Conway, New Hampshire Regarding Certain Tax Claims (Dkt. No.2048); Agreed Order Resolving FairPoint’s First Omnibus Motion to Estimate the Maximum Allowed Amount of Proofs of Claim Pursuant to Bankruptcy Code Sections 105(a) and 502(c), Solely as it Relates to Proofs of Claim 4798, 5897, 5889, 5891 and 6603 (Dkt. No. 2422).
In light of the aforementioned stipulations, only FairPoint’s disputes with Clare-mont and Concord remain outstanding. The Court will address Claremont’s Motion for Reconsideration first, as it deals with the threshold question of whether Claremont’s objection may be entertained,
b. Discussion
Claremont seeks relief from the First Estimation Order pursuant to section 502(j) of the Bankruptcy Code, which permits a court to reconsider a previously disallowed claim based on the “equities of the case.” 11 U.S.C. § 502(j); see In re Enron, Inc., et al., 325 B.R. 114, 117 (Bankr.S.D.N.Y.2005). Motions for reconsideration are reviewed under Federal Rule of Civil Procedure (“Rule”) 60(b), which is made applicable to bankruptcy proceedings pursuant to Federal Rule of Bankruptcy Procedure (“Bankruptcy Rule”) 9024. In relevant part, Rule 60(b) states: “[T]he court may relieve a party or its legal representative from a final judgment, order, or proceeding for ... (1) mistake, inadvertence, surprise, or excusable neglect.” FED.R.CrvP. 60(b), (b)(1). Claremont argues that, pursuant to Rule 60(b)(1)’s “excusable neglect” standard, the Court should vacate the First Estimation Order with regard to Claremont and permit it to be heard on its objection to the First Estimation Motion.
Although the Bankruptcy Code has not defined excusable neglect, the Second Circuit in American Alliance Insurance Co. v. Eagle Insurance Co. has promulgated a three factor test to determine whether excusable neglect is present in the con*80text of a Rule 60(b) motion.6 92 F.3d 57 (2d Cir.1996); see also In re Journal Register Co., No. 09-10769, 2010 WL 5376278, at *2 (Bankr.S.D.N.Y. Dec. 23, 2010) (applying the American Alliance test where claimant moved to vacate a court order expunging a bankruptcy claim based on excusable neglect); Enron, 325 B.R. at 118 (applying the American Alliance test in deciding a motion for reconsideration under Rule 60(b)); In re Coxeter, No. 05-19146, 2009 WL 4893170, at *4 (Bankr. N.D.N.Y. Dec. 10, 2009) (“The Southern District of New York has embraced the American Alliance standard in evaluating excusable neglect in the context of reconsidering claims under § 502(j)”). The factors are: (1) whether the failure to respond was willful; (2) the existence of a meritorious defense; and (3) the degree of prejudice that the non-movant would suffer if the court granted the motion. Am. Alliance, 92 F.3d at 59.
In applying the American Alliance test, the Court finds that Claremont has satisfied its burden to establish that its failure to respond to FairPoint’s First Estimation Motion constitutes excusable neglect.
1. Willfulness
The first factor in the Second Circuit’s three-prong test is whether the movant’s default was willful. American Alliance, 92 F.3d at 59. In determining willfulness, the Second Circuit has indicated that “it will look for bad faith, or at least something more than mere negligence, before rejecting a claim of excusable neglect based on an attorney’s or litigant’s error.” Id. at 60; see also Gucci Am., Inc. v. Gold Ctr. Jewelry, 158 F.3d 631, 635 (2d Cir.1998) (contrasting “defaults caused by negligence, which may in some cases be excusable, with defaults resulting from deliberate conduct, which are not excusable.”). In American Alliance, for example, the court did not find a mail clerk’s conduct willful where the clerk mistakenly failed to relay two notices to claimant’s counsel; the Court noted that the mail clerk’s “conduct, though grossly negligent ... was not willful, deliberate or evidence of bad faith, though it weighs somewhat against granting relief.” Id. at 61-62. At bottom, the “key issue” in this district is “whether the claimant made a conscious decision to allow a hearing to go forward without a response.” In re Worldcom, Inc., No. 02-13533, 2006 WL 2400094, at *3 (Bankr.S.D.N.Y. Aug. 16, 2006).
FairPoint argues that Claremont has failed to rebut the presumption of receipt7 of the First Estimation Motion, as *81Claremont provides “no excuse for its failure to file a timely response.” Omnibus Reply, ¶ 26. FairPoint posits that “[s]uch failure rises to a level of ‘willfulness’ sufficient to find a lack of excusable neglect” under American Alliance. Id. In support, FairPoint relies on In re STN Enterprises, 94 B.R. 329 (Bankr.D.Vt.1988), for the proposition that when adequate notice has been provided and the presumption of receipt has not been rebutted, there can be no finding of excusable neglect under American Alliance due to the presence of willfulness. Omnibus Reply, ¶26, n.25. Yet, STN Enterprises, a case that predated American Alliance by eight years, does not support FairPoint’s argument. In fact, STN Enterprises did not analyze willfulness; instead, it evaluated only “(i) the adequacy of the notice provided [and] (ii) the source of the delay” in determining whether excusable neglect existed. STN Enters., 94 B.R. at 333. Accordingly, STN Enterprises is inapposite.
More importantly, however, Fair-Point’s argument is fallacious. In the instant case, even if notice was adequate and Claremont failed to rebut the presumption of receipt, there can be a finding of excusable neglect, as the Court finds that Claremont’s actions were not willful. Specifically, Claremont responded quickly after discovering the First Estimation Order, filing its Motion for Reconsideration just eleven days later. See Journal Register, 2010 WL 5376278 at *1, *3 (finding that even though claimant’s delay in responding was due to her attorney’s tardily discovering a “previously unreviewed Claim Objection” that was in his possession, the claimant did not act willfully “because she did not have actual knowledge [of the] proceeding and promptly sought relief ”) (emphasis added); see also JWP, 231 B.R. at 210, 212-213 (holding an “internal error that caused [the movant] to receive the Trustee’s notice of motion twenty-six days after [the court] heard the Trustee’s motion ... may have constituted ‘excusable neglect’ had [the movant] made a prompt motion for reconsideration,” and pointing out, “[i]t is [the movant’s] actions after he became aware of the existence of the Trustee’s motion ... that reaches the level of willfulness”) (emphasis added). In addition, there is no evidence, nor any assertion that Claremont was attempting in any way to delay the claims process or that entry of the First Estimation Order without opposition “was intended as part of some strategy or plan to advance its interests.” In re Enron, Inc., 326 B.R. 46, 52 (Bankr.S.D.N.Y.2005). Finally, it appears that had Claremont been aware of the pendency of the First Estimation Motion, it would have objected rather than allow the Court to enter an order reducing its claim by nearly half a million dollars, a large sum for a self-proclaimed small municipality. See Taylor Decl., ¶ 18; Enron, 326 B.R. at 52 (finding that “had the University been aware of the pendency of the Objection to the Claim, it would have responded to the Objection rather than allow the Court to enter the Order expunging the Claim without opposition.”). At worst, therefore, Claremont’s conduct may have been the product of some carelessness, even gross negligence, but it does not rise to the level of willfulness, as it was not deliberate or carried out in bad faith.
2. Meritorious Defense
The second factor in the Second Circuit’s three-prong test is whether the movant has a legally supportable defense or position within the underlying litigation. Am. Alliance, 92 F.3d at 61. In determining whether a defense is meritorious, the Second Circuit has held that such defense “need not be ultimately persuasive at this stage.” JWP Info. Servs., 231 B.R. at 213 *82(citing Am. Alliance, 92 F.3d at 61). Rather, “[a] defense is meritorious if it is good law so as to give the factfinder some determination to make.” Id.
In the instant case, there is adequate evidence to support the idea that Clare-mont has a viable claim. FairPoint argues that Claremont’s tax claims should be estimated at zero because it has violated the New Hampshire State Constitution by imposing property taxes only against Fair-Point and not against other similarly-situated utilities. In support, FairPoint relies on the case of Verizon New England, Inc. v. City of Rochester, 156 N.H. 624, 940 A.2d 237 (2007) and argues that it is clear and settled New Hampshire Supreme Court precedent. It is unclear, however, whether Rochester is applicable here. For example, while in Rochester the town of Rochester only imposed taxes on Verizon for its use of the municipal right-of-way but did not impose taxes on all utilities for their use of the same, Claremont posits that it taxes all utilities that use its public ways. In support of this argument, Claremont submitted the tax cards for each utility that uses public right-of-ways in Claremont and the corresponding assessment value for the right-of-way use tax. See Claremont Objection, Ex. B. If true, FairPoint’s equal protection argument against Claremont would likely fail. Therefore, under American Alliance, Claremont has a meritorious defense to FairPoint’s First Estimation Motion and this factor weighs in favor of Claremont.
3. Prejudice
The third and final factor in the Second Circuit’s three-prong test is the amount of prejudice that granting the Motion for Reconsideration would cause the debtor. Am. Alliance, 92 F.3d at 59. As a general rule, “mere delay is not sufficient to demonstrate a sufficient level of prejudice.” Enron, 326 B.R. at 53 (citations omitted). The Bankruptcy Court for the Southern District has broadened the definition of prejudice to include consideration of prejudice to the bankruptcy estate, as well as the debtor. Id. (“[A] court should consider the impact that the granting of relief may have on the administration of the bankruptcy case, specifically, on the claims adjudication process.”).
In the instant case, all things considered, granting the Motion for Reconsideration would cause only a minimal amount of prejudice to FairPoint. FairPoint had the opportunity to litigate Claremont’s Objection to its First Estimation Motion before this Court: FairPoint filed its Omnibus Reply only after Claremont filed its Motion for Reconsideration (and its accompanying objection) and a hearing addressing all of the New Hampshire municipalities’ objections, including the Claremont Objection, was held on October 20, 2010. Further, FairPoint is not prejudiced because (i) it can still litigate Claremont’s tax claims in the Claremont state court, an obligation it faced before Claremont’s claim was estimated at $1,062.30, and (ii) FairPoint has not established that any additional obligation or harm would arise from granting Claremont’s Motion for Reconsideration. The prejudice here could be the ramifications to the efficiency and finality of the claims adjudication process if Claremont is excused for not responding to a document that was timely served upon it. The Court finds, however, that this policy concern is lessened by, inter alia, the timing of Claremont’s reaction to correct its mistake, its attempts to reach out to FairPoint to reach an agreement to allow Claremont to file its objection, and the absence of demonstrated specific prejudice to Fair-Point regarding the Claremont tax claims.
If the Motion for Reconsideration were not granted, on the other hand, there *83would be great prejudice to Claremont since it would lose the opportunity to litigate its half a million dollar claim against FairPoint, a substantial sum for a self-described small municipality. See Taylor Decl., ¶ 18. The Court finds that denying the Motion for Reconsideration would significantly prejudice Claremont. Thus, this element weighs in favor of Claremont.
At bottom, the Court generally disfavors defaults and prefers to have matters resolved on their merits. See Brien v. Kullman Indus., Inc., 71 F.3d 1073, 1077 (2d Cir.1995). Indeed, courts resolve any doubts in favor of the movant to increase the chances that disputes will be adjudicated on their merits. See Pecarsky v. Galaxiworld.com Ltd., 249 F.3d 167, 172 (2d Cir.2001) (citations omitted). The equities in this case and the application of the Second Circuit’s American Alliance factors weigh in favor of Claremont. In light of the foregoing, Claremont’s Motion for Reconsideration of the First Estimation Order is GRANTED. Accordingly, the First Estimation Order with regard to Claremont should be vacated and Clare-mont’s claim should be restored to the claims registry.
II. FAIRPOINT’S FIRST ESTIMATION MOTION
As Claremont’s Motion for Reconsideration is granted, the objections of both Concord and Claremont to FairPoint’s First Estimation Motion are currently before the Court.
a. Factual History
i. State Court Litigations
Concord and Claremont timely filed proofs of claim8 in this Court for assessed real property taxes (the “Taxes” or “Tax Claims”) on FairPoint’s use and occupancy of the right-of-way pursuant to New Hampshire statute RSA 72:6 (“All real estate, whether improved or unimproved, shall be taxed except as otherwise provided”) and RSA 72:23, 1(b), which provides:
All leases and other agreements, the terms of which provide for the use or occupation by others of real or personal property owned by ... a city [or] town ... shall provide for the payment of properly assessed real and personal property taxes by the party using or occupying said property....
RSA 72:23,1(b).
With regard to Concord, the Tax Claims are the subject of a series of tax abatement actions (the “Concord State Court Litigation”) between FairPoint (and its predecessor in interest, Northern New England Telephone Operations, LLC and other predecessors in interest where applicable) and Concord dating back over ten years to May 2000, and which are currently pending in the Merrimack County Superior Court in Concord, New Hampshire (the “Concord State Court”). In the Concord State Court Litigation, FairPoint challenges its duty to pay the taxes based upon, inter alia, alleged violations of the Equal Protection Clause of the New Hampshire State Constitution. On April 15, 2010, the Concord State Court set a trial date for November 15, 2010 and, at the request of FairPoint and Concord, continued the Concord State Court Litigation until July 30, 2010.
With regard to Claremont, FairPoint filed two petitions for abatement of the *84Tax Claims against Claremont in the New Hampshire Superior Court, Sullivan County (the “Claremont State Court”) titled Northern New England Telephone Operations LLC, d/b/a FairPoint Communications v. City of Claremont, Dkt. Nos. 08-E-0036 and 07-E-0058 (the “Claremont State Court Litigation”), which were consolidated on December 15, 2008. In the Claremont State Court Litigation, as in the Concord State Court Litigation, Fair-Point challenges its duty to pay the taxes based upon, among other things, alleged violations of the Equal Protection Clause of the New Hampshire State Constitution.
Both the Concord and the Claremont State Court Litigations have been consensually stayed pending resolution of Fair-Point’s First Estimation Motion. Specifically, on January 7, 2011, FairPoint and Concord mutually agreed to continue the Concord State Court Litigation, “pending notification from the parties regarding resolution of the pleadings pending before the bankruptcy court.” See Assented-To Motion To Continue Action And Vacate Structuring Conference Scheduled For January 18, 2011 (the “Consensual Motion”), ¶ 3 (Merrimack Superior Court, Dkt. No. 217-2010-CV-00578); Notice of Decision, dated January 10, 2011, Judge McNamara (granting the Consensual Motion). Likewise, on September 9, 2009, the Claremont State Court Litigation was stayed by motion on consent pending resolution of Fair-Point’s First Estimation Motion before this Court. See Claremont Objection, If 29, n.4.
ii. FairPoint’s First Estimation Motion
On June 15, 2010, FairPoint filed its First Estimation Motion requesting that this Court assert jurisdiction over the Cities’ Tax Claims, which are already the subject of state court litigations, by finding that (i) Concord’s proofs of claim for the underlying Taxes should be estimated at $0 and (ii) Claremont’s proof of claim should be estimated only at $1,062.30. FairPoint argues for such an estimation because the Cities allegedly violated Fair-Point’s equal protection rights under the New Hampshire State Constitution through disparate taxation. In support of this argument, FairPoint looks to precedent from the highest state court in New Hampshire involving its predecessor-in-interest, Verizon. See Rochester, 156 N.H. at 630-32, 940 A.2d 237.
In opposition, the Cities request, inter alia,9 that the Court permissively abstain from asserting jurisdiction over their respective Tax Claims, as the merits should be determined in the state court litigations currently pending in the New Hampshire state courts.10
b. Discussion
Even though “core” jurisdiction was conferred on this Court when the Cities filed *85their proofs of claim against the estate,11 good cause exists to permissively abstain from considering their Tax Claims to permit the state courts to conclude their adjudication of those claims. 28 U.S.C. section 1834(c)(1) refers to comity with “State courts” and respect for “State law” and provides that a court may, “in the interest of justice, or in the interest of comity” abstain from hearing a particular proceeding “arising under title 11 or arising in or related to a case under title 11.” This section “demonstrates the intent of Congress that concerns of comity and judicial convenience should be met, not by rigid limitations on the jurisdiction of federal courts, but by the discretionary exercise of abstention when appropriate in a particular case.” Cody, Inc. v. County of Orange (In re Cody, Inc.), 281 B.R. 182, 190 (S.D.N.Y.2002) (quotations and citations omitted); see also Luan Inv. S.E. v. Franklin 145 Corp. (In re Petrie Retail, Inc.), 304 F.3d 223, 232 (2d Cir.2002) (“Permissive abstention from core proceedings under 28 U.S.C. § 1334(c)(1) is left to the bankruptcy court’s discretion.”) (citations omitted).
When deciding whether to exercise discretion to permissively abstain from hearing a matter, bankruptcy courts generally consider one or more (although not necessarily all) of the following twelve factors: (1) the effect of abstention, or lack thereof, on the efficient administration of the estate; (2) the extent to which state law issues predominate; (3) the difficult or unsettled nature of the applicable state law; (4) the presence of a related proceeding commenced in state court or another non-bankruptcy forum; (5) whether there is a basis for federal jurisdiction apart from the debtor’s bankruptcy filing; (6) the degree of relatedness or remoteness of a proceeding to the main bankruptcy case; (7) the substance, rather than form, of the asserted “core” proceeding; (8) the feasibility of severing state law claims; (9) the burden on the court’s docket; (10) the likelihood that commencement of the proceeding in bankruptcy court involves forum shopping; (11) the existence of a right to jury trial; and (12) the presence in the proceeding of non-debtor parties. Cody, 281 B.R. at 190-91; In re New York City Off-Track Betting Corp., 434 B.R. 131, 147 (Bankr.S.D.N.Y.2010) (citing In re Ephedra Prods. Liab. Litig., No. 04-MD-1598, 2010 WL 882988, at *2 n. 2 (S.D.N.Y. Mar. 8, 2010)); Bickerton v. Bozel, S.A. (In re Bozel S.A.), 434 B.R. 86, 102 (Bankr. S.D.N.Y.2010); see also AEG Liquidation Trust v. Toobro (In re Am. Equities Group, Inc.), 460 B.R. 123 (Bankr. S.D.N.Y.2011) (using similar analysis of these factors in the context of remand).
In the instant case, the above-enumerated factors greatly militate in favor of permissive abstention, especially factors 1 through 4, 6 and 8.
Effect of abstention, or lack thereof, on efficient administration of estate (Factor # 1)
One relevant factor is the effect that abstention would have on the efficient administration of the estate. Here, the *86Court’s abstention would not amount to abdication of any critical role in the administration of the estate. A plan has already been confirmed and at least with regard to Concord, FairPoint has reserved the full value of Concord’s priority tax claims.12 Accordingly, the Court finds that this factor weighs in favor of abstention.
Extent to which state law issues predominate (Factor # 2)
A second relevant factor is the extent to which state law issues predominate over bankruptcy issues with regard to the Cities’ Tax Claims. Any dispute between FairPoint and the Cities relies on state taxation law and requires the application of the New Hampshire State Constitution. Moreover, the outcome of this case will have a precedential effect in New Hampshire for future equal protection challenges to a municipality’s taxation of similarly situated entities. As state law issues clearly predominate, New Hampshire has a strong interest in interpreting its own laws and setting precedent in a state constitutional area of law. Adjudication of the Cities’ Tax Claims is therefore more appropriately left to the New Hampshire state courts. Accordingly, this factor also weighs in favor of abstention.
The difficult or unsettled nature of the applicable state law (Factor # 3)
A third relevant factor is the difficulty or unsettled nature of the applicable state law. FairPoint relies on the Rochester case in support of its First Estimation Motion, arguing that it is clear, settled New Hampshire Supreme Court precedent that this Court can, and should, interpret. In Rochester, the New Hampshire Supreme Court determined that telephone companies using a right-of-way should be assessed the same tax as any other parties using the same. Rochester, 156 N.H. at 630-31, 940 A.2d 237. The court found that the city of Rochester selectively imposed the tax on Verizon without providing a legitimate state interest, and therefore the city’s taxing scheme was discriminatory and in violation of the Equal Protection Clause of the New Hampshire State Constitution.
Concord, however, contends that Rochester is inapposite for a variety of reasons. For example, in Rochester, the New Hampshire Supreme Court found that the city failed to provide a “rational reason” or “any legitimate governmental interest” to justify its selective taxation of Verizon and no other public utility. Id. at 631, 940 A.2d 237. In contrast, Concord posits that it has a legitimate governmental interest in not taxing the cable company in order to maintain the “free” services the company provides to it, including considerable monetary and multi-media benefits. Further, in Rochester, the court struck, in their entirety, the taxes Rochester had imposed against Verizon for the years in question because the city of Rochester erred by taxing Verizon but not any of the other public utilities for their use and occupation of the same right-of-way. Id. at 630-32, 940 A.2d 237. Here, however, Concord asserts that striking the tax of FairPoint and all the other public utilities would not be a viable remedy. Concord taxes every public utility except the cable company. To the extent a court finds that the cable company should be taxed, Concord argues that the remedy must be prospective, not retrospective. Accordingly, Concord would tax the cable company on a going forward basis, not undo the taxes imposed *87on FairPoint and all the other public utilities.
Claremont likewise argues that the Rochester case is inapplicable. For example, Claremont asserts that unlike the town of Rochester that taxed only Verizon for its use of the right-of-way and failed to tax all other utilities that used that right-of-way, Claremont taxes all utilities that use its public ways and therefore there is no disparate tax treatment. If correct, FairPoint’s equal protection argument against Claremont would likely fail.
In light of the foregoing, the applicable state law is unsettled. The New Hampshire state courts are in a far better position than this Court to interpret the parameters and establish fitting remedies for violations of the Equal Protection Clause of the New Hampshire State Constitution. Accordingly, this factor likewise weighs in favor of abstention.
Presence of a related proceeding commenced in another non-bankruptcy forum (Factor # 4)
A fourth relevant factor is whether there is a related proceeding pending in the state court or another non-bankruptcy forum. Here, the Concord and Claremont State Court Litigations have been pending for a number of years in the New Hampshire state courts, wherein the court is trying the same taxation and constitutional issues that FairPoint seeks to have adjudicated here in the form of an estimation motion. Since an alternate, more appropriate forum exists for adjudication of the Cities’ Tax Claims, this factor weighs in favor of abstention.
Degree of relatedness or remoteness of proceeding to main bankruptcy case (Factor # 6)
A fifth relevant factor is the extent to which this action is related to or remote from the main bankruptcy case. As of the filing of FairPoint’s Omnibus Reply, more than 8,000 claims had been filed in this case. The Cities’ Tax Claims represent only a tiny fraction of the total claims in this bankruptcy and therefore proceedings regarding these claims are remote from these bankruptcy cases, which have already been confirmed. Accordingly, this factor weighs in favor of abstention.
Feasibility of severing state law claims (Factor # 8)
A sixth relevant factor is whether the state law claims asserted here may be severed from the core bankruptcy matters, so that judgment may be entered in state court with enforcement to be carried out in this forum. It is feasible and appropriate to sever the state law claims from core bankruptcy matters to allow judgments to be entered in the New Hampshire state courts, especially given (i) the modest amount of the Cities’ Tax Claims relative to FairPoint’s billion dollar reorganization, (ii) the fact that, at least with respect to Concord, FairPoint has already reserved the necessary funds to satisfy these claims, and (iii) the Concord and Claremont State Court Litigations are pending and awaiting trial. With respect to Concord, a trial date has already been set by the New Hampshire State Court. Indeed, counsel for Concord stated at oral argument that the parties “were on schedule for summary judgment motions to be filed in Merrimack County Superior Court and on trial for a final hearing on the merits [on November 15, 2010].... The court in Merrimack County is ready, willing and able to hear our case upon our notice.” See Transcript of October 20, 2010 Hearing, p. 40, lines 6-12-13. The Claremont State Court Litigation is also awaiting adjudication pending resolution of FairPoint’s First Estimation Motion. Accordingly, this factor also weighs in favor of abstention.
*88For the foregoing reasons, the Court finds that the relevant factors weigh heavily in favor of this Court exercising its discretion to permissively abstain from adjudicating the Cities’ Tax Claims. At bottom, these chapter 11 cases are at an advanced stage, having already been confirmed, and adjudication of these Tax Claims will not threaten the efficient administration of the estates, especially since, at least with respect to Concord, FairPoint has already set aside the necessary reserve to cover its priority tax claims. Indeed, there is little left for this Court to do. The only remaining issues require application of New Hampshire state laws and interpretation of the New Hampshire State Constitution. As such, this matter is more appropriately left to the New Hampshire state courts, where proceedings regarding these claims have been pending for a number of years. Accordingly, the Court hereby permissively abstains from considering the Cities’ Tax Claims.
CONCLUSION
In light of the foregoing, Claremont’s Motion for Reconsideration is GRANTED. The Clerk of the Court is directed to vacate the First Estimation Order with regard to Claremont (Dkt. No. 1679, Ex. C, Claim Number 355) and restore Clare-mont’s claim to the claims registry.
In addition, FairPoint’s First Estimation Motion is DENIED with regard to Concord and Claremont and the Court abstains from considering the Cities’ Tax Claims. Accordingly, the parties are free to proceed with their respective state court litigations.
IT IS SO ORDERED.
. It appears that the total amount of Clare-mont’s proof of claim is $423,066.18 and not “$423,096.186," as stated in the Taylor Declaration, as the sum of $422,003.88 and $1,062.30 is $423,066.18. See Taylor Decl., ¶ 6.
. At the hearing, the Court did not address the objections to FairPoint’s First Estimation Motion submitted by the Five Towns, Conway or Concord.
. Declaration of Pamela Dyer in Support of Creditor City of Claremont’s Motion to Reconsider and Vacate (Dkt. No. 1701), Ex. 3.
. Objection of the City of Claremont to Fair-Point's First Omnibus Motion to Estimate the Maximum Allowed Amount of Proofs of Claim Pursuant to Bankruptcy Code Sections 105(a) and 502(c) [hereinafter the "Claremont Objection”] (Dkt. No. 1701).
. FairPoint’s Omnibus Reply to (I) Objections to FairPoint’s First Omnibus Motion to Estimate the Maximum Allowed Amount of Proofs of Claim Pursuant to Bankruptcy Code Sections 105(a) and 502(c) Filed by the Towns of Seabrook, Salem, Raymond, Hinsdale, New-market and the City of Concord; and (II) City of Claremont’s Motion to Reconsider and Vacate Pursuant to 11 U.S.C. §§ 105, 502(j) and Bankruptcy Rule 9024 [hereinafter the “Omnibus Reply”] (Dkt. No. 1804).
. Although it is appropriate to construe excusable neglect under the American Alliance test, it is also fitting to do so under the less lenient Pioneer test. See In re JWP Info. Servs., Inc., 231 B.R. 209, 211-12 (Bankr.S.D.N.Y.1999) (noting the potential application of the less lenient Pioneer test but ultimately applying the American Alliance test). However, given that briefing before this Court has involved argumentation only under American Alliance, the Court will apply that standard to determine the issue.
. The presumption of receipt or the common law "mailbox rule” states that a properly directed letter proven to have been delivered to either the post office or the mail carrier, and not returned to the sender, is presumed to have reached its destination at the regular time and been received by the person to whom it was addressed. Hagner v. U.S., 285 U.S. 427, 430, 52 S.Ct. 417, 76 L.Ed. 861 (1932) (citations omitted). This presumption of receipt is “very strong” and "can only be rebutted by specific facts and not by invoking another presumption and not by a mere affidavit to the contrary.... Evidence of an objective nature going beyond the claimant's statement of non-receipt is necessary.” In re Dana Corp., No. 06-10354(BRL), 2007 WL 1577763, at *4 (Bankr.S.D.N.Y. May 30, 2007) (citations omitted).
. Concord asserts that it filed proofs of claims totaling $205,682.38 (claim numbers 362-382). See City of Concord New Hampshire's Objection to FairPoint’s First Omnibus Motion to Estimate the Maximum Allowed Amount of Proofs of Claim Pursuant to Bankruptcy Code Sections 105(a) and 502(c) [hereinafter “Concord Objection”] (Dkt. No. 1616), ¶ 2.
. The Cities make a number of other arguments in opposition to FairPoint’s First Estimation Motion, including that (i) Rochester is inapposite and distinguishable on its facts; (ii) pursuant to section 502(c) of the Bankruptcy Code, estimation is inappropriate because their Tax Claims are not contingent, as they were assessed and due and not dependent on the occurrence of any future event; (iii) FairPoint is judicially estopped from requesting that this Court make a determination on the merits of FairPoint’s action against Concord in the Concord State Court; and (iv) the automatic stay is inapplicable to the claims asserted by FairPoint against it in the state court litigations. As discussed below, this Court will permissively abstain from adjudicating the Cities’ Tax Claims, thereby obviating the need to address these or any other arguments.
. See 28 U.S.C. § 157(b)(2)(B) (conferring on the court jurisdiction "over allowance or disallowance of claims against the estate”); see also Gulf States Exploration Co. v. Manville Forest Prods. Corp. (In re Manville Forest Prods. Corp.), 896 F.2d 1384, 1390 (2d Cir. 1990) ("The determination of the objection to and allowance of [the applicant's] claim is clearly within the traditional core jurisdiction of the bankruptcy court.”); Enron Corp. v. Citigroup, Inc. (In re Enron Corp.), 349 B.R. 108, 112 (Bankr.S.D.N.Y.2006) ("When a creditor files a proof of claim, the bankruptcy court has core jurisdiction to determine that claim.”).
. According to Concord, as of the filing of their objection on July 8, 2010, FairPoint has challenged the taxes owed to Concord through the 2010 tax year and has not paid taxes on the assessed properties subject to these tax abatement actions. See Concord Objection, ¶ 6.
. Counsel for FairPoint has orally represented to the Court that FairPoint has reserved the full value of Concord’s priority tax claims. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494445/ | OPINION1
BRENDAN LINEHAN SHANNON, Bankruptcy Judge.
Before the Court is Indianapolis Downs, LLC’s (“Indianapolis Downs” or the “Debtor”) motion for a determination of the legality of certain taxes under § 505(a) of the Bankruptcy Code2 (the “Tax Motion”).3 This contested matter4 presents a dispute between Indianapolis Downs, a corporate debtor in the gaming industry, and the Indiana Department of Revenue (the “Department”),5 a state taxing authority. The parties disagree over whether an Indiana tax reaches all, or only part, of the Debtor’s revenue from slot-machine wagering. The Debtor claims the latter, arguing that the tax does not extend to slot-machine revenue that it must, by statute, transfer to third parties. The Department insists, however, that the tax extends to all slot-machine receipts, without exception. The Department also challenges the Court’s jurisdiction over this dispute on the basis of sovereign immunity, the Tax Injunction Act, and various abstention doctrines.
The Court concludes that it has jurisdiction and that the Debtor’s view of the Indiana tax is correct. First, jurisdiction lies because § 505(a) of the Bankruptcy Code gives the Court the express authority *109to determine the Debtor’s tax obligations. Second, the state tax does not reach the slot-machine revenues that the Debtor must set aside for others because the Debtor acts as a mere conduit for those funds; that is, it cannot use and does not enjoy the benefits of that money. The Court will grant the Tax Motion.
I. BACKGROUND
Indianapolis Downs, a debtor in these chapter 11 cases, operates a combined horse racing track and casino — “racino,” for short — in Shelbyvillé, Indiana. It employs over 1,000 people and provides its patrons a wealth of wagering options. In addition to betting on horse races, visitors to Indianapolis Downs can try their luck at roughly two thousand electronic wagering games, including slot machines. The games are available at Indianapolis Downs thanks to a 2007 law (as codified at Ind. Code § 4-35-1-1 et seq. (2011), the “Raci-no Statute”) that extended the privilege of operating slot machines beyond riverboat casinos, where they had been on offer since 1993, to the state’s horse racing tracks. Under the statute, two tracks may be licensed to run racinos; the Debtor is one of them.6 As a licensee, the Debtor is subject to all of the Racino Statute’s provisions, two of which give rise to this dispute.
The Graduated Tax: The Racino Statute imposes a graduated tax (the “Graduated Tax”) on the adjusted gross receipts (“AGR”) that the Debtor receives from slot-machines wagering.7 Id. § 4-35-8-1(a) (the “Graduated Tax Provision”). AGR includes “all cash and property ... received by a” racino from slot-machine wagering, minus what is “paid out to patrons as winnings” and certain “uncollectible” amounts. Id. § 4-35-2-2. Depending on how much AGR the Debtor takes in each year, the Graduated Tax rate ranges from 25% (on the first $100 million of AGR) to 35% (on AGR above $200 million). Id. § 4-35-8-1(a)(1)-(3). After applying the proper rate, the Debtor remits what it owes to the Department “before the close of ... business” the next day. Id. § 4-35-8-1(b).
The Set-Aside Funds: In addition to paying the Graduated Tax, the Debtor must, each month, “distribute” 15% of its slot-machine AGR (the “Seb-Aside Funds”) to various third parties, as detailed in the Racino Statute and its implementing regulations. Id. § 4-35-7-12(b) (the “Set-Aside Funds Provision”); 71 Ind. Admin. Code 1-1-1 et seq (2011).
• The first $1.5 million of Set-Aside Funds goes to “the treasurer of the state for deposit in the Indiana tobacco master settlement agreement fund[.]” Ind.Code § 4-35-7-12(b).
• The next $250,000 goes to “the Indiana horse racing commission, for deposit in the gaming integrity fund[.]” Id.
• Funds beyond that go to horse racing purse trust accounts and to various horsemen’s associations to “promot[e] the equine industry or equine welfare^] or for a benevolent purpose that ... is in the best interests of horse racing in Indiana.” Id. § 4-35-7-12(b), (c); see 71 Ind. Admin. Code 4-2-7.
*110• Finally, after the Debtor makes all of those distributions, and if certain statutory caps are met, any remaining Set-Aside Funds are deposited in Indiana’s general fund. Ind.Code § 4 — 35—7—12(j).8
For as long as it has been a racino, Indianapolis Downs has calculated and paid the Graduated Tax on its slot-machine AGR without excluding the Seh-Aside Funds. For instance, in the 2011 fiscal year, it paid Indiana approximately $69 million in Graduated Tax, of which $10.4 million represented taxes paid on the Set-Aside Funds. The Debtor objects to the $10.4 million payment, arguing that because it is statutorily obliged to distribute the Seh-Aside Funds to others, it never actually “receives” that money.9
In November 2010, five months before filing for bankruptcy, Indianapolis Downs filed a timely claim with the Department seeking a refund of all taxes it had paid to that point on the Seh-Aside Funds. The Department denied the claim and the Debtor appealed. On August 31, 2011, it lost the initial appeal at the administrative level.
Meanwhile, in April 2011, Indianapolis Downs voluntarily entered bankruptcy.10 Three months later, it filed the Tax Motion, asking the Court to enter an order under § 505(a)(1) of the Bankruptcy Code “declaring that the Debtor need not include the 15% Set-Aside [F]unds in its calculation and payment of the Graduated Tax.”11 Significantly, the Debtor does not use the Tax Motion to request a refund for the taxes it has already paid — the issue on which it lost its initial appeal in August. Rather, the relief sought in the Tax Motion is limited to fixing the Debtor’s present and future tax obligations. The Department objected to the Tax Motion12 and, following the Debtor’s reply,13 the Court heard oral argument.14 Because the Department has lodged several challenges to the Court’s jurisdiction, the Court’s analysis begins there, and then proceeds to the merits.
II. LEGAL ANALYSIS
A. The Department Challenges the Court’s Jurisdiction
The Department first contends that either sovereign immunity or the Tax Injunction Act, 28 U.S.C. § 1341, operate to shield it from the Court’s jurisdiction. But if the Court finds it has jurisdiction, the Department asks the Court to abstain *111from hearing this dispute and allow an Indiana state court to decide it. The Court has carefully considered the Department’s arguments but rejects them.
The Court plainly has jurisdiction over the parties and the subject matter of the pending Tax Motion. Jurisdiction flows from § 505(a) of Bankruptcy Code, which provides, in relevant part:
[T]he court may determine the amount or legality of any tax, any fíne or penalty relating to a tax, or any addition to tax, whether or not previously assessed, whether or not paid, and whether or not contested before and adjudicated by a judicial or administrative tribunal of competent jurisdiction.
The Third Circuit has “consistently interpreted § 505(a) as a jurisdictional statute that confers on the bankruptcy court authority to determine certain tax claims.” City of Perth Amboy v. Custom Distrib. Servs. (In re Custom Distrib. Servs.), 224 F.3d 235, 239-40 (3d Cir.2000); Quattrone Accountants, Inc. v. IRS, 895 F.2d 921, 923 (3d Cir.1990) (“Section 505 was intended to clarify the bankruptcy court’s jurisdiction over tax claims.”). Though the statute does not specify that this authority extends to determinations of state tax claims, “courts have interpreted the statute to cover them.” In re Stoecker, 179 F.3d 546, 549 (7th Cir.1999) (citations omitted) (Posner, J.), aff'd on other grounds sub nom. Raleigh v. Ill. Dep’t of Revenue, 530 U.S. 15, 120 S.Ct. 1951, 147 L.Ed.2d 13 (2000). Congress gave bankruptcy courts this broad power under § 505 to promote prompt and centralized estate administration; that is, to avoid making the estate “litigate the tax or assessment in several state jurisdictions.” In re Cable & Wireless USA, Inc., 331 B.R. 568, 575 (Bankr.D.Del.2005).
1. The Department’s Sovereign Immunity Defense Has No Bearing on the Court’s Jurisdiction
Despite the above authority supporting the Court’s jurisdiction, the Department challenges it by invoking sovereign immunity. That argument, grounded in the Eleventh Amendment of the U.S. Constitution,15 starts from the premise that the Tax Motion is injunctive in nature because it is aimed at “regulat[ing] the future interactions between [Indianapolis Downs] and ... Indiana,” not at “adjudicating ... property of the[ ] estate[ ].” 16 Injunctive relief, the Department argues, requires that the Court have personal (in personam) jurisdiction over the party to be enjoined. But because “[b]ankruptcy courts lack in personam jurisdiction over sovereign states,” the Department concludes that “the relief requested ... is barred.” 17
The Court finds that the Department’s initial premise is mistaken. The Tax Motion—without question—“asks this Court to adjudicate issues concerning the property” 18 of the Indianapolis Downs estate. In bankruptcy, property of the estate includes a debtor’s interest in property acquired after the bankruptcy case begins. 11 U.S.C. § 541(a)(7). So as the Debtor generates revenue post-petition, the revenue becomes property of the estate. Up to now, the Debtor’s estate has, each day, *112paid a portion of that revenue (i.e., that property) over to the Department in the form of the Graduated Tax on the Set-Aside Funds. The Tax Motion asks the Court to determine whether the estate must keep making those payments. If the Debtor prevails and the Court finds the payments need not be made, then the amount of money in the estate will increase — perhaps by quite a lot.19 If the Department prevails, the amount will decrease. Thus, a ruling on the Tax Motion would directly affect the property of the Debtor’s estate.
The Court’s power to “adjudicate issues” involving property of the estate stems from its in rem jurisdiction over the bankruptcy estate, not, as the Department suggests, its in personam jurisdiction over Indiana. See Tenn. Student Assistance Corp. v. Hood, 541 U.S. 440, 447, 124 S.Ct. 1905, 158 L.Ed.2d 764 (2004) (In bankruptcy, “the court’s jurisdiction is premised on the debtor and his estate, and not on the creditors.”); In re Pa. Cent. Brewing Co., 135 F.2d 60, 64 (3d Cir.1943) (“A proceeding in bankruptcy is a proceeding in rem against the [debtor’s] estate.... As such the entire estate is within the jurisdiction of the bankruptcy eourt[,] which must dispose of the entire estate and not only the portion or portions thereof to which particular [creditors] may lay claim or be entitled.”); United States v. Crookshanks, 441 F.Supp. 268, 270 (D.Or.1977) (“An example of the in rem jurisdiction of the federal courts is that of bankruptcy, in which the ability of nonparty creditors to enforce their rights is restricted. The res in bank ruptcy is the estate of the bankrupt.”). Jurisdiction in rem encompasses “a court’s power to adjudicate the rights to a given piece of property,” Black’s Law Dictionary 929 (9th ed. 2009), even if the court does not have in personam jurisdiction over all the parties affected by that adjudication.
State sovereign immunity is waived when a bankruptcy court exercises its in rem jurisdiction. Justice Stephens, writing for the Supreme Court in Central Virginia Community College v. Katz, 546 U.S. 356, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006), concluded that “[i]n ratifying the bankruptcy clause, the states acquiesced in subordination of whatever sovereign immunity they might otherwise have asserted in proceedings necessary to effectuate the in rem jurisdiction of the bankruptcy courts.” Id. at 378, 126 S.Ct. 990. The Court also noted that “exclusive jurisdiction over all of the debtor’s property, [and] the equitable distribution of that property among the debtor’s creditors” is a “[c]ritical featuref ] of every bankruptcy proceeding.” Id. at 363-64, 126 S.Ct. 990. Thus, when the a bankruptcy court acts in conformity with its in rem jurisdiction, “its exercise [of jurisdiction] does not, in the usual case, interfere with state sovereignty even when State’s interests are affected.” Id. at 370, 126 S.Ct. 990 (quotations omitted).
In sum, because the Court has in rem jurisdiction over the Debtor’s estate — the subject matter of the Tax Motion — its purported lack of in personam jurisdiction over Indiana is a nonissue.20
*1132. The Tax Injunction Act Does Not Bar the Court from Exercising Jurisdiction
The Department’s next argument, that the Tax Injunction Act (“TIA”) “bars injunctive relief by this Court,”21 is both factually and legally misplaced. The TIA states that federal courts cannot “enjoin, suspend or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.” 28 U.S.C. § 1341. As a matter of fact, nowhere does the Tax Motion refer to an “injunction,” or any variation of the term. Rather, it asks for “an order declaring that [Indianapolis Downs] need not include the 15% Set-Aside Funds in its calculation and payment of the Graduated Tax.”22 (Emphasis added). Such relief is neither inappropriate nor unusual in the § 505 context. A treatise notes that “declaratory relief may be obtained” under § 505(a)(1) “to accelerate the[] [Court’s] determinationf ]” of the amount or legality of the challenged tax. 1 Collier on Bankruptcy ¶ 3.09[3] (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2011). In fact, the Declaratory Judgment Act, which empowers courts to declare parties’ rights in certain situations, specifically contemplates determinations under § 505 within that power, at least as to federal taxes. See 28 U.S.C § 2201(a) (“In a case of actual controversy within its jurisdiction, except with respect to Federal taxes other than ... a proceeding under section 505 ... of title 11, ... 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.”) (emphasis added).
Moreover, as a matter of law, many courts — including the Third Circuit — have concluded that the TIA does not affect a bankruptcy court’s subject matter jurisdiction under § 505. See Baltimore Cnty. v. Hechinger Liquidation Trust (In re Hechinger Inv. Co. of Del., Inc.), 335 F.3d 243, 247 n. 1 (3d Cir.2003) (“It is well established ... that the Tax Injunction Act does not prevent a Bankruptcy Court from enforcing the provisions of the Bankruptcy Code that affect the collection of state taxes.”); In re Plymouth House Health Care Ctr., Inc., Bankr.No. 03-19135F, 2004 Bankr.LEXIS 2616, at *5-8 (Bankr.E.D.Pa. Sept. 10, 2004) (holding bankruptcy court subject matter jurisdiction under 11 U.S.C.S. § 505(a) not affected by the provisions of the Tax Injunction Act). Though “the jurisdictional bar of the TIA is indeed broad,” Pontes v. Cunha (In re Pontes), 310 F.Supp.2d 447, 453 (D.R.I. 2004), § 505 reflects, in clear terms, Congress’ choice to allow bankruptcy courts to determine a debtor’s tax liability. See Daniels v. Cnty. of Chester (In re Daniels), 304 B.R. 695, 700 (Bankr.E.D.Pa. 2003) (“To the extent that a bankruptcy court must determine a debtor’s tax liability in an area where such a determination may otherwise be barred by the Tax Injunction Act, the overwhelming majority view is that Congress expressly conferred jurisdiction on bankruptcy courts to do so in § 505 of the Code.”). Giving bankruptcy courts that authority helps “finalize the estate and move the bankruptcy case to closure.” In re Pontes, 310 F.Supp.2d at 453. Otherwise, if courts “had to abstain pending a determination of [tax] liability in state court — bankruptcy proceedings *114would be even more protracted than they are.” In re Stoecker, 179 F.3d at 549. Put simply, because § 505 is an exception to the TIA, the act does not impair the Court’s exercise of jurisdiction over this proceeding.
3. The Court Need Not, and Will Not, Abstain
The Department’s next argument, that the Court must (or at least should) abstain from deciding the Tax Motion, also fails to persuade; the Court will not abstain. Under 28 U.S.C. 1334(c)(2), mandatory abstention does not apply to “core” proceedings. Core proceedings include matters that “invoke[ ] a substantive right provided by title 11 or [that] ... could arise only in the context of a bankruptcy case.” Beard v. Braunstein, 914 F.2d 434, 444 (3d Cir.1990). Just so here: the Tax Motion invokes the Debtor’s right to have this Court determine its tax liability — a substantive right provided by § 505(a)(1). See, e.g., ANC Rental Corp. v. Cnty. of Allegheny (In re ANC Rental Corp.), 316 B.R. 153, 157 (Bankr.D.Del. 2004) (holding debtor’s claim brought under § 505 constituted a core proceeding “because it invokes a right given to the [d]ebtor under title 11”); United States v. Wilson, 974 F.2d 514, 517 (4th Cir.1992) (same); In re Hunt, 95 B.R. 442, 444 (Bankr.N.D.Tex.1989) (same); Drummond v. Dep’t of Revenue (In re Kurth Ranch), No. CV-90-084-GF, 1991 WL 365065, at *2, 1991 U.S. Dist. LEXIS 21133, at *7 (D.Mont. April 23, 1991) (same). Accordingly, the Court is not required to abstain.
The general rule is that if a matter falls within a bankruptcy court’s “core” jurisdiction, then the court should decide it. See Garland & Lachance Constr. Co. v. City of Keene (In re Garland & Lachance Constr. Co.), 144 B.R. 586, 594-95 (Bankr.D.N.H.1991) (noting that “abstention is normally inappropriate if a matter is a core proceeding [but that] ... the rule is not inflexible and the [c]ourt retains the power to abstain for reasons of justice, comity with state courts, or respect for state law”) (citation omitted). For example, in ANC Rental, the debtor asked the bankruptcy court to determine its tax liability to certain state taxing authorities under § 505. One of the taxing authorities, citing the predominance of state law issues and concerns over the uniform assessment of the tax, argued that the bankruptcy court should abstain and require the debtor to seek redress at the state and local level. The court ultimately agreed with the taxing authority and abstained. It noted that while federal courts “should exercise abstention sparingly[,] ... [o]nly in exceptional circumstances,” and for “a compelling reason,” abstention was appropriate in that instance because the case was post-confirmation and there was no prejudice in having the matter heard by the state court. In re ANC Rental, 316 B.R. at 158-59 (citations and quotation marks omitted).
Courts have generally looked to the following six factors to guide their abstention analysis in the § 505 context: 1) the complexity of the tax issue; 2) the need to administer the bankruptcy case in an orderly and efficient manner; 3) the asset and liability structure of the debtor; 4) the prejudice to the debtor and the potential prejudice to the taxing authority 5) the burden on the bankruptcy court’s docket; 6) the length of time required for trial and decision. Id. at 159.
Applying these factors, the Court notes first that the tax issue raised in the Tax Motion is not complex. Courts that have abstained in the § 505 context have generally done so if deciding the claim would require “a fact intensive review of the val*115ue of the property and the amount of the taxes in question,” or if its decision “could affect the uniformity of assessment of ... taxes imposed on other taxpayers.” Id,.; see In re AWB Assoc., G.P, 144 B.R. 270, 276 (Bankr.E.D.Pa.1992) (“Abstention from deciding a tax adjudication question under [§ ] 505 is only appropriate under a showing that uniformity of assessment is of significant importance.”). These concerns are largely absent here. For instance, deciding the Tax Motion does not involve valuation at all, or anything beyond basic computation; rather, it requires the Court to interpret and apply the Indiana statutes at issue using traditional tools of statutory interpretation. Similarly, uniformity of assessment is not a significant issue as there are only two Racinos in Indiana and they are both parties to this proceeding. The first factor therefore, weighs against abstention.
As do the second, third and fourth factors. Unlike in ANC Rental, where a plan had been confirmed and all that remained were adversary proceedings, this bankruptcy case remains at a relatively early stage. As such, having this Court resolve the Tax Motion allows the Court to oversee the disclosure statement and plan process, and to keep the bankruptcy case moving forward in an orderly and expeditious fashion. The Court has found compelling the Debtor’s argument that a ruling on the Tax Motion — regardless of the outcome- — will materially aid the Debtor in structuring its plan of reorganization, which in turn will likely impact the entire creditor body.
Because the Motion has already been fully presented to the Court both through briefing and at oral argument, and because the Court stands prepared to rule, the fifth and sixth factors — the burden on the bankruptcy court’s docket, and the length of time required for trial and decision, respectively — also favor this Court deciding the Motion.
Nothing in the Department’s final abstention argument, which is based on the Burford abstention doctrine, see generally Burford v. Sun Oil Co., 319 U.S. 315, 63 S.Ct. 1098, 87 L.Ed. 1424 (1943), has convinced the Court to abstain. Bur-ford abstention “may be warranted “where the exercise of federal review of the question in a case and in similar cases would be disruptive of state efforts to establish a coherent policy with respect to a matter of substantial public concern.’ ” New Orleans Pub. Serv., Inc. v. Council of New Orleans, 491 U.S. 350, 361, 109 S.Ct. 2506, 105 L.Ed.2d 298 (1989) (quoting Colo. River Water Conservation Dist. v. United States, 424 U.S. 800, 814, 96 S.Ct. 1236, 47 L.Ed.2d 483 (1976)). Nonetheless, the Supreme Court has found that “[w]hile Bur-ford is concerned with protecting complex state administrative processes from undue federal interference, it does not require abstention whenever there exists such a process, or even at all in cases where there is a potential for conflict with state regulatory policy.” Id. at 362, 109 S.Ct. 2506 (quotation marks omitted). Indeed, the “balance rarely favors abstention, and the power to dismiss recognized in Burford represents an extraordinary and narrow exception to the duty of the [c]ourt to adjudicate a controversy properly before it.” Quackenbush v. Allstate, Ins. Co., 517 U.S. 706, 706, 116 S.Ct. 1712, 135 L.Ed.2d 1, (1996); see Deakins v. Monaghan, 484 U.S. 193, 203, 108 S.Ct. 523, 98 L.Ed.2d 529 (1988) (recognizing longtime holding that federal courts have a “virtually unflagging obligation” to adjudicate claims within their jurisdiction).
The Department cites, as “a matter of great state concern” Indiana’s “overarching interest in independently and uniformly addressing [its] tax imposition stat*116utes.”23 Yet that concern is present any time a debtor invokes § 505 to determine its tax liability to a state, and “Congress is presumed to have been fully aware of the potential for conflict when it enacted § 505, and to have concluded that bankruptcy policy nonetheless compelled provision for resolving tax disputes in the bankruptcy forum.” In re Super Van, 161 B.R. 184, 190 (Bankr.W.D.Tex.1993).
The Court, in declining to abstain under Burford, has found Bankruptcy Judge Clark’s Super Van opinion to be especially persuasive. In Super Van, a business debtor filed a motion under § 505 for a determination of its tax liability, if any, to the Texas Employment Commission. The commission argued for Burford abstention based on Texas’ interest in protecting the administrative scheme it had developed to handle disputes involving the commission. Because the scheme included judicial review of commission orders, the state courts had specialized knowledge of the regulations. According to the commission’s argument “[f]ederal court jurisdiction invoked in such a context ... could only lead to the same sort of delays, misunderstandings of local law, and needless federal conflict with state policy as were found likely to occur in Burford.” Id. at 188.
After a thoughtful analysis, Judge Clark rejected the commission’s argument. He concluded, in part:
Burford abstention is not at issue in the bankruptcy context because we do not here have the mere resort to a federal court in order to attack or evade a state regulatory scheme; rather we have the incidental ability to employ the federal forum to do what would otherwise have to be done in the state’s administrative scheme, in service to the larger policies underlying the administration of the bankruptcy case. There is no “interference,” such as in Burford — unless one wants to argue that the sole purpose of filing the bankruptcy itself was to interfere with the state administrative process. No one has made that argument here, and ... were a debtor to file bankruptcy solely for that reason ..., abstention would not be the proper tool to grab for; dismissal for bad faith filing would.
Id. at 190-91.
This Court agrees with Judge Clark’s analysis and rejects the Department’s Burford abstention argument.
Having considered each of the Department’s jurisdictional and procedural arguments, the Court finds no reason why it cannot, or should not, decide the Tax Motion. The Court therefore concludes it has jurisdiction over this contested matter under 11 U.S.C. § 505(a)(1), 28 U.S.C. §§ 157 and 1334(e)(1). Venue is also proper in this Court under 28 U.S.C. §§ 1408 and 1409. As this is a core proceeding under 28 U.S.C. § 157(b)(2),24 the Court may enter a final order.
B. The Set-Aside Funds Are Not Subject to the Graduated Tax
The Court will order that the Set-Aside Funds need not be included in the Debtor’s calculation and payment of the Graduated Tax. The reason is that the Court finds the Racino Statute ambiguous on the question of whether the Graduated Tax reaches the Seb-Aside Funds. The Court must therefore go beyond the statute’s plain language to carry out the legislature’s intent. Given the dearth of sources revealing that intent, the Court *117turns to Indiana state court decisions in similar situations for interpretive guidance. The case law reveals that Indiana generally does not tax receipts that a party collects and transfers to another if the collecting-party cannot use or control the funds transferred. Both the Racino Statute and its implementing regulations confirm that that rule applies to the Debtor here. In addition, the Department’s reading of the Racino Statute would operate to impose a double-tax on the Debtor, which Indiana law has long disfavored where, as here, the directive to double-tax is not plain from the statute’s face. All of this leads the Court to conclude that the Set-Aside Funds are not subject to the Graduated Tax.
1. The Racino Statute Contains an Ambiguity
The Court cannot determine from face of the Racino Statute whether the Graduated Tax applies to the Set-Aside Funds. Indiana courts25 interpret statutes by first deciding “if the legislature has spoken clearly and unambiguously on the point in question.” Siwinski v. Town of Ogden Dunes, 949 N.E.2d 825, 828-29 (Ind.2011); see Ind.Code § 1-1-4-1(1) (setting out rules of statutory construction that apply to all Indiana statutes). If it has, “no room exists for judicial construction.” Siwinski, 949 N.E.2d at 828. If it has not, and the “statute contains ambiguity that allows for more than one interpretation,” the court should construe the statute to give “effect [to] the legislative intent.” Id. (“[A] cardinal rule of statutory construction ... is to ascertain the intent of the drafter.” (quotation marks omitted)). That means courts must consider the “entire enactment” and “con-stru[e] the ambiguity ... consistent” with it. Id. “If possible, every word [in the statute]’ must be given effect and meaning, and no part should be held to be meaningless if it can be reconciled with the rest[.]” Id. The Court should “not presumed however,] that the [legislature intended [statutory] language ... to be applied illogically or to bring about an unjust or absurd result.” City of Carmel v. Steele, 865 N.E.2d 612, 618 (Ind.2007). Finally, Indiana courts strictly construe tax statutes “against the imposition of the tax,” though not if the construction “override[s] the plain language of a statutory provision.” RDI/Caesars Riverboat Casino, LLC v. Ind. Dep’t of State Revenue, 854 N.E.2d 957, 963 (Ind.T.C.2006).
The Racino Statute does not “clearly and unambiguously” speak to whether the Graduated Tax applies to the Set-Aside Funds. Rather, the statutory language permits two plausible, yet opposing, answers to that question. The Court’s analysis begins, as it must, with the statutory text. State v. Am. Family Voices, Inc., 898 N.E.2d 293, 297 (Ind.2008) (“The statute itself is the best evidence of legislative intent.”).
The Racino Statute provides for the Set Aside Funds as follows:
[A] licensee shall before the fifteenth day of each month distribute an amount equal to fifteen percent (15%) of the adjusted gross receipts of the slot machine wagering from the previous month[.].... A licensee shall pay the first one million five hundred thousand dollars ($1,500,000) distributed under this section in a state fiscal year to the treasurer of state for deposit in the *118Indiana tobacco master settlement agreement fund.... A licensee shall pay the next two hundred fifty thousand dollars ($250,000) distributed under this section in a state fiscal year to the Indiana horse racing commission for deposit in the gaming integrity fund.... After this money has been distributed to the treasurer of state and the Indiana horse racing commission, a licensee shall distribute the remaining money devoted to horse racing purses and to horsemen’s associations under this subsection[.]
Ind.Code § 4-35-7-12(b) (emphasis added).26 In short, the Seb-Aside Funds consist of the 15% of Indianapolis Downs’ AGR from slot-machine wagering that must be “distributed” in the manner described in the statute. Based only on the Seb-Aside Funds Provision, one cannot say whether that 15% of AGR is subject to the Graduated Tax; the section, by itself, simply does not address the issue.
Turning to the Graduated Tax Provision reveals that the Graduated Tax “is imposed ... on one hundred percent (100%) of the adjusted gross receipts received before July 1, 2012, and on ninety-nine percent (99%) of the adjusted gross receipts received after June 30, 2012, from wagering on gambling games[.]” Id. § 4-35-8-1(a) (emphasis added). As with the Set-Aside Funds provision, the Graduated Tax Provision makes no explicit reference to whether the Seb-Aside Funds are to be taxed.
The two provisions clearly apply to the same base — AGR. The statute defines AGR as:
(1) the total of all cash and property (including checks received by a licensee, whether collected or not) received by a licensee from gambling games; minus (2) the total of:
(A) all cash paid out to patrons as winnings for gambling games; and
(B) uncollectible gambling game receivables, not to exceed the lesser of:
(i) a reasonable provision for uncol-lectible patron checks received from gambling games; or
(ii) two percent (2%) of the total of all sums, including checks, whether collected or not, less the amount paid out to patrons as winnings for gambling games.
For purposes of this section, a counter or personal check that is invalid or unenforceable under this article is considered cash received by the licensee from gambling games.
Ind.Code § 4-35-2-2 (emphasis added). Yet this definition, read together with the Graduated Tax and Seb-Aside Funds provisions, permits both interpretations offered by parties. First, according to the Department, the Graduated Tax applies to the AGR from slot machine wagering, and the Seb-Aside Funds are AGR from slot machine wagering; therefore, the Graduated Tax applies to the Seb-Aside Funds. That argument has a straightforward appeal with support in statutory language. But so does the Debtor’s interpretation, namely, that the Graduated Tax applies to AGR that the Debtor actually receives as income, but that the Set-Aside Funds Provision applies to all AGR, even amounts that the Debtor cannot control or use for its own purposes.
The Department answers the Debtor’s argument by pointing to the definition of AGR, claiming that though the definition *119“specifíe[s] the exclusion of certain monies,” it does not specifically exclude the Set>-Aside Funds.27 Had the legislature intended to excluded the Set-Aside Funds from AGR, the Department claims, then it would have so expressly when it defined that term.
The Debtor, however, points to language in the last part of the definition, under which a “check that is invalid or unenforceable ... is considered cash received by the licensee from gambling games.” Ind.Code § 4-35-2-2 (emphasis added). It argues that the legislature, “by specifically including the amount of invalid checks in the definition of AGR ‘received by a licensee,’ ... demonstrated that it knows how to include and, thus, tax funds that realistically are not ‘received’ by a racino[.]”28
The Court finds that both interpretations have support in the statutory text. Thus the key phrase “adjusted gross receipts received” reveals an ambiguity in the Racino Statute. Elmer Buchta Trucking, Inc. v. Stanley, 744 N.E.2d 939, 942 (Ind.2001) (“A statute is ambiguous where it is susceptible to more than one interpretation.”); see also Dep’t of Treas. of Ind. v. Muessel, 218 Ind. 250, 32 N.E.2d 596, 597 (1941) (“It is a settled rule of statutory construction that statutes levying taxes are not to be extended by implications beyond the clear import of the language used, ... in case of doubt such statutes are to be construed more strongly against the state and in favor of the citizen.”).
2. Indiana Case Law and the Racino Statute’s Implementing Regulations Reveal that the Set Aside Funds Are Not Subject to the Graduated Tax
Again, “[i]f a statute is ambiguous,” the Court “must ascertain the legislature’s intent and interpret the statute ... to effectuate” it. Elmer Buchta, 744 N.E.2d at 942. Given the lack of case law and legislative history regarding the Racino Statute, the Court has construed the statute by focusing on three sources: (1) court decisions in analogous situations; (2) regulations adopted by the entities responsible for implementing the Racino Law; and (3) principles of Indiana tax policy. These sources have led the Court to conclude that because the Racino Statute prohibits Indianapolis Downs’ from using or controlling the Set-Aside Funds for any purpose other than turning the funds over to third-parties, the Graduated Tax does not apply to those funds.
The Debtor argues that the cases most analogous to this one involve disputes over the reach of Indiana’s gross income tax. The Department contends, however, that income tax principles do not apply here because this case involves an excise tax, not an income tax. The Court agrees with the Debtor, for three reasons. First, the Department fails to say how the distinction (excise tax versus income tax) affects analysis. Second, in 2004, the Indiana Tax Court examined a nearly identical graduated tax provision in the Riverboat Casino Law29 and called it “an excise tax that is measured by income.” Aztar Ind. Gaming Corp. v. Ind. Dep’t of State Rev., 806 N.E.2d 381, 386 (Ind.T.C.2004) (holding that AGR “received” by a riverboat casino “certainly constituted income”) (emphasis added); see also Miles v. Dep’t of Treasury, 209 Ind. 172, 199 N.E. 372, 382 (1935) (“the term ‘gross income’ ... is understood by lexicographers, and in common usage, to mean total receipts.”). Third, the Indiana Supreme Court has said:
*120[I]t is difficult to find any practical distinction to be made between a gross income tax and an ordinary excise tax. It is a tax on the recipient of the income, the tax being upon the right or ability to produce, create, receive, and enjoy, and not upon specific property.
Id. at 377 (internal quotation marks omitted). The Debtor must therefore pay the Graduated Tax on the Set-Aside Funds if Indiana law considers those funds part the Debtor’s income. But it does not.
A significant body of Indiana case law holds that funds for which a party acts as a “mere conduit” are not considered part of the party’s income because the party lacks a “beneficial interest” in them. See e.g., Starwood Hotels & Resorts Worldwide, Inc. v. Ind. Dep’t of State Rev., No. 49T10-0504-TA-41, 2006 WL 367894, at *3 (Ind.T.C. Feb. 16, 2006); Bloomington Country Club v. Ind. Dep’t of State Rev., 543 N.E.2d 1, 3-4 (Ind.T.C.1989); U-Haul Co. of Ind. v. Ind. Dep’t of State Rev., 784 N.E.2d 1078, 1083 (Ind.T.C.2002); Universal Grp. Ltd. v. Ind. Dep’t of State Revenue, 609 N.E.2d 48, 53 (Ind.T.C.1993).
The Department’s own administrative regulations “recognize that when taxpayers [receive money] as agents, they are ‘mere conduits’ ... [and so] are not liable for ... [or] subject to gross income tax” on that money. Ne. Ind. Chevrolet Dealers Adver. Ass’n v. Ind. Dep’t of State Revenue, No. 02T10-0008-TA-93, 2004 Ind. Tax LEXIS 67, at *6-7 (Ind.T.C. Aug. 25, 2004); see 45 Ind. Admin. Code 1.1-6-10. This “agency exclusion to gross income” applies when the taxpayer is a true agent with no right, title, or interest in money or property received from the transaction. Id. A true agent is one who transacts business on behalf of, and under the control of, either a governmental entity or a nongovernmental third-party. See Miles, 199 N.E. at 382 (“Taxes collected by the taxpayers as the agent of the state or of the United States are exempt, and we cannot conceive why they should not be.”); 45 Ind. Admin. Code § 1.1 — 1—2.
For example, the taxpayer in Blooming-ton was a private country club with a restaurant and bar. It had a policy of automatically adding a 15% “service charge” to its member’s checks. At first, the club used the service charge to generate additional revenue. It later changed the policy and made the charge a “gratuity” that the club passed on, in full, to its wait staff. The Department sought to collect sales and income tax from the club, arguing that the club owed tax on the 15%-charge-money. Though the Indiana Tax Court agreed with the Department that the club could be taxed on the money it initially kept as additional revenue, it disagreed regarding the gratuity. Citing the rule that “[a] taxpayer is not subject to gross income tax on receipts received on behalf of a third person,” the court held that the “[c]lub is not subject to the [gross income] tax” on the money it collected after the policy changed because at that point “it was merely acting as a conduit to pass along the service charges to service personnel.” Bloomington, 543 N.E.2d at 3; see also Summit Club, Inc. v. Ind. Dep’t of State Rev., 528 N.E.2d 129 (Ind. T.C.1988) (holding gratuity service charge not subject to sales tax).
In U-Haul, the Department argued that truck maintenance companies owed income tax on 100% of the money up-streamed to them from truck rental dealers, even though the maintenance companies were entitled to keep but a fraction of that money before again up-streaming the rest. The tax court framed the issue as “whether the [maintenance companies] are liable for gross income tax on 100% of the [up-streamed] rental amounts collected ... when they did not receive 100% of those *121rental amounts.” U-Haul, 784 N.E.2d at 1083-84 (emphases added). The court first noted that “the taxpayer’s beneficial interest in income is central to the receipt of gross income,” and that “the incidents of taxation follow the beneficial interest in income.” Id. It then held that because the maintenance companies were “mere[ ] conduit[s]” for the funds, and because they “did not have a beneficial interest in 100% of the” the funds, they were “not liable for gross income tax on 100% of the” funds. Id. at 184.
The Tax Court applied the same reasoning in another dispute between U-Haul and the Department, and again sided with U-Haul. U-Haul Int’l, Inc. v. Ind. Dept. of State Rev., 826 N.E.2d 713, 717-18 (Ind. T.C.2005). The Indiana Supreme Court denied review, essentially leaving the Tax Court’s analysis as the governing law of the State. U-Haul Int’l, Inc. v. Ind. Dep’t of State Rev., 841 N.E.2d 181 (Ind.2005) (denying review).
The Department asserts that these cases are irrelevant because they require an agency relationship and here there is no “voluntary agreement that the Debtor[] accepted or consented to.”30 No — but there is a legislative edict. And while no Indiana case is directly on point, under federal case law, which Indiana finds instructive on tax matters, see e.g., Allison Engine Co. v. Ind. Dep’t of State Revenue, 744 N.E.2d 606, 609, (Ind.T.C.2001) (looking to federal law when faced with tax “issue of first impression in Indiana”), a taxpayer cannot be taxed on income received “under an unequivocal contractual, statutory or regulatory duty to repay it, so that [the taxpayer] is really just the custodian of the money.” Ill. Power Co. v. Comm’r of Internal Rev., 792 F.2d 683, 689 (7th Cir.1986) (emphasis added). This view comports with the Indiana agency cases, which focus on the fact of the taxpayer’s lack of control and beneficial interest, not on the source of that lack of control and interest. In fact, the rationale behind the “conduit” line of cases is even more compelling when the taxpayer faces a statutory command (as opposed to a contractual obligation) to collect and distribute funds to others. For instance, the 15% gratuity charged by the club in Blooming-ton was completely voluntary. It could have kept the money (or a portion of it) for itself if it wished. Yet even in that context the court found the club could not be taxed on funds received through the gratuity charge. Bloomington, 543 N.E.2d at 3. In short, the Court finds the agency cases persuasive.
Indiana courts “presume that the legislature is aware of the common law and intends to make no change therein beyond its declaration either by express terms or unmistakable implication.” Hinshaw v. Bd. of Comm’rs, 611 N.E.2d 637, 639 (Ind. 1993). All of the rules regarding “mere conduits,” “beneficial interests,” and the like, existed before the legislature enacted the Racino Statute. With those rules in mind, the Court returns to the statutory language.
This much is clear: the Racino Statute dictates how every penny of Seb-Aside Funds the Debtor collects is to be distributed. Ind.Code § 4-35-7-12(b), (j). All of the funds are devoted to the state’s tobacco settlement fund, its general fund, or to nongovernmental third parties — none goes to the Debtor. Id. Should the Debtor defy its statutory obligations, it risks civil penalties, the revocation of its license, or both. See id. at § 4-35-7-12(h). So if, as Miles explains, a tax on income is based upon a taxpayer’s “right or ability to produce, ere-*122ate receive and enjoy,” that income, 199 N.E. at 377 (emphasis added), then the Graduated Tax cannot reach the Set-Aside Funds. The Racino Law simply does not treat the funds as the Debtor’s money.
Nor do the regulations implementing the Set-Aside Funds Provision. The Racino Statute charges the Indiana Horse Racing Commission, with promulgating and enforcing rules regarding the Set-Aside Funds. Ind.Code § 4-35-4-1. Those rules highlight how the Debtor acts as a mere conduit for the funds. For instance:
[I]f, at the time [the Debtor] is required to make a payment of [Set-Aside] [F]unds to a horsemen’s association, either: (1) the commission has not approved the registration of a horsemen’s association otherwise eligible to receive the permit holder’s payment; or (2) for any other reason, no horsemen’s association is eligible to receive the permit holder’s payment; then [the Debtor] shall pay the [Set-Aside] [F]unds ... into one (1) or more interest bearing escrow accounts established and maintained by [the Debtor] solely for the purpose of holding and distributing those funds as may be directed by the commission. When a horsemen’s association becomes eligible to receive [the funds] ..., the commission shall immediately direct the release of the es-crowed funds and all interest earned on those funds to,the eligible horsemen’s association, and [Indianapolis Downs] shall thereafter make payments to that horsemen’s association....
71 Ind. Admin. Code § 13-1-1. Note that this regulation gives the commission — not the Debtor — the right to “direct” how the funds in the horsemen’s account are held and distributed. The commission’s control extends even to the “interest earned” on the funds, thus reinforcing that the Debtor receives absolutely no benefit from the money in that account.
The regulations further mandate that the Debtor maintain segregated “trust” accounts for “any purse monies that it is obligated ... to pay.” Id. at § 4-2-7. The Debtor cannot commingle the trust funds with any of its own funds. Id. “Horse industry trust accounts” are defined as: “interest bearing accounts] established by a [racino] in a fiduciary capacity for the deposit and dispersal of funds that are the property of a horsemen’s association representing the owners and trainers of a designated breed racing at [the racino.]” Id. at § 1-1-47.1 (emphasis added).
Hence both the text of the Racino Statute and its implementing regulations confirm that the Debtor acts at least as a conduit and, at most, as a trustee for the Set-Aside Funds. Either way, the Debtor has no right to use, control, or enjoy the benefits of the Sei>-Aside funds.
3. The Department’s Interpretation Of The Racino Statute Results In Unintended Double Taxation.
The Debtor claims, and the Court agrees, that under the Department’s reading of the Racino Statute the Debtor is, in effect, doubly taxed. That is, the Department would have the Debtor pay the Graduated Tax on the Set-Aside Funds that the Debtor must hand-over to the state itself. The double taxation occurs in two instances. First, the Debtor must give the initial $1.5 million in Set-Aside Funds to the state treasurer for deposit in the state’s tobacco settlement funds. The Department would then have the Debtor pay the Graduated Tax on that money — which it has just handed to the state. The amount of Graduated Tax the Debtor would owe on that money would range *123from $375,000 (25% of $1.5 million) to $525,000 (35% of $1.5 million).
The second instance of double taxation arises when the Set-Aside Funds given to non-governmental third parties exceeds certain caps listed in the Set-Aside Funds Provision. When that happens, the surplus Set-Aside Funds go to the state’s general fund. See Ind.Code § 4-35-7-12Q).
These two examples show that under the Department’s interpretation the Debtor pays an effective tax rate in the range of 125%-135% on the Set-Aside Funds that go to the state. In other words, for every dollar of AGR the Racino Statute directs to the state, the state receives both the 25%-35% Graduated Tax, and the underlying dollar itself. Thus, in this scenario the Debtor actually loses money because for each dollar of AGR that goes to the state, the Debtor must dip into its own pocket to pay tax on that dollar.
The Department claims that “[n]o double taxation exists” here because “the distribution required by the [Racino Statute] is not a listed tax.”31 Indeed, as far as the Court can tell, the Set-Aside Funds Provision is the only Indiana Code provision that requires an entity to devote and distribute a portion of its AGR to the state and third-parties without specifying if the extraction is a tax, fee, or fíne. The Court concludes, however, that the Seh-Aside Fund Provision, or “required distribution” (as the Department would have it), is a tax, listed or not. In Empress Casino Joliet Corp. v. Balmoral Racing Club, Inc., 651 F.3d 722 (7th Cir.2011), the Court of Appeals for the Seventh Circuit, sitting en banc, considered an Illinois Code provision requiring riverboat casinos to pay 3% of their AGR into a state trust fund established to bolster the state’s struggling horseracing industry. The question was whether the 3% extraction was a tax for purposes of the Tax Injunction Act. The court, held that, “whatever its nominal designation,” the 3% extraction was a tax because it was “calculated not just to recover a cost imposed on the municipality or its residents but to generate revenues that the municipality can use to offset unrelated costs or confer unrelated benefits.” Id. at 728-29 (quoting Diginet, Inc. v. Western Union ATS, Inc., 958 F.2d 1388, 1399 (7th Cir.1992)). Indiana courts hold a similar view when deciding if an extraction is a tax. See BellSouth Telecommunications, Inc. v. City of Orangeburg, 337 S.C. 35, 522 S.E.2d 804, 806 (1999) (“Generally, a tax is an enforced contribution to provide for the support of government ... ”; Ace Rent-A-Car, Inc. v. Indianapolis Airport Auth, 612 N.E.2d 1104 (1993) (“A tax is compulsory and not optional; it entitles the taxpayer to receive nothing in return, other than the rights of government which are enjoyed by all citizens.”))
Here, at least with respect to the Seh-Aside Funds that the Debtor gives to the State of Indiana (for the tobacco settlement fund and the general fund), the Set-Aside Funds Provision functions as a tax. The Debtor receives no benefit other than what the general public receives. It is therefore beyond serious debate that the Set-Aside Funds Provision, combined with the Graduated Tax Provision, doubly taxes Indianapolis Downs.
While the Indiana Supreme Court may have long ago recognized a state policy of avoiding double taxation, see Darnell v. State, 174 Ind. 143, 90 N.E. 769, 774 (1910) (“The intent manifest in our tax law is to require all property to contribute pro rata its share of taxes, and so far as practicable *124to avoid double taxation.”), it has also recently held that double taxation is not per se illegal. See State Bd. of Tax Comm’rs v. Jewell Grain Co., Inc., 556 N.E.2d 920, 925 (Ind.1990). In Jewell Grain, the court said that “[w]hen the purpose of a taxing act is plain, courts will not interfere!;]” they will not, for instance, “ignore the words of the statute in order to avoid double taxation.” Id.
However, if the Indiana legislature intended the Racino Statute to impose a double tax on Indianapolis Downs, it did not make that intent “plain.” While the statute explicitly imposes Graduated Tax rates of 25%-35% on the Debtor’s slot-machine revenue, it does not disclose or acknowledge that significant portions of the Debtors’ adjusted gross receipts should be taxed at effective rates north of 100%. Given the Indiana Supreme Court’s directive that where doubt exists a tax statute like this one “will be construed against the state and in favor of the taxpayer,” Dept. of State Revenue, v. Crown Dev. Co., 231 Ind. 449, 109 N.E.2d 426, 428 (1952), the statutory language here does not support a construction demonstrably at odds with well-established principles of Indiana tax law. See Ind. Dep’t of State Rev. v. Safayan, 654 N.E.2d 270 (Ind.1995) (“We take care not to extend the force and operation of tax statutes beyond the clear import of their language.... When in doubt about the imposition of a tax, we construe statutes against the State and in favor of the taxpayer.”)
The Court finds that Indianapolis Downs has satisfied its burden to show that the Graduated Tax does not extend to the Set-Aside Funds. Again, in Indiana, “taxation follow[s] the beneficial interest in income, [and] a person who is a mere conduit for another is generally not taxable on the income.” U-Haul, 784 N.E.2d at 1083-84. Here, the Set-Aside Funds belong to third parties, not the Debtor. The Debtor merely collects the funds and passes them along, and thus they are not included in the Debtor’s income. Because the Graduated Tax is measured by the Debtor’s income, the Seb-Aside Funds cannot be subject to that tax.
III. CONCLUSION
For all these reasons, the Court will enter an order declaring that the Debtor need not include the Set-Aside Funds in its calculation and payment of the Graduated Tax. The Tax Motion is therefore GRANTED. An appropriate Order follows.
. This Opinion constitutes the Court’s findings of fact and conclusions of law, as required by the Federal Rules of Bankruptcy Procedure. See Fed. R. Bankr.P. 7052, 9014(c).
. 11 U.S.C. § 101 et seq. (2011).
. Docket No. 313.
. Requests for a court to determine a debtor's tax liability under § 505 are made by motion, not by filing a complaint. See Fed. R. Bankr.P. 9014; In re Taylor, 132 F.3d 256, 262 (5th Cir.1998) ("Filing a § 505 motion institutes a contested matter” because "it does not fall within adversary proceedings as delineated by Rule 7001.”).
.The Department functions, in part, to administer Indiana tax laws, develop regulations, and decide tax policy. About DOR, IN.gov (October, 23 2011), http://www.in.gov/ dor/3324.htm; see Ind.Code § 6-8.1-3-1 (2011) ("The department has the primary responsibility for the administration, collection, and enforcement of ... listed taxes.”).
. Hoosier Park, L.P., the other state-licensed racino in Indiana, and also a debtor in this Court, see In re Hoosier Park L.P., 10-10801-KJC (jointly administered with In re Centaur, LLC, et al., No. 10-10799-KJC), moved to intervene in the Tax Motion and join Indianapolis Downs' position. [Docket No. 353]. That request was granted. [Docket No. 405].
. The Racino Statute refers to slot machines as "gambling games.” See Ind.Code § 4-35-2-5.
.A simple illustration may help to make all of this more concrete: Say that Indianapolis Downs’ patrons spend a total of $500 playing slot machines on Monday, all of which is collectible. Of that $500, the machines pay out jackpots totaling $400, leaving Indianapolis Downs with $100 in AGR for Monday. From that $100, Indianapolis Downs must set-aside $15 (15%) under the Set-Aside Funds Provision; it now has $85 remaining. Come Tuesday, Indianapolis Downs must pay the Graduated Tax on Monday's AGR. The Department insists that the tax should be applied to the $100 in AGR from Monday. Indianapolis Downs, however, con tends that the Graduated Tax applies only to the $85 remaining after the Set-Aside Funds are removed.
.The Eleventh Amendment provides: "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.”
. Dep't Obj. p. 8.
. Dep't Obj. pp. 8, 9.
. Dep't Obj. p. 8.
. The Debtor does not dispute its obligations to pay the Graduated Tax or to distribute the Set-Aside Funds. It only disputes the amount of the Graduated Tax. Indianapolis Downs thus believes that for fiscal year 2011 it owes Indiana roughly $58 million in Graduated Tax. Mot. p. 10.
. Docket. No. 1.
. Mot. p. 25.
. Docket No. 433.
. Docket No. 452.
. Docket No. 470.
. According to Indianapolis Downs, a ruling in its favor could lead to an additional $15 million per year for the estate. Mot. p. 2.
. Even if deciding the Tax Motion required the Court to have personal jurisdiction over Indiana — which it does not — sovereign immunity would still not be a defense. That is because the Court finds that having jurisdiction over Indiana in this proceeding is “necessary to effectuate” the Court’s in rem jurisdiction, which, under Katz, is the test for overcoming a state sovereign immunity defense. See Katz, at 546 U.S 378, 126 S.Ct. 990; Fla. Dep't of Revenue v. Diaz (In re Diaz), *113647 F.3d 1073 (11th Cir.2011) (discussing the Katz "necessary to effectuate standard").
. Dep’t Obj. p. 9.
. Mot. p. 25.
. Dep't Obj. p. 16.
. Specifically, the Court finds this proceeding to be core under 28 U.S.C. § 157(b)(2)(A), (B), (C), (E), (M), or (O).
. The parties agree that Indiana law applies to the merits of this dispute. See Mot. p. 6; Dep't Obj. pp. 19-25; In re R-P Packaging, Inc., 278 B.R. 281, 288 (Bankr.M.D.Ga.2002) (holding that in § 505 determinations bankruptcy courts apply substantive, but not procedural, aspects of state law).
. The Racino Statute was amended during the pendency of this proceeding. Because this dispute pertains to Indianapolis Downs’ current and future obligations under the statute, the Court refers to the Racino Statute as amended.
. Dep’t Obj. p. 20.
. Reply p. 28-29.
.See Ind.Code 4-33-13-1.
. Dep’t Obj. p. 23.
. Dep't Obj. p. 25. "Listed Taxes” are those that the Department administers. The Graduated Tax is a listed tax, the Set-Aside Funds are not. See Ind.Code § 6-8.1-1-1. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494451/ | AMENDED MEMORANDUM OPINION AND ORDER GRANTING APPLICATION OF CHAPTER 13 DEBTOR’S COUNSEL FOR ALLOWANCE OF COMPENSATION AND REIMBURSEMENT OF EXPENSES, BUT DENYING FEE-SHIFTING REQUEST [DE ## 84 & 100]1
STACEY G.C. JERNIGAN, Bankruptcy Judge.
Before this court is the Application of Chapter 13 Debtor’s Counsel for Allow-*204anee of Compensation and Reimbursement of Expenses [DE # 84] and the Supplement thereto [DE # 100] (collectively, the “Compensation Application”). The Compensation Application is not a typical fee application, that merely seeks an award of attorney’s fees and expenses, payable from the Debtor’s bankruptcy estate.2 Rather, the application contains a request for fee shifting. Specifically, Debtor’s counsel not only seeks an award of $29,177.50 in fees and $814.95 in expenses, pursuant to 11 U.S.C. § 330 (reimbursable from the Debtor) but, more significantly (and really primarily), seeks reimbursement for attorney’s fees and costs from two mortgage loan servicers and the law firm who represented them in connection with certain motions to lift stay they filed, which motions were allegedly lacking in foundation and caused needless fees to be incurred by the Debtor. The authority cited by the Debt- or for the fee shifting is 28 U.S.C. § 1927, 11 U.S.C. § 105(a), and the court’s inherent authority.
The court has core jurisdiction in this matter pursuant to 28 U.S.C. §§ 1334 and 157(b)(2)(A), (G) and/or (O). For the reasons stated below, the court is granting the Compensation Application, but is denying the request for fee shifting. This memorandum opinion constitutes the court’s findings of fact and conclusions of law pursuant to Federal Rules of Bankruptcy Procedure 7052 and 9014. Where appropriate, a finding of fact will be construed as a conclusion of law and vice versa.
I.FINDINGS OF FACT
1. On November 3, 2006, the Debtor filed a voluntary petition under chapter 13 of the Bankruptcy Code.
2. The Debtor has a homestead at 309 Shelly Circle, Irving, Texas, 75061 (the “Homestead”), which is encumbered with an Adjustable Rate Note and Deed of Trust (for simplicity hereafter, the “mortgage loan”).
3. The Debtor’s Bankruptcy Schedules indicated that she was behind in payments on her Homestead mortgage loan at the date of the filing her bankruptcy petition-estimating that she was approximately $5,154 in arrears. The Debtor listed AMC Mortgage Services as the secured creditor on the Homestead mortgage loan [DE # 1, Schedule D].
*205
A. AMC as Servicer for Argent
4. On November 22, 2006, the entity AMC Mortgage Services, Inc. (“AMC”), filed a Proof of Claim in respect of the Homestead mortgage loan in this case. AMC indicated in the Proof of Claim that it was a loan servicer for the actual secured creditor Argent Mortgage Company, LLC (“Argent”). See Proof of Claim No. 1 on the Official Claims Register of the Bankruptcy Clerk.
5. Apparently, this Proof of Claim contained an error, in that AMC was servicing the mortgage loan for Deutsche Bank National Trust Company (“Deutsche”), as Trustee, in Trust for the Registered Holders of Argent Securities, Inc., Asset-Backed Pass-Through Certificates, Series 2004-W9, not Argent.
B. Citi as Servicer for Deutsche
6. In any event, at some point post-petition, Citi Residential Lending, Inc. (“Citi”) took over servicing the Homestead mortgage loan from AMC. Additionally, at some point, the Debtor stopped making post-petition payments on her mortgage loan.
7. On March 14, 2008, the law firm of Hughes, Watters & Askanase, LLP (“HWALLP”) filed a Motion for Relief from Stay (the “Citi Stay Lift Motion”) [DE # 41], on behalf of Citi, as Loan Ser-vicer for Deutsche, seeking permission for Citi to exercise contractual and state law remedies as to the Homestead mortgage loan. At this juncture, no notice of transfer of claim had been filed in the case, transferring the claim in respect of the Homestead mortgage loan from AMC to Citi. Moreover, the copy of the mortgage loan note attached to the Citi Stay Lift Motion was unindorsed and there was no assignment or other chain of title documentation showing that the note was payable to anyone other than the original Lender, Argent. The Debtor questioned Citi’s standing.
8. On April 30, 2008, approximately six weeks after the Citi Stay Lift Motion was filed, a Notice of Transfer of Claim was filed, indicating that the AMC proof of claim in respect of the Homestead mortgage loan had been transferred or assigned to Citi pursuant to an “Assignment Agreement” (not attached-nor was any other chain of title documentation). Then, on June 19, 2008, just days prior to a final hearing on the Citi Stay Lift Motion, HWALLP withdrew the Citi Stay Lift Motion. The court heard reports of the withdrawal at a subsequent hearing held on June 23, 2008.
C.AHMSI as Servicer for Deutsche
9. On March 29, 2009, many months later, Citi filed a Transfer of Claim Other Than for Security [DE # 56], this time effectively transferring the servicing of the Debtor’s loan to yet another entity, American Home Mortgage Servicing Inc. (“AHMSI”).
10. On July 2, 2009, AHMSI filed its own Motion of American Home Mortgage Servicing, Inc., as Attorney-in-Fact and Servicer-in-Fact for Deutsche Bank National Trust Company, as Trustee in Trust for the Benefit of the Certificate Holders for Argent Securities Trust 2004-W9, Asset-Backed Pass-Through Certificates, Series 2004-W9 for Relief from the Automatic Stay of an Act Against Property of 11 U.S.C. § 362 Regarding 309 Shelly Circle, Irving, Texas 75061; and (b) the Motion of American Home Mortgage Servicing, Inc., as Attorney-in-Fact and Ser-vicer-in-Fact for Deutsche Bank National Trust Company, as Trustee in Trust for the Benefit of the Certificate Holders for Argent Securities Trust 2004-W9, Asset-Backed Pass-Through Certificates, Series *2062004-W9 for Relief from the Automatic Stay of an Act Against Co-Debtor of 11 U.S.C. § 1301 (collectively, the “AHMSI Stay Lift Motions”) [DE ## 58 & 59].
11. The court held a final hearing on the AHMSI Stay Lift Motions on February 1, 2010 (the “Final AHMSI Hearing”). Certain post-trial briefing was subsequently submitted [DE ## 75 & 76], when thorny standing and evidentiary issues percolated to the surface during the Final AHMSI Hearing.
12. On July 13, 2010, the court issued a Memorandum Opinion and Order ultimately denying the AHMSI Stay Lift Motions (the “Opinion”) [DE # 80].3 The Opinion contains a detailed discussion of the thorny standing and evidentiary problems that surfaced at the Final AHMSI Hearing. Specifically, the court found that AHMSI failed to meet its evidentiary burden at the hearing of establishing it had actual standing to pursue collection remedies under the mortgage loan note as either the holder or owner (i.e., servicer or lender) of the note. First, AHMSI had not attached documents to the AHMSI Stay Lift Motions to show chain of title and holder status. Then, at the Final AHMSI Hearing, AHM-SI showed up with a different version of the mortgage loan note than had been attached to the AHMSI Stay Lift Motions, which was indorsed in blank. However, AHMSI’s lawyer did not move to have it admitted into evidence. Moreover, the AHMSI witness was not able to competently testify from personal knowledge regarding holder or chain of custody issues. In denying the AHMSI Stay Lift Motions, the court indicated that the denial was without prejudice to AHMSI refiling a motion and adequately proving up its holder status. Additionally, the court found that the court’s ruling was without prejudice to the Debtor seeking reimbursement for its attorney’s fees and costs in defending the AHMSI Stay Lift Motions.
13. On September 13, 2010, counsel for the Debtor, Theodore O. Bartholow, III (“Debtor’s Counsel”), filed an Application of Debtor’s Counsel for Allowance of Compensations and Reimbursement of Expenses (the “Original Application”) [DE # 84], which requested that the court award him $29,177.50 in attorney’s fees and $814.95 in expenses for work performed in connection with the defense of the Citi Stay Lift Motion and the AHMSI Stay Lift Motions. To be clear, the Original Application not only requested approval of such fees as reasonable and necessary under Johnson v. Georgia Highway Express, Inc., 488 F.2d 714, 717-719 (5th Cir.1974) and Am. Benefit Life Ins. Co. v. Baddock (In re First Colonial Corp. of Am.), 544 F.2d 1291, 1299 (5th Cir.1977), cert. denied, 431 U.S. 904, 97 S.Ct. 1696, 52 L.Ed.2d 388 (1977), but it also requested an order directing that Citi, AHMSI and HWALLP pay these fees and expenses, effectively shifting the burden to pay from the Debtor to Citi, AHMSI and HWALLP.4
14. On October 13, 2010, this court held a hearing on the Original Application. At the hearing, the court expressed concerns *207about adequate and proper notice being given to all parties of the fee-shifting aspect of the Original Application. The court then instructed counsel for the Debt- or to file a supplement to the Original Application disclosing the exact fee shifting-allocation being requested as to various parties (and counsel) and also disclosing the legal authority being relied upon.
15. On February 25, 2011, the Debtor filed a Supplement to Debtor’s Application for Compensation (the “Supplement”) [DE # 100]. The Supplement asserted that “neither the Citi or AHMSI motions for relief should have been filed because the motions lacked foundation in fact or law because Citi, AHMSI and their counsel, HWALLP, knew or should have known that they lacked foundation.”5 As such, Debtor’s Counsel contended that all of the Debtor’s attorney’s fees and costs incurred in the defense of the AHMSI Stay Lift Motions and the Citi Stay Lift Motion were incurred needlessly and that such fees and costs should be charged to the moving parties and their attorneys pursuant to the court’s broad authority under 11 U.S.C. § 105(a), the court’s inherent authority, and 28 U.S.C. § 1927.6
16. On April 26, 2011, the court held a hearing on the Compensation Application. After hearing all of the evidence, the court deduced that Debtor’s Counsel’s request for shifting its fees centered around two main issues: (1) the AHMSI Stay Lift Motions represented that the attached note to the AHMSI Stay Lift Motions was a true and correct copy, when, in fact, there was a more “updated” version of the note that contained additional indorse-ments; and (2) the witness AHMSI brought to the final hearing did not have personal knowledge of the facts and circumstances surrounding the signing and transfer of the Debtor’s note and thus, was unable to appropriately prove up AHMSI’s loan documents.7
II. CONCLUSIONS OF LAW
When the Original Application was first presented by Debtor’s Counsel, the court had some initial concern that Debtor’s Counsel was, essentially, seeking Rule 11 sanctions without having adhered to the steps in Rule 11. Federal Rule of Civil Procedure 11 and Federal Rule of Bankruptcy Procedure 9011 require that a motion for sanctions be made separately from any other motion and describe the specific conduct that has allegedly been committed in violation of the rule. See Fed.R.Civ.P. 11(c)(2); Fed. R. BankrJP. 9011(c)(1)(A). Moreover, even where a motion is served, it cannot be filed with the court unless, within 21 days after it has been served on the party subject to the motion, there has not been withdrawal of the problematic pleading or other appropriate correction. See Fed.R.Civ.P. 11(c)(2); Fed. R. Bankr. 9011(c)(1)(A). The purpose of this mandatory safe-harbor provision is to protect litigants from sanctions, formalize procedural due process considerations such as *208notice for the protection of the party accused of sanctionable behavior, and encourage the withdrawal of papers that violate the rule without involving the court. See Roth v. Green, 466 F.3d 1179, 1192 (10th Cir.2006), cert. denied, 552 U.S. 814, 128 S.Ct. 69, 169 L.Ed.2d 18 (2007); see also Cadle Co. v. Pratt (In re Pratt), 524 F.3d 580, 585-87 (5th Cir.2008). As noted herein, the Debtor and her counsel did not choose this option for requesting reimbursement of its attorney’s fees; rather the Debtor requested that the court should require Citi, AHMSI and HWALLP to pay for her attorney’s fees pursuant to 28 U.S.C. § 1927, the court’s inherent authority, and Section 105(a) of the Bankruptcy Code.
A. The Court’s Ability to Shift Fees Under 28 U.S.C. § 1927
First, the Debtor has cited 28 U.S.C. § 1927 as authority for requiring HWALLP and AHMSI to pay for her attorney’s fees and expenses incurred in defending the Citi Stay Lift Motion and the AHMSI Stay Lift Motions.8 Specifically, Section 1927 provides that:
Any attorney or other person admitted to conduct cases in any court of the United States or any Territory thereof who so multiplies the proceedings in any case unreasonably and vexatiously may be required by the court to satisfy personally the excess costs, expenses, and attorneys’ fees reasonably incurred because of such conduct.9
Thus, at the outset, it should be noted that 28 U.S.C. § 1927 is not applicable to AHMSI (or Citi, for that matter) as they are not attorneys or persons admitted to practice before the court. See Procter & Gamble Co. v. Amway Corp., 280 F.3d 519, 525 (5th Cir.2002); see also In re Butan, No. H-09-0894, 2009 WL 6509350, at *2-4, (Bankr.S.D.Tex. Sept. 15, 2009).
In any event, as to HWALLP, the Fifth Circuit has interpreted this statute as requiring evidence of bad faith, improper motive, or reckless disregard of the duty owed to the court. See Edwards v. Gen. Motors Corp., 153 F.3d 242, 246 (5th Cir.1998). Moreover, the Fifth Circuit has noted that 28 U.S.C. § 1927 should be sparingly applied, and “except when the entire course of proceedings were unwarranted and should neither have been commenced nor persisted in, an award under 28 U.S.C. § 1927 may not shift the entire financial burden of an action’s defense.” FDIC v. Calhoun, 34 F.3d 1291, 1297 (5th Cir.1994) (citing Browning v. Kramer, 931 F.2d 340, 345 (5th Cir. 1991)).
The court, having considered the evidence and arguments presented by the parties, finds that HWALLP did not act with bad faith, improper motive, or reckless disregard of its duty to the court as to the AHMSI Stay Lift Motions or the Citi Stay Lift Motion. First, as stated in the court’s Opinion, the AHMSI Stay Lift Motions ultimately came down to standing. The court was certainly troubled by the *209somewhat lackluster evidence presented at the Final AHMSI Hearing, but the court does not think that forgetfulness in offering a piece of evidence or carelessness when choosing the proper/best witness to prove up one’s case necessarily rises to the level which would allow this court to assess the Debtor’s attorney’s fees against HWALLP under Section 1927. Second, as to the request for fees against HWALLP for its involvement in the Citi Stay Lift Motion, the court does not find that HWALLP acted in bad faith, with an improper motive, or reckless disregard of its duty to the court. Although the court was initially bothered by the fact that the Citi Stay Lift Motion was abruptly withdrawn only days before a final hearing (an action that may certainly have raised concerns that AHMSI was recklessly disregarding its duty to the court and causing additional time and expense to be placed on the Debtor), the court is convinced that the withdrawal of the Citi Stay Lift Motion was not done with such an improper purpose. Rather, withdrawal was done at the request of Debtor’s Counsel in hopes that a settlement could be reached between the parties. See Debtor’s Exhibit G & HWALLP’s Exhibit 16.
B. The Court’s Ability to Fee Shift Under Its Inherent Authority and Section 105(a) of the Bankruptcy Code
When a party’s conduct is not effectively sanctionable pursuant to an existing rule or statute (i.e., Rule 11 or 28 U.S.C. § 1927), it may nevertheless be appropriate for a court to turn to its inherent power to impose sanctions. See Chambers v. NASCO, Inc., 501 U.S. 32, 50, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991); see also Carroll v. The Jaques Admiralty Law Firm, P.C., 110 F.3d 290, 292 (5th Cir.1997). Inherent sanctioning power is “based on the need to control court proceeding^] and [the] necessity of protecting the exercise of judicial authority in connection with those proceedings.” Case, 937 F.2d at 1023. Thus, a court’s inherent power is not “a broad reservoir of power, ready at the imperial hand, but a limited source; an implied power squeezed from the need to make the court function.” NASCO, Inc. v. Calcasieu Television & Radio, Inc., 894 F.2d 696, 702 (5th Cir.1990), aff'd sub nom. Chambers v. NASCO, Inc., 501 U.S. 32, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991).
As to the court’s ability to use its inherent power to fee shift, the general rule in federal courts is that a prevailing party cannot recover attorney’s fees absent specific statutory authority, a contractual right, or certain special circumstances. See Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 255-60, 95 S.Ct. 1612, 44 L.Ed.2d 141 (1975); see also Galveston County Navigation Dist No. 1 v. Hopson Towing Co., Inc., 92 F.3d 353, 356 (5th Cir.1996). This rule “is so venerable and ubiquitous in American courts it is known as the ‘American Rule’ ”. Frazin v. Haynes & Boone, LLP (In re Frazin), 413 B.R. 378, 400 (Bankr.N.D.Tex.2009) (citing Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, 310-11 (Tex.2006)); see also Crenshaw v. Gen. Dynamics Corp., 940 F.2d 125, 129 (5th Cir.1991). The American Rule, however, does have several exceptions.
Specifically, the Supreme Court has recognized that courts have the inherent power to issue sanctions against litigants for their bad faith conduct and that a court may assess attorney’s fees as a sanction when a party has acted in bad faith, vexatiously, wantonly, or for oppressive reasons. Chambers, 501 U.S. at 43-46, 111 S.Ct. 2123; Alyeska, 421 U.S. at 258-259, *21095 S.Ct. 1612.10 The threshold for invocation is high and if such inherent power is invoked, it must be exercised with restraint and discretion. Maguire Oil Co. v. City of Houston, 143 F.3d 205, 209 (5th Cir.1998). Accordingly, a court should only invoke its inherent power if it finds that “a fraud has been practiced upon it or that the very temple of justice has been defiled.” Boland Marine & Mfg. Co. v. Rihner, 41 F.3d 997, 1005 (5th Cir.1995) (citing Chambers, 501 U.S. at 46, 111 S.Ct. 2123).
The Fifth Circuit has found that “the ‘bad faith’ actions must occur in the course of litigation” and that the bad faith exception “does not address conduct underlying the substance of the case; rather, it refers to the conduct of the party and the party’s counsel during the litigation of the case.” Rogers v. Air Line Pilots Assoc., Int’l, 988 F.2d 607, 615-16 (5th Cir.1993); Flanagan v. Havertys Furniture Cos, Inc., 484 F.Supp.2d 580, 582 (W.D.Tex.2006). Moreover, the Fifth Circuit has described that the conduct required to invoke the exception to the American Rule must be “callous and recalcitrant, arbitrary, and capricious, or will-full, callous, and persistent.” Galveston County, 92 F.3d 353, 358 (5th Cir.1996).
Similarly, a bankruptcy court’s authority under Section 105(a) of the Bankruptcy Code also comports with its inherent power to sanction, and some courts have found that such powers are essentially coterminous. Caldwell v. Unified Capital Corp. (In re Rainbow Magazine, Inc.), 77 F.3d 278, 284 (9th Cir.1996) (“By providing that bankruptcy courts could issue orders necessary ‘to prevent an abuse of process,’ Congress impliedly rec-ognized that bankruptcy courts have the inherent power to sanction that Chambers recognized within Article III courts.”); Jones v. Bank of Santa Fe (In re Courtesy Inns, Ltd., Inc.), 40 F.3d 1084, 1089 (10th Cir.1994) (“We believe, and hold, that § 105 intended to imbue the bankruptcy courts with the inherent power recognized by the Supreme court in Chambers”); but see Ginsberg v. Evergreen Sec. Ltd. (In re Evergreen Sec., Ltd.), 570 F.3d 1257, 1273 (11th Cir.2009); Knupfer v. Lindblade (In re Dyer), 322 F.3d 1178, 1196 (9th Cir. 2003); In re Rimsat, Ltd., 212 F.3d 1039, 1049 (7th Cir.2000). Section 105(a) of the Bankruptcy Code states that:
The court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of the title. No provision of this title providing for the raising of an issue by a party in interest shall be construed to preclude the court from, sua sponte, taking any action or making any determination necessary or appropriate to enforce or implement court orders or rules, or to prevent an abuse of process.11
Several courts have concluded that Section 105(a) provides a basis for a bankruptcy court to make an award of attorney’s fees under certain circumstances. In re Paige, 365 B.R. 632, 637-40 (Bankr.N.D.Tex. 2007); In re Brown, 444 B.R. 691, 695 (Bankr.E.D.Tex.2009); In re Gorshtein, 285 B.R. 118, 124 (Bankr.S.D.N.Y.2002). However, regardless of whether a bankruptcy court chooses to impose sanctions under its inherent authority or under Section 105(a) of the Bankruptcy Code, it still must make a “specific finding of bad faith.” In re Parsley, 384 B.R. 138, 179 (Bankr. S.D.Tex.2008); Gorshtein, 285 B.R. at 124. *211In order to better determine if such bad faith has been demonstrated by the evidence presented here, the court believes it to be a useful exercise to look at a few cases in which bankruptcy courts have found that such bad faith existed, specifically in the factual scenario of a loan servi-cer prosecuting a motion for relief from stay.
First, in In re Brown, Judge McGuire imposed a relatively modest sanction against a loan servicer and its counsel under Section 105(a) of the Bankruptcy Code.12 See Brown, 444 B.R. at 695. In Brown, Citi Residential Lending, Inc., (the “Servicer”), filed a motion for relief from the automatic stay, which was ultimately objected to by the debtor through counsel (ironically, the same lawyer also involved in our case, Theodore O. Bartholow, III). Id. at 693. After reviewing the debtor’s objection, the Servicer sought to withdraw the motion for relief from the automatic stay. Id. The bankruptcy court ultimately heard evidence that the note that was the basis of the Servicer’s motion had been transferred to another loan servicer prior to the Servicer filing its motion for relief from the automatic stay. Id. Based on this behavior, the court ultimately found that the Servicer had failed to present any testimony or other evidence establishing that its motion for relief from the automatic stay had a reasonable basis in law or fact, and because a motion for relief from the automatic stay to foreclose on a debt- or’s home must have a high degree of reliability, the court concluded that sanctions were appropriate under Section 105(a) of the Bankruptcy Code. Id. at 695. The court would note that although sanctions amounting to $4,675 in attorney’s fees were requested by the debtor, the court ultimately awarded only $650 to be paid by the Servicer and its counsel, HWALLP. Id.
Judge Bohm, in the case of In re Parsley, found that “bad faith” also existed when an attorney made a knowing misrepresentation to the court during his prosecution of a motion for relief from stay. See Parsley, 384 B.R. at 180. This knowing misrepresentation was made by an attorney representing a loan servicer with regard to a routine motion for relief from stay. Specifically, the attorney had stated on the record that the motion for relief from stay “was a good motion” in response to questions from the bankruptcy court about whether allegations regarding the payment history as set forth in the motion for relief from stay were “just flat-out wrong.” Id. The bankruptcy court later heard evidence that the attorney had actual knowledge of the inaccurate factual allegations in the motion for relief from stay (including inaccuracies with the payment history), and this ultimately amounted to a finding of bad faith against the attorney as well as his law firm. Id. Interestingly, despite finding such bad faith and ultimately imputing this bad faith on the attorney’s law firm, Judge Bohm did not ultimately issue sanctions against either the attorney or his law firm, as the attorney was ultimately fired (and the Judge believed this to be punishment enough) and the law firm took certain corrective measures in how it handled future motions for relief from stay. Such actions in Judge Bohm’s view remedied any bad faith that had occurred in the bankruptcy case. Id. at 182-83.
Here, the court does not believe that the evidence submitted rises to the level of “bad faith” as articulated by the Fifth Circuit as well as other bankruptcy *212courts in this circuit. Although there were certainly some issues with the evidentiary presentation at the final hearing on the AHMSI Stay Lift Motions, which ultimately created a standing issue as articulated in the Opinion, the court does not believe that such behavior amounted to anything that could be characterized as callous, recalcitrant, arbitrary, capricious, willful, callous, or persistent. Similarly, the court does not think that the evidence presented rises to the level of bad faith with regard to HWALLP bringing the Citi Stay Lift Motion. As articulated earlier, the court does not think that HWALLP’s decision to withdraw the Citi Stay Lift Motion, just days before the final hearing, shows bad faith, but if anything, shows a good faith effort to possibly settle matters with Debt- or’s Counsel. Accordingly, the court denies the Debtor’s request for HWALLP and AHMSI to pay for the Debtor’s attorney’s fees under either this court’s inherent authority or section 105(a) of the Bankruptcy Code.
III. CONCLUSION
A. No Fee Shifting.
The court is certainly cognizant of the fact that the mortgage servicing industry does not always show itself to be the perfect, well-oiled machine that one would hope it to be. As more and more individuals have gone into default on their home mortgages and resorted to seeking bankruptcy protection, bankruptcy courts have seen certain problems that exist in the home mortgage servicing industry, particularly issues when it comes to chain of title and other documentation. Some of these cases may require bankruptcy courts to take action and issue appropriate orders to ensure that such practices do not continue; however, in this case, the court does not believe it to be a good exercise of discretion to do so.
The court would conclude, on the topic of fee-shifting, by stating that Rule 11 seems to be the more appropriate tool to use when requesting sanctions or fee shifting, not only because it allows a party an opportunity to remedy any mistakes it may have made, but also because it seems to make parties engage in a dialogue which could ultimately facilitate settlement. The court found it very enlightening to read Debtor’s Exhibit G, which was a myriad of emails that were exchanged between Debt- or’s Counsel and HWALLP over the approximately 3-year period that this matter was pending. From the court’s review of these emails, there was certainly no evidence of inappropriate behavior by HWALLP, AHMSI, or Citi. In fact, the overall tone of the emails was quite professional and courteous. If anything, this case appeared to be one primed for settlement, as there were significant discussions about a possible loan modification. However, settlement and/or a loan modification never happened. Instead, HWALLP filed the Citi Stay Lift Motion and the AHMSI Stay Lift Motions with certain chain-of-custody gaps and documentation errors (first no indorsement; then ultimately an indorsement-in-blank supplied but not offered into evidence). While this was sloppy and bad form (which justified denying stay relief), this, in and of itself, did not rise to the level of bad faith or vexatious litigation that would legitimize fee shifting.
B. Amendment of Prior Ruling, So as to Allow Debtor’s Counsel’s Fees and Expenses, Payable by the Debtor or From Trust Funds Held by Debtor’s Counsel.
As noted at footnote 1 of this Amended Memorandum Opinion and Order, this court, in its Original Opinion and Ordei;, denied both the fee-shifting request of Debtor’s Counsel’s Application as well *213as the overall allowance of the fees and expenses and reimbursement of such from the Debtor. On October 4, 2011, Debtor’s Counsel filed his Motion to Reconsider, requesting that the court reconsider the Original Opinion and Order and enter an amended order allowing his requested fees and costs in the amount of $29,992.45, with $20,992.45 to be paid directly by the Debtor or from funds held in trust by his law firm (Debtor’s Counsel has already been paid $9,000 from Citi). As noted in footnote 1, no party in interest objected to the Motion to Reconsider. On November 17, 2011, the court held a lengthy hearing on the Motion to Reconsider. The Debtor testified in support of the Application — even as she was advised that her problems with her mortgage had not yet been resolved and she will almost certainly have continued litigation regarding the mortgage in the future, post-discharge. The Debtor expressed a full understanding that she still owed a large amount of postpetition arrearages on her mortgage and that this was not going to “go away” by virtue of her likely, imminent discharge.
The court ultimately decided to grant the Motion to Reconsider — but it allows the fees and expenses to be assessed against the Debtor with significant angst.
On the one hand, the work performed by Debtor’s counsel was real and was performed at reasonable rates. Specifically, the court has no doubt about the hours of labor provided, that such work was performed at reasonable rates, that Debtor’s Counsel was competent and qualified, and that he provided the tangible benefit of keeping the Debtor in her house for the five years of her bankruptcy case (in fact, “rent-free” for much of the case, since the Debtor has not paid any mortgage company for several months, due to ongoing concern on the Debtor’s part regarding what entity is the holder of the mortgage note and regarding certain fees assessed). Remarkably, no mortgage servicer/holder has filed a motion to lift stay after this court denied a previous motion to lift stay (without prejudice) due to proof defects by the movant.
On the other hand, this court has grave concerns about what has been accomplished in this case. And, moreover, do the requested fees and expenses pass muster under Section 330(a)(4)(B) (i.e., has there been the “benefit” to the Debtor that this section contemplates, when representing a chapter 13 debtor)?
To use a phrase popular with politicians, it seems, in many respects, all that has been accomplished here is “kicking the can down the road.” Bankruptcy certainly is, and should be about, solving problems. Is the Debtor’s problem with her mortgage lender on her home solved? No. The Debtor is almost certainly looking at more litigation in the state courts, post-discharge, or maybe in another bankruptcy case. Debtor’s Counsel urged vociferously that he has tried mightily to solve the Debtor’s problems with her mortgage company, and that despite such problems, he has been able to keep the Debtor in her house thus far. And Debtor’s Counsel urges that he is essentially dealing with a Goliath every time he goes up against a mortgage servicer/holder and requests chain of title, proof of holder status, and information about fees charged, such as inspection and appraisal fees. Debtor’s Counsel also urges that it is unreasonable to always “back down” and enter into an agreed order with a mortgage lender pertaining to a debtor’s home and that it would have a chilling effect on debtors and the debtors’ bar if the court did not allow fair (albeit large) fees in a case like Ms. Pastran’s.
*214Debtor’s Counsel has ultimately persuaded the court that the fees and expenses should be allowed under Section 330(a)(4)(B) of the Bankruptcy Code in the case at bar. But, again, the court does it with some angst and with no open invitation for attorneys to ask for this in every case. Again, the court believes a bankruptcy case should solve problems. Here, the court will accept the unrefuted position of the Debtor and her counsel that: (a) the incurred fees and expenses have benefitted the Debtor by keeping her in her home during her five-year case; and (b) there was really no way to provide any more benefit than this to her, given the difficulty they have had in obtaining information from and engaging in dialogue with the mortgage servicer. However, in all candor, this has been a hard and close call.
Often, bankruptcy is about picking the least-bad solution:
1. In some cases, the least-bad solution chosen is to negotiate an agreed order with a mortgage servicerfiender — even if the servicer’s chain of title documents are questionable and even if the servicer seems to be asserting some unwarranted fees. This might be the least-bad solution because a debtor does not have much equity in the house and any war will not be worth the cost of the fight. Or it might be the least-bad solution because the mortgage lender will possibly enter into a mortgage modification after an agreed order is put in place.
2. In some cases, the least-bad solution may mean litigating with a mortgage servi-cer. Such litigation may be fighting a motion to lift stay (or two, as was done here), because one does not believe a servi-cer can meet its burden of proof at the stay-lift hearing. Or such litigation may mean objecting to proofs of claim and filing adversary proceedings to seek declaratory judgments about holder status and/or fees charged or other actions taken. This type of fighting takes time and costs money. Cost-benefit decisions must be made.
Every case is different. And Monday morning quarter-backing is difficult when the case is over and the fees have been incurred. It is frustrating and unfortunate that there is a status quo right now in the real estate markets and home mortgage industry such that there seems to be nothing but least-bad solutions for all concerned.
Accordingly,
IT IS ORDERED that the fee-shifting aspect of the Compensation Application is DENIED.
IT IS FURTHER ORDERED that in all other respects, the Compensation Application is GRANTED and that pursuant to Section 330(a)(4)(B) of the Bankruptcy Code, fees and expenses shall be awarded to Debtor’s Counsel, to be paid from the Debtor and/or her funds currently being held in trust by Debtor’s Counsel.
. On September 20, 2011, this court entered a Memorandum Opinion and Order Denying Ap*204plication of Chapter 13 Debtor’s Counsel for Allowance of Compensation and Reimbursement of Expenses (Including Fee-Shifting Request) [DE ## 84 & 100] (the "Original Opinion and Order”) [DE # 111]. On October 4, 2011, counsel for the Debtor, Theodore O. Bartholow, III, filed a Motion to Reconsider Order Denying Application for Compensation (the “Motion to Reconsider”) [DE # 113], requesting that the court reconsider the Original Opinion and Order and enter an amended order allowing his requested fees and costs in the amount of $29,992.45, with $20,992.45 to be paid directly by the Debtor or from funds held in trust by his law firm. However, the Motion to Reconsider did not request any further consideration of the court’s denial of the fee-shifting request. No party in interest objected to the Motion to Reconsider. On November 17, 2011, the court held a lengthy hearing on the Motion to Reconsider, and ultimately decided to grant the Motion to Reconsider-for the reasons now discussed in the new Section III.B. of this Amended Memorandum Opinion and Order. Thus, the court issues this Amended Memorandum Opinion and Order — allowing the fee and expense request to be paid from Debtor-funds, but keeping intact the court’s decision on fee shifting.
. Note, that in the Northern District of Texas, a Chapter 13 debtor’s counsel need not file a formal fee application in order to be paid compensation for his work representing a debtor unless counsel is seeking more than the "Standard Fee” of $3,000, plus filing fees and costs. See General Order 2010-01 (entitled, "Amended Standing Order Concerning all Chapter 13 Cases”), ¶ 10(c).
. The Opinion was subsequently amended on July 30, 2010 to change the term "note maker” to "note payee” on p. 3 of the Opinion.
. Specifically, Debtor’s Counsel allocated $13,755 in fees defending the Citi Stay Lift Motion (sought from Citi) and $15,267.50 in fees defending the AHMSI Stay Lift Motions (sought from AHMSI). Additionally, Debtor's Counsel also allocated $155.00 in fees expended due to the threat of a motion for relief from stay by HWALLP early on in the case. Debtor's Counsel asked that HWALLP be held jointly and severally liable for the entire amount of fees and expenses since it had filed and prosecuted both the Citi Stay Lift Motion and the AHMSI Stay Lift Motions.
. See Supplement at p. 1.
. The Debtor did not request any form of fee shifting as a sanction pursuant to Federal Rule of Civil Procedure 11 and Federal Rule of Bankruptcy Procedure 9011.
. The request for fee-shifting as to the Citi Stay Lift Motion revolved around the fact that Citi filed its motion not only at a time when AMC was the servicer of record (according to the Proof of Claim on file) but Citi’s motion did not attach proof of holder status. Then the Citi Stay Lift Motion was ultimately withdrawn by Citi on June 19, 2008 (on the eve of a final hearing). Citi and the Debtor reached a settlement prior to the Hearing on the Compensation Application, and the Debtor withdrew its claims for attorney’s fees and costs only as to Citi in exchange for Citi paying the Debtor $9,000.
. Recall that Citi has settled with the Debtor as to the fee shifting issues. See note 7 herein.
. 28 U.S.C. § 1927 (emphasis added). The Fifth Circuit has expressly held that bankruptcy courts have the ability to impose sanctions under 28 U.S.C. § 1927. See Citizens Bank & Trust Co. v. Case (In re Case), 937 F.2d 1014, 1023 (5th Cir.1991); but see, e.g., In re Courtesy Inns, Ltd., Inc., 40 F.3d 1084, 1086 (10th Cir.1994) (holding that a bankruptcy court was not a "court of the United States,” and thus lacked jurisdiction to sanction Chapter 11 debtor’s president for having filed the petition in bad faith); Miller v. Cardinale (In re DeVille), 361 F.3d 539, 546 (9th Cir.2004) (finding that a bankruptcy court was not a "court of the United States”).
. Although Chambers involved a district court, the inherent powers described by the Supreme Court "are equally applicable to the bankruptcy court.” Case, 937 F.2d at 1023.
. See 11 U.S.C. § 105(a).
. Judge McGuire also imposed sanctions against the loan servicer’s counsel (also coincidentally, the same law firm in this case, HWALLP) pursuant to 28 U.S.C. § 1927. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494452/ | MEMORANDUM OPINION REGARDING PLAINTIFFS’ COMPLAINT FOR TURNOVER AND DAMAGES [Doc. No. 1]
JEFF BOHM, Bankruptcy Judge.
I. Introduction
This Memorandum Opinion concerns a financial institution’s right to freeze a depositor’s account after the depositor has filed a Chapter 13 petition. Case law is clear that the financial institution may *217freeze an account without violating the automatic stay. However, the question in this suit is whether the institution may freeze the account indefinitely or whether it is required, once it freezes the account, to promptly seek a lifting of the automatic stay in order to effectuate a setoff of the account.
II. Procedural and Factual Background
1. On April 5, 2010, Bryant Turner and Wendi Johnson Turner (the Debtors) filed their Chapter 13 bankruptcy petition. [Main Case, Doc. No. 1].
2. The Debtors had a checking account, a savings account, and loans with First Community Credit Union (First Community). [Debtor’s Ex. No. 30].
3. In their Schedule B — Personal Property, the Debtors listed $3,000 in a checking account. This property was described as a First Community Credit Union Checking Account. [Schedule B, Main Case, Doc. No. 23]. The Debtors listed this property as exempt pursuant to 11 U.S.C. § 522(d)(5). [Schedule C, Main Case, Doc. No. 23].
4. In their Schedule D — Creditors Holding Secured Claims, the Debtors listed First Community as having a lien on the Debtors’ 2003 Nissan Altima. The amount of the claim without deducting the value of the collateral, was listed as $3,225.00. [Schedule D, Main Case, Doc. No. 23].
5. In their Schedule F — Creditors Holding Unsecured Nonpriority Claims, the Debtors listed First Community as having one unsecured claim in the amount of $1,837.00. [Schedule F, Main Case, Doc. No. 23].1 According to the Debtors’ schedules, the total amount of indebtedness owed to First Community, both secured and unsecured, was $5,062.00. On April 5, 2010, the Debtors actually had $5.58 in their savings account and $5,643.98 in their checking account. [Debtor’s Ex. No. 30].
6. On April 8, 2010, the Debtors attempted to make a deposit in their checking account with First Community. They were unable to do so. The Debtors also attempted to withdraw funds on that same day. They were unable to do so; First Community had frozen the Debtor’s funds. [Tape Recording, 4/20/11, 4:24:48 P.MJ.
7. On April 8, 2011, Nicole Roberts (Roberts), an employee of First Community, and the sole employee within First Community’s bankruptcy department, telephoned Wendi Johnson Turner and spoke with her to inquire whether she would be paying her loans outside of the Chapter 13 bankruptcy.2 [First Community’s Ex. No. 8].
*2188. On April 9, 2010, the Debtors made a demand for their frozen funds, but First Community declined to unfreeze the funds. [Debtor’s Ex. No. 17, p. 2]; [Debtor’s Ex. No. 13].
9. Between April 16, 2010 and October 4, 2010, First Community withdrew $203.58 from the Debtors’ account and applied these funds to pay down the Debtors’ loans with First Community via an automatic bill pay that the Debtors failed to disable before filing for bankruptcy. First Community did not seek to have the automatic stay lifted to debit the Debtors’ account (and has never subsequently sought to have the stay lifted). [Debtor’s Ex. No. 31]; [Tape Recording, 4/20/11, 1:15:09 P.M.]. It was not the policy of First Community to cease automatic debiting upon the filing of a bankruptcy. [Tape Recording, 4/20/11, 1:59:31 P.M.]. The automatic bill pay was cancelled as of December 30, 2010. [First Community’s Ex. No. 9]. First Community refunded the automatic debit withdrawals in October of 2010. [Debtors’ Ex. No. 31].
10. First Community filed three proofs of claim in this bankruptcy case. Proof of Claim No. 3 was filed for $3,214.58, and represents that this debt is secured by the Nissan Altima. [Debtors’ Ex. No. 5], Proof of Claim No. 4 was filed for $943.86. [Debtors’ Ex. No. 6]. This claim is also shown as secured by the Nissan Altima. Proof of Claim No. 6 was filed for $1,834.64. [Debtor’s Ex. No. 7]. This claim is also shown as secured by the Nissan Altima. No proof of claim shows any checking or savings accounts at First Community as collateral. No proof of claim indicates that First Community would freeze the Debtors’ account so as to setoff the funds at a later date. The total amount of debt owed to First Community, based on the proofs of claim, is $5,993.08
11. First Community intended to freeze the funds until the five-year Chapter 13 period for plan payments is over. [Debtor’s Ex. No. 13].
12. First Community asserted that it removed the freeze on April 18, 2011 — i.e., more than one year after it imposed the freeze on the funds. [Tape Recording, 4/20/11, 4:27:43 P.M.]. However, even after the freeze was removed, the Debtors could not access the funds. [Tape Recording, 4/20/11, 4:27:54 P.M.].
13. On July 7, 2010, the Debtors initiated the above-referenced adversary proceeding. [Adv. Doc. No. 1].
14. On February 9, 2011, counsel for First Community sent a letter to the Debtors stating the following: “As you may be aware, FCCU claims a right of setoff as to certain deposits in Debtors’ accounts at FCCU. In the near future, FCCU intends to seek relief from the automatic stay in order to effectuate its right.” [Ex. No. 16]. Included with the letter was a check in the amount of $1,459.91, which purported to be the amount of the Debtors’ deposits less the amount subject to First Community’s setoff right. [Ex. No. 16, p. 2]. *219The check was dated December 10, 2010. [Ex. No. 16, p. 2].
15. On April 20, 2011, this Court held a trial as to whether First Community violated the automatic stay and whether the Debtors incurred any actual damages. Exhibits were introduced and testimony was adduced. The following persons testified: Nicole Roberts (Roberts), an employee at First Community who worked in the bankruptcy department; and the two debtors: Bryant Turner and Wendi Johnson Turner. On April 27, 2011, counsel for the parties made closing arguments and the Court took the matter under advisement.
16. At the beginning of the April 20, 2011 trial, the Court ruled from the bench that because counsel for the Debtors made woefully late disclosures to First Community’s counsel about the basis for actual damages alleged by the Debtors, the Debtors would be prohibited from seeking damages concerning any medical expenses allegedly due to First Community’s violation of the automatic stay, as well as any damages relating to the Debtors’ inability to obtain a mortgage modification.3 [Tape Recording, 4/20/2011 at 12:44:32 PM].
III. Credibility of Witnesses
A.Nicole Roberts
The Court finds Roberts to be credible on only some of the issues about which she testified. By way of one example, Roberts testified that First Community had placed an administrative freeze on only a portion of the Debtors’ deposits, totaling $2,985.98. [Debtor’s Ex. No. 30]. However, First Community had no documentation confirming a partial freeze. [Tape Recording, 4/20/11, 1:00:14 P.M.]. Moreover, Wendi Johnson Turner credibly contradicted this testimony, testifying that she was unable to access any of the funds on deposit at First Community. [Tape Recording, 4/20/2011, 4:24:48 P.MJ. Accordingly, the Court gives only some weight to Roberts’ testimony.
B. Bryant Turner
The Court finds Bryant Turner to be very credible on all issues about which he testified. Accordingly, the Court gives substantial weight to his testimony.
C. Wendi Johnson Turner
The Court finds Wendi Johnson Turner to be very credible on all issues about which she testified. Accordingly, the Court gives substantial weight to her testimony.
IV. Conclusions of Law
A. Jurisdiction and Venue
The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(a). This particular dispute is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (C) and (O), and the general “catch-all” language of 28 U.S.C. § 157(b)(2). See In re Southmark Corp., 163 F.3d 925, 930 (5th Cir.1999) (“[A] proceeding is core under section 157 if it invokes a substantive right provided by title 11 or if it is a proceeding that, by its nature, could arise only in the context of a bankruptcy case.”); De Montaigu v. Ginther (In re Ginther Trusts) Adv. No. 06-3556, 2006 WL 3805670, at *19 (Bankr. S.D.Tex. Dec. 22, 2006) (holding that an “[adversary [proceeding is a core proceeding under 28 U.S.C. § 157(b)(2) even though the laundry list of core proceedings under § 157(b)(2) does not specifically name this particular circumstance”).
*220Having made this conclusion of law as to jurisdiction, this Court nevertheless notes that since the trial in this suit was concluded (at which time the Court took the matter under advisement), the Supreme Court of the United States has issued its watershed opinion of Stern v. Marshall, No. 10-179, 2011 WL 2472792 (June 23, 2011). In Stern, the Supreme Court held that 28 U.S.C. § 157(b)(2)(C)— which authorizes bankruptcy judges to issue final judgments in counterclaims by the debtors’ estate against entities filing claims against the estate — is an unconstitutional delegation of Article III authority to bankruptcy judges, at least when the dispute being adjudicated is based on state common law. Id: at *14. Because the Debtors’ suit against First Community is in effect a counterclaim against this institution which filed proofs of claim in the Debtors’ main case, at first blush it would appear that Stem is on all fours and therefore that: (1) this Court does not have the constitutional authority to enter a final judgment in this dispute; and (2) this Court must therefore submit proposed findings of fact and conclusions of law to the District Court, together with a proposed judgment to be signed by that Article III Court. However, for the reasons set forth below, the undersigned bankruptcy judge believes that he does have constitutional authority to sign a final judgment in this adversary proceeding.
First, in Stern, the suit between the debtor’s estate and the creditor concerned state law issues. Id. at *19. In the suit at bar, the suit arises out of alleged violations of the automatic stay imposed by an express Bankruptcy Code provision — i.e. § 362(a). Moreover, the relief sought by the Debtors is based upon another express Bankruptcy Code provision — i.e. § 362(k), which expressly provides for recovery of damages by a debtor for a creditor’s violation of the automatic stay. State law has no equivalent to these statutes; they are purely a creature of the Bankruptcy Code. Accordingly, because the resolution of this dispute is not based on state common law, Stem is inapplicable, and this Court has the constitutional authority to enter a final judgment in this suit pursuant to 28 U.S.C. §§ 157(a) and (b)(1).
Alternatively, even if Stem is applicable, this Court concludes that the one exception articulated by the Supreme Court applies. In Stem, the Supreme Court discusses a “public rights” exception to the general rule that only an Article III judge may exercise adjudicative authority. Id. at *15. The “public rights” exception is not well defined. The Supreme Court has stated that the application of Article III “is guided by the principle that ‘practical attention to substance rather than doctrinaire reliance on formal categories should inform application of Article III.’ ” CFTC v. Schor, 478 U.S. 833, 853-54, 106 S.Ct. 3245, 92 L.Ed.2d 675 (1986). In general, the “public rights” exception arises when “Congress selects a quasi-judicial method of resolving matters that could be conclusively determined by the Executive and Legislative Branches, [because] the danger of encroaching on the judicial powers is less than when private rights, which are normally within the purview of the judiciary, are relegated as an initial matter to administrative adjudication.” Id. Although a public rights dispute may arise between two individuals, “it is still the case that what makes a right ‘public’ rather than private is that the right is integrally related to particular federal government action.” Stern, 131 S.Ct. at 2598.
This suit involves the adjudication of rights created under a complex public rights scheme, and therefore it falls within the Bankruptcy Court’s constitutional authority. Under Thomas v. Union Carbide *221Agricultural Products Co., a right closely integrated into a public regulatory scheme, even “a seemingly ‘private’ right,” may be resolved by a non-Article III tribunal “with limited involvement by the Article III judiciary.” 473 U.S. 568, 593, 105 S.Ct. 3325, 87 L.Ed.2d 409 (1985). The Bankruptcy Code is a public scheme for restructuring debtor-creditor relations, necessarily including “the exercise of exclusive jurisdiction over all of the debtor’s property, the equitable distribution of that property among the debtor’s creditors, and the ultimate discharge that gives the debt- or a ‘fresh start’ by releasing him, her, or it from further liability for old debts.” Central Va. Cmty. College v. Katz, 546 U.S. 356, 363-64, 126 S.Ct. 990, 163 L.Ed.2d 945 (2006); see Northern Pipeline Const. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 71, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982) (plurality opinion) (noting in dicta that the restructuring of debtor-creditor relations “may well be a ‘public right’ ”). But see Stern, 131 S.Ct. at 2614 n. 7 (“We noted [in Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 56 n. 11, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989) ] that we did not mean to ‘suggest that the restructuring of debtor-creditor relations is in fact a public right.’.... Because neither party asks us to reconsider the public rights framework for bankruptcy, we follow the same approach here.”).
Disputes that are integrally bound up in the claims adjudication process — and thus involve the exercise of the Bankruptcy Court’s in rem jurisdiction over the estate — are part of the “public rights” exception. See Stern, 131 S.Ct. at 2618 (noting that when determining whether Congress may bypass Article III, “the question is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims adjudication process”). Disputes over rights created by the Bankruptcy Code itself as part of the public bankruptcy scheme also fall within the “public rights” exception. See Thomas, 473 U.S. at 593, 105 S.Ct. 3325 (allowing non-Article III adjudication of rights created by a public regulatory scheme). The Bankruptcy Court may enter final judgments in these matters. This lawsuit relates solely to the automatic stay, a right established by § 362 of the Bankruptcy Code, and it falls within the Court’s constitutional authority.
The automatic stay is one of the most important — if not the most important — features of the Bankruptcy Code, and it is integral to the public bankruptcy scheme. Its purpose is to enjoin all creditors from taking action against the debtor and the estate so that the debtor may have some breathing room to propose and obtain confirmation of a plan of reorganization which will pay creditors. In re Chesnut, 422 F.3d 298, 301 (5th Cir.2005). A debtor has a fiduciary duty to his creditors to take the action necessary to pay their claims. See In re Mooney, 2002 Bankr.LEXIS 1958 at *25 n. 16 (Bankr. N.D.Tex. Nov. 26, 2002). Given the central role of the automatic stay in the bankruptcy scheme, the broad effect of the automatic stay, and the fiduciary duty imposed upon debtors, this Court concludes that enforcement of the automatic stay fits within the “public rights” exception. The automatic stay protects not just one person or entity, but rather protects all of those persons and entities affected by the filing of a bankruptcy petition. In re Chesnut, 422 F.3d at 301. The debtor and the estate benefit because the stay is an injunction that enjoins creditors from unilaterally attempting to collect their respective claims against the estate. Campbell v. Countrywide Home Loans, Inc., 545 F.3d 348, 354-55 (5th Cir.2008). Each of the creditors benefits because no other credi*222tor may unilaterally take action against the estate — which means that the debtor has time to deliberately and carefully file a plan and then obtain confirmation so that all claims can be paid. In re Chesnut, 422 F.3d at 301. Stated differently, the existence of, and the benefits provided by, the automatic stay do not constitute a private right of any one specific person or entity, but rather comprise a public right that inures to the benefit of all those persons involved in a bankruptcy. Without the enforcement of the automatic stay, reorganization of consumer debtors and business debtors throughout the country would be impossible and would undermine the public policy of allowing honest debtors to obtain a fresh start. Accordingly, because the undersigned judge concludes that the dispute at bar involves a “public right,” the undersigned judge concludes that he has the constitutional authority to sign a final judgment in this adversary proceeding.
Venue in the suit at bar is proper pursuant to 28 U.S.C. § 1409.
B. The Automatic Stay and Damages for Violating the Stay
1. The Automatic Stay and First Community’s Violations Thereof
A bankruptcy petition operates as a stay applicable to creditors attempting to recover “a claim against the debtor that arose before the commencement of the case.” 11 U.S.C. § 362(a)(6).4 Relief from the automatic stay can only be granted on request of a party in interest and after notice and a hearing. Id. § 362(d). Chapter 13 debtors who are injured by willful violations of the automatic stay shall recover actual damages — including costs and attorneys’ fees — and may recover punitive damages if warranted. Id. at § 362(k)(1).
Clearly, at least two violations of the automatic stay occurred in the suit at bar. First, Roberts, an employee of First Community and the sole employee within the bankruptcy department, telephoned Wendi Johnson Turner to ask whether her husband and she would be paying their loans outside of their Chapter 13 bankruptcy. [Finding of Fact No. 7]. This telephone call violated the automatic stay, although the Debtors failed to prove any damages from this violation. Second, First Community continued to “auto-debit” from the Debtors’ bank account certain amounts to pay off loans that the Debtors had taken out with First Community. [Finding of Fact No. 9]. These amounts, however, were paid back to the Debtors’ account. [Finding of Fact No. 9]. Accordingly, while the stay was twice violated, neither action led to actual damages accruing.
2. First Community Violated the Stay Because Exercising an Administrative Freeze in Order to Preserve a Right to Set Off Requires the Prompt Filing and Prosecution of a Motion to Lift the Automatic Stay
A third action by First Community also violated the automatic stay, but like the other violations by First Community, did not result in actual damages. Despite the lack of actual damages, this Court does find First Community’s actions disturbing. In the suit at bar, the Debtors allege that the automatic stay was violated when: (a) First Community placed an administrative freeze on their funds; (b) First Community never sought relief from the automatic *223stay; and (c) First Community froze the funds for over one year. First Community’s policies unquestionably put it in danger of being liable for both actual and punitive damages.
First Community cites the case of Citizens Bank v. Strumpf for the proposition that creditors are allowed to impose an administrative freeze on an account when pursuing setoff. 516 U.S. 16, 21, 116 S.Ct. 286, 183 L.Ed.2d 258 (1995). Strumpf holds that an administrative freeze does not violate the automatic stay as it relates to 11 U.S.C. § 362(a)(3) or (a)(6).5 Indeed, Strumpf holds that “reliance on these provisions rests on the false premise that [an] administrative [freeze] [takes] something ... or exercises[s] dominion over property.... In fact, however, [an administrative freeze] consists of nothing more or less than a promise to pay, from the bank to the depositor.” Strumpf 516 U.S. at 21, 116 S.Ct. 286 (citing Bank of Marin v. England, 385 U.S. 99, 101, 87 S.Ct. 274, 17 L.Ed.2d 197 (1966)). Accordingly, an administrative freeze is “neither a taking of possession ... nor an exercising of control over” a bank account, but instead, “merely a refusal to perform” a promise. Id.; Calvin v. Wells Fargo Bank, N.A. (In re Calvin), 329 B.R. 589, 603 (Bankr.S.D.Tex.2005). As such, neither § 362(a)(3) nor § 362(a)(6) apply in the suit at bar. Unfortunately for First Community, Strumpf only gets it two-thirds of the way there, as Strumpf also addresses § 362(a)(7).
11 U.S.C. § 362(a)(7) operates as a stay of “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.” While the Supreme Court concluded that the creditor in Strumpf did not violate § 362(a)(7), it based its conclusion on two critical factors: (1) a motion for relief from the automatic stay must be filed; and (2) the administrative freeze was not intended to be permanent, but only intended to continue so long as it was necessary to request from the bankruptcy court relief from the automatic stay. Strumpf, 516 U.S. at 19, 116 S.Ct. 286; In re Hernandez, No. 04-40178, 2005 Bankr.LEXIS 789, at *7 (Bankr.S.D.Tex. Apr. 27, 2005); In re Calvin, 329 B.R. at 603.
Stated differently, First Community ignored the Strumpf requirement that a creditor shall promptly file a motion for relief from the automatic stay and only apply the freeze so long as it takes the bankruptcy court to grant the appropriate relief requested. Strumpf, 516 U.S. at 19, 116 S.Ct. 286; Town of Hempstead Emps. Fed. Credit Union v. Wicks (In re Wicks), 215 B.R. 316, 319-20 (E.D.N.Y.1997) (holding that credit union which placed an administrative freeze on debtor’s account but did not seek relief from the stay for four months violated the stay). In the suit at bar, First Community applied the administrative freeze on April 8, 2010. [Finding of Fact No. 6]. Here, the administrative freeze was kept in place for over one year — i.e. until April 18, 2011.6 [Finding *224of Fact No. 13]. To this day, no motion for relief from the automatic stay has been filed, despite representations from First Community to the Debtors that it would do so. [Finding of Fact Nos. 9 and 16]. Therefore, First Community violated both Strumpf requirements by failing to promptly file a motion for relief from stay and then continuing the administrative freeze for a significant, if not indefinite, period of time. For these reasons, First Community willfully violated 11 U.S.C. § 362(a)(7).
3. The Debtors Failed to Prove That They Incurred Actual Damages As a Result of First Community’s Violation of the Automatic Stay
“[Actual] damages under § 362(k) must be proven with reasonable certainty and may not be speculative or based on conjecture.” Dugas v. Claron Corp., No. 1:09-CV-990, 2010 WL 3338625, at *5 (E.D.Tex. Aug. 23, 2010) (quoting Collier v. Hill (In re Collier), 410 B.R. 464, 476 (Bankr.E.D.Tex.2009)). Therefore, although First Community willfully violated the automatic stay, the Debtors must still prove actual damages as a prerequisite to any damage award. Id.
Unfortunately, the Debtors have failed to do so. While the Court is sympathetic to the plight of the Debtors, the Debtors’ attorney, through his own ambush-like tactics, precluded any chance of the Debtors being able to prove actual damages. Indeed, counsel for the Debtors waited until the day before trial to alert First Community’s counsel as to the basis of the alleged actual damages, resulting in this Court excluding the mortgage modification and medical expenses as sources of actual damages. [Finding of Fact No. 16], Moreover, even if this Court had not excluded evidence concerning the medical expenses and the Debtors’ failure to obtain a mortgage modification, these damages are still speculative and conjectural. In sum, after reviewing the entire record, this Court comes to the same conclusion as did the Debtors’ counsel with respect to the amount of actual damages (as outlined in the Debtors Proposed Findings of Fact and Conclusions of Law): “$_” (Note: Debtors’ counsel actually left a blank in his proposed Findings and Conclusions; Doc. No. 44, p. 5 of 7.). Just as the Court can find no amount of actual damages, Debtors’ counsel was literally drawing a blank as to the amount of actual damages when he submitted his proposed findings and conclusions.7
In sum, for the reasons stated above, this Court finds that the Debtors have incurred no actual damages for any violations of the automatic stay. As such, this Court will award neither punitive damages nor attorney’s fees. In re Martinez, 281 B.R. 883, 886 (Bankr.W.D.Tex.2002) (“If there are no actual damages, then there can be no sanction.”)
V. Conclusion
There is no question that First Community violated the automatic stay. Fortunately for this institution, because the *225Debtors failed to prove any damages, this is a case of “no harm, no foul.” Indeed, it is no small coincidence that since the Debtors initiated this suit, First Community has changed its policies whenever a credit union member files a bankruptcy petition. First, all automatic debits are now stopped so as to prevent violations of the automatic stay. Second, when First Community places an administrative freeze on an account, it will either promptly request a lift of the automatic stay from the bankruptcy court in order to apply offset, or it will promptly unfreeze the account if a motion to lift the automatic stay is not sought. [Tape Recording, 4:20/11, 2:00:30 P.M.]. Thus, First Community has learned that its actions were inappropriate and has moved to take corrective action. This is a good thing.
It is probably, however, of small consolation to the Debtors. As the credible testimony revealed, they were rightfully distraught and upset about their inability to access funds in their account at First Community, which unquestionably intentionally violated the automatic stay by its actions towards them. Stress and anxiety alone, however, do not equate to actual damages; there must be more. While an unfortunate result, perhaps this suit will serve as a lesson for attorneys seeking damages for violations of the automatic stay: when a statute requires proof of actual damages in order to obtain relief, waiting until the day before trial to inform opposing counsel as to the nature and basis of those actual damages will not lead to a successful result for the client.
A judgment consistent with this Memorandum Opinion will be entered on the docket simultaneously with the entry on the docket of this Opinion.
. Two credit cards are listed but they have the exact same balance, leading this Court to believe that they are not separate debts, but rather one and the same debt which the Debtors erroneously scheduled twice.
. The term "under the plan” properly refers to any payment made pursuant to the provisions of a Chapter 13 plan, regardless of whether such payment is made through the trustee or by a debtor directly to a creditor. Unfortunately, over the years, certain nomenclature has evolved which has led to confusion over the meaning of the phrase “under the plan." The term “outside the plan” is bankruptcy parlance that has been used to describe a payment made by a debtor directly to a creditor without going through the Chapter 13 trustee. Some practitioners and courts believe that making a payment "outside the plan” means that the payment is not made "under the plan.” In re Gregory, 143 B.R. 424, 427 (Bankr.E.D.Tex.1992) (referring to "outside the plan” as treatment of creditors "not specified in or governed by the plan”) (citing In re Evans, 66 B.R. 506, 511 (Bankr. E.D.Pa.1986)). Conversely, the term "inside the plan” has been used to describe a payment made by a debtor through the trustee, and some practitioners and courts believe that only such payments as these are made *218“under the plan.” This Court disagrees with both of these views. Every Chapter 13 plan which this Court has reviewed reflects which claims will be paid through the trustee and which claims will be paid directly by the debtor; therefore, when the plan is confirmed, all payments that are referenced in the plan, regardless of whether they are made by the trustee or directly by the debtor, are payments made "under the plan.” For these reasons, the Court believes that the use of the terms "outside the plan” and "inside the plan” are confusing. Robert B. Chapman, The Bankruptcy of Haig-Simons?, 10 Am. Bankr.Inst. L.Rev. 765, 847 n. 446 (2002). It would be preferable to discard the use of these two phrases and, instead, use the phrases "payments through the trustee” and "direct payments by the debtor” — all of which are payments made "under the plan.”
. This Court notes that the Debtors’ home loan was with Wells Fargo, not First Community, and it is Wells Fargo with whom the Debtors unsuccessfully attempted to negotiate a mortgage modification.
. Reference to a "Bankruptcy Rule” refers to the Federal Rules of Bankruptcy Procedure. Any reference herein to "the Code” refers to the United States Bankruptcy Code. Further, reference to any section (i.e. § ) refers to a section in 11 U.S.C., which is the United States Bankruptcy Code.
. 11 U.S.C. § 362(a)(3) operates as a stay of "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." In turn, § 362(a)(6) operates as a stay of “any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this title.”
. Unlike the creditor in Strumpf, who only intended to place an administrative freeze on the bank account until a motion for relief from stay could be filed in order to minimize its losses and exercise its set off rights, First Community intended to continue the administrative freeze throughout the entirety of the Debtors' Chapter 13 case (i.e., five years). *224Strumpf, 516 U.S. at 17-18, 116 S.Ct. 286; [Finding of Fact No. 11],
. While Debtors’ counsel made vague references to pre-judgment interest on the withheld funds as a source of actual damages, that alone is not enough to preserve a claim for pre-judgment interest — no exhibits were introduced, no testimony was adduced, and no briefing was done relating to pre-judgment interest. United States v. Dunkel, 927 F.2d 955, 956 (7th Cir.1991) (per curiam) ("A skeletal ‘argument,’ really nothing more than an assertion, does not preserve a claim. Especially not when the brief presents a passel of other arguments.... Judges are not like pigs, hunting for truffles buried in briefs.” (citation omitted)). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494453/ | OPINION REGARDING OBJECTIONS TO CONFIRMATION OF DEBTOR’S PLAN
THOMAS J. TUCKER, Bankruptcy Judge.
This Chapter 11 case presents a dispute over confirmation of the proposed plan of reorganization filed by the Debtor, BWP Transport, Inc. (“BWP”). BWP’s largest creditor, JPMorgan Chase Bank, N.A. (“Chase,”) which also is a secured creditor, objects to confirmation on numerous grounds. Among these, Chase argues that BWP’s plan unfairly discriminates against Chase, because the plan proposes to treat its secured claim less favorably than several other secured creditors. Chase also argues that BWP is a solvent debtor whose plan fails to meet the requirements that case law imposes on solvent debtors.
For the reasons stated in this opinion, the Court will deny confirmation of BWP’s plan.
I. Background
As BWP says in its combined plan and disclosure statement,
[BWP] is a trucking company specializing in the transportation, storage, and delivery of dry bulk materials — specifically plastics. [BWP]’s fleet provides transportation services to all 48 states as well as Canada and Mexico. [BWP] began in 1989 as a local less-than-truckload and truckload dry van freight company. Since then, [BWP] diversified into a dry bulk storage, delivery, and transportation company.1
The Court held a hearing on May 18, 2011, regarding confirmation of BWP’s proposed plan, contained in the document entitled “Debtor’s Third Amended *228Combined Plan of Reorganization and Disclosure Statement.”2 During the confirmation hearing, the Court heard oral argument on Chase’s objections, which were the only unresolved objections to confirmation. On May 19, 2011, Chase filed a supplement to its objections,3 which the Court has reviewed.
Soon after the confirmation hearing, on June 6, 2011, BWP’s sole shareholder, Sandra J. Lickwala, filed a voluntary Chapter 7 case in this Court, jointly with her husband, Donald P. Lickwala (Case No. 11-55831). On July 14, 2011, the Chapter 7 Trustee in the Lickwala bankruptcy case, Charles L. Wells, III, filed an objection to confirmation in this case.4 The Trustee claimed that Sandra Lickwala’s 100% ownership interest in BWP was property of the Lickwala bankruptcy estate. The Trustee appears to have assumed that this gave him control over BWP’s actions in its Chapter 11 case.
In his objection to confirmation of the BWP Plan, the Trustee stated that “he is conducting due diligence regarding the debtor [Sandra Lickwala] and may, among other things, attempt to negotiate an amendment to the plan regarding the treatment of [Chase] to provide for entry of a consensual confirmation order.”5
In response to the Trustee’s objection, the Court entered an order requiring BWP, the Lickwala Trustee, and Chase to file a joint status report, “describing the status of, and prospects for, negotiation of a possible consensual plan of reorganization for BWP Transport, Inc.”6 The parties filed their joint report on August 25, 2011, stating that no settlement had been reached, and expressing differing views about the likelihood of settlement.7
There has been much motion activity in the Lickwala bankruptcy case during the last few months. Recently, however, the Trustee and the Lickwalas have agreed to a settlement of numerous disputes between them. One of the terms of the settlement is that the Trustee will abandon the Lickwala estate’s ownership interest in BWP. The Trustee has filed a motion for approval of the settlement. Chase, which is also a creditor in the Lickwala case, has objected to the settlement. A hearing is scheduled for January 11, 2012.8 Meanwhile, Chase’s objections to confirmation of BWP’s Plan in this case remain unresolved.
II. Jurisdiction
This Court has subject matter jurisdiction over this bankruptcy case under 28 U.S.C. §§ 1334(b), 157(a) and 157(b)(1), and Local Rule 83.50(a) (E.D. Mich.). This matter is a core proceeding under, among other possible provisions, 28 U.S.C. § 157(b)(2)(L).
III. Discussion of Chase’s objections to confirmation of BWP’s Plan
A. The Plan’s treatment of Chase
BWP is liable to Chase, either directly or as a guarantor, on four promissory notes. BWP’s Plan bifurcates the claim of Chase. In Class E.4 of the Plan, BWP says that “Chase’s claim is secured [by] Debtor’s cash, inventory, chattel paper, ac*229counts, equipment, general intangibles and the proceeds therefrom.”9 The Plan says that the total amount of Chase’s claim is $2,101,172.64. The Plan says that the value of Chase’s collateral, and therefore the allowed amount of Chase’s secured claim under 11 U.S.C. § 506, is $1,531,500.00.10 According to the Plan, therefore, Chase’s unsecured claim is $478,672.60.11
The Plan proposes to pay Chase’s $1,531,500.00 secured claim in full over 6 years with 6.25% interest, with 72 monthly payments of $25,562.50 in principal and interest, starting 30 days after the Plan’s “Effective Date.” The Plan also states that Chase will retain its liens until its secured claim is paid in full.12
The Plan places Chase’s $478,672.60 unsecured claim in a class by itself, Class E.ll. The Plan proposes to pay Chase’s unsecured claim in full over 5 years with 7.575% interest, with 60 monthly payments of $9,608.67 in principal and interest, starting 30 days after the Plan’s “Effective Date.”13
B. Other features of BWP’s Plan
In addition to grouping and treating administrative claims and priority tax claims, BWP’s Plan contains 12 classes of non-priority claims. The first 8 classes, E.l through E.8, are secured claims, including Chase’s secured claim in Class E.4. Each of these classes contains the claim of a single secured creditor. Six of these secured creditors have first liens in specified trailers and/or tractors owned by BWP. The remaining secured creditor, other than Chase, is the United States Small Business Administration, Class E.8. That creditor has a security interest in “certain cleaning system equipment” valued by the Plan at $79,000.00.14
The other Plan classes are three classes of unsecured claims, E.9 through E.ll, and a class for BWP’s equity interests, E.12. The three unsecured claim classes contain (1) all unsecured claims less than $10,000.00; (2) all unsecured claims equal to or greater than $10,000.00 except the unsecured claim of Chase; and (3) the unsecured claim of Chase.15
BWP’s Plan proposes to pay every claim in every class, secured and unsecured, in full, and with interest, with variations among the classes regarding the interest rate and length of time for payments. The Plan also proposes that BWP’s equity interest holder retain her interest.
C. Chase’s objections to confirmation of BWP’s Plan
1. Chase’s objection that the Plan unfairly discriminates against Chase’s secured claim
Except for the two classes populated by Chase, every class of secured and unsecured claims under BWP’s Plan voted to accept the plan.16 Chase voted to reject *230the Plan, in both its capacity as the secured claim class E.4 and the unsecured claim class E.ll. Because of Chase’s rejection, the plan can be confirmed only on a “cramdown” basis under 11 U.S.C. § 1129(b). Among the requirements for confirmation under § 1129(b) is that the Plan “does not discriminate unfairly, and is fair and equitable, with respect to each class of claims ... that is impaired under, and has not accepted, the plan.” 11 U.S.C. § 1129(b)(1).
Chase argues that the Plan discriminates unfairly against Chase’s secured-claim class, because the Plan proposes to pay Chase’s secured claim in full over a longer period — 6 years — than the 5-year period in which some of the other secured-claim classes will be paid in full.
As noted above, under the Plan Chase’s secured claim is to be paid, with interest, by equal monthly payments over 6 years. But five of the other secured claims are to be paid, with interest and by equal monthly payments, over a period of only 5 years.
Among the secured claim classes in the BWP Plan, there are variations in claim amount, collateral, payment period, and interest rate. The following table details these differences:
Secured
Claim Payment Interest
Class: Creditor:_Amount: Collateral: Period:_Rate:
E.l Eastern Michigan Bank $ 320,883.31 8 trailers 6.25 years 5.5%
___(75 months)_
E.2 Fifth Third Bank_$ 511,944.07 15 trailers 5 years 6.0%
E.3 General Electric Capital Corn. $ 234,144,96 8 trailers 5 years_6.0%
E.4 Chase $1,531,500.00 cash, in- 6 years 6.25% ventory, chattel paper, accounts, equipment, general in-_tangibles_
E.5 JX Financial, Inc. $ 321,601.43 18 trailers, 5 years 5.5%
_10 tractors_
E.6 PACCAR $1,000,783.55 2 trailers, 5 years 6.0%
_29 tractors_
E.7 Seaway Community Bank $ 196,840.79 10 trailers, 5 years 5.0%
_3 tractors_
E.8 Small Business Admin. $ 79,000.00 cleaning 6 years 5.0%
system
equipment
As the table shows, BWP’s Plan would pay off the secured claims of five of the secured creditors in 5 years, while paying Chase’s secured claim and the claim of the Small Business Administration in 6 years, and the claim of Eastern Michigan Bank in 6.25 years.
Chase argues that the shorter payment period for the “5-year” secured creditors is unfair discrimination against Chase, because stretching Chase’s payment period out for a year longer imposes a greater risk of default by BWP and loss by Chase than the risk borne by the secured creditors who are to be paid in 5 years.
To determine whether BWP’s Plan “does not discriminate unfairly” with*231in the meaning of § 1129(b)(1), the Court applies the presumption-based standard used by the court in In re Dow Corning Corp., 244 B.R. 696, 702 (Bankr.E.D.Mich. 1999). Under this standard,
a rebuttable presumption of unfair discrimination would arise where:
there is: (1) a dissenting class; (2) another class of the same priority; and (3) a difference in the plan’s treatment of the two classes that results in either (a) a materially lower percentage recovery for the dissenting class (measured in terms of the net present value of all payments), or (b) regardless of percentage recovery, an allocation under the plan of materially greater risk to the dissenting class in connection with its proposed distribution.
The plan proponent could rebut the presumption of unfairness established by a significant recovery differential by showing that, outside of bankruptcy, the dissenting class would similarly receive less than the class receiving a greater recovery, or that the alleged preferred class had infused new value into the reorganization which offset its gain. The plan proponent could overcome the presumption of unfair treatment based on different risk allocation by showing that such allocation was consistent with the risk assumed by parties before the bankruptcy.
Dow Corning, 244 B.R. at 702 (citations and footnote omitted, emphasis added); see also In re Armstrong World Indus., Inc., 348 B.R. 111, 122 (D.Del.2006); In re Aleris Int’l, Inc., No. 09-10478, 2010 WL 3492664, at *31 (Bankr.D.Del. May 13, 2010); In re Unbreakable Nation Co., 437 B.R. 189, 202 (Bankr.E.D.Pa.2010).
BWP and Chase have not discussed the “unfair discrimination” issue in the specific terms of the Dow Corning standard, quoted above. With respect to the three elements necessary to establish the rebuttable presumption of unfair discrimination, Chase meets the first element — it is a dissenting class.
And Chase meets the second element— the “5-year” secured claim classes are of “the same priority” as Chase, within the meaning of the Dow Corning standard. Although Chase and the other secured creditors all have security interests in different collateral, for purposes of the “unfair discrimination” test, all of the secured creditors are considered to have the same priority level. See Corestates Bank, N.A. v. United Chem. Technologies, Inc., 202 B.R. 33, 47 n. 12 (E.D.Pa.1996) (“the comparison called for by the unfair discrimination provision of § 1129(b)(1) relates to the category of similarly situated claimants” and “[t]he appropriate inquiry focuses on discrimination among categories of creditors who hold similar legal claims against the debtor, i.e. ‘Administrative Claims,’ ‘Secured Claims,’ ‘Priority Claims,’ etc.”); In re Trenton Ridge Investors, LLC, Nos. 09-62570, 09-63160, 2011 WL 4442270, at *41 (Bankr.S.D.Ohio June 23, 2011) (the purpose behind the unfair discrimination test is that “a dissenting class will receive value equal to the value given to all other similarly situated classes” and “[i]n the context of unfair discrimination, the phrase ‘similarly situated’ suggests an ‘inquiry fo-cuse[d] on discrimination among categories of creditors who hold similar legal claims against the debtor, [such as] ‘Administrative Claims,’ ‘Secured Claims,’ [and] ‘Priority Claims’ ”).
Whether Chase meets the third element is unclear on the present record. That element requires one of two things — either (a) the shorter payment period for the “5-year” secured claim classes results in “a materially lower percentage recovery for [Chase,] the dissenting class (measured in *232terms of the net present value of all payments);” or (b) Chase’s longer payment period, compared to the “5-year” classes, allocates to Chase a “materially greater risk ... in connection with its proposed distribution.” Dow Corning, 244 B.R. at 702.
Chase has not argued the first prong of the third element — ie., that it will receive a materially lower percentage recovery on its secured claim than the “5-year” secured claim classes. With respect to the present value of payments, the Court notes that while Chase’s 6-year payment period is longer, Chase also is to be paid interest at a higher rate than the “5-year” secured creditors. As the table above shows, Chase’s secured claim is to receive interest at 6.25%, while all of the “5-year” secured creditors are to receive a lower rate of interest — 6.0, 6.0, 5.5, 6.0 and 5.0%. And unlike all of the other “5-year” secured creditors, Chase’s claim is bifurcated, and the $478,672.00 unsecured portion of its claim is to be paid over 5 years at 7.575%, a rate significantly higher than any other class of claims, secured or unsecured, is to receive. None of the “5-year” secured claims are to be paid at an interest rate higher than 6.0%, and as the following table illustrates, the unsecured creditor classes other than Chase’s class are to be paid a much lower interest rate than Chase:
Unsecured creditor(s) Total amount Payment Interest
Class: in class:_of class claims: Period: Rate:
E.9 claims less than $10,000_$ 51,824,32_1 year 3.5%
E.10 claims $10,000 or greater (excluding Chase, includes unsecured $507,310.20 5 years 4.25%
E.ll Chase_$478,672.00 5 years 7.575%
Chase’s unfair-discrimination argument invokes the second prong above, namely that the longer payment period for Chase allocates to Chase a “materially greater risk ... in connection with its proposed distribution” than the risk facing the “5-year” secured claim classes. Presumably, Chase is arguing, at least in part, that if BWP makes all of its Plan payments to all the secured creditors for a time, but then defaults on its Plan payments at any time before reaching the 6-year payoff date for Chase’s secured claim, Chase will end up receiving payment of a lower percentage of its secured claim than the “5-year” secured creditors, who are to be paid at a faster rate under the Plan. Whether the risk of such a plan default actually occurring is high enough to be “material,” and whether the differences in the ultimate percentage payments under such a default scenario would be material, are not issues the Court can decide on the present record. Rather, BWP and Chase must first have the opportunity to present evidence and briefing on these issues.
The same is true regarding whether BWP can rebut the presumption of unfair discrimination, if it does arise. Under Dow Corning, “[t]he plan proponent [can] overcome the presumption of unfair treatment based on different risk allocation by showing that such allocation [is] consistent with the risk assumed by parties before the bankruptcy.” Dow Corning, 244 B.R. at 702. BWP’s counsel argued at the confirmation hearing that the nature of Chase’s collateral — chiefly, accounts receivable — -justifies allocating the greater risk of a one-year longer payoff to Chase, compared to the other secured creditors, whose collateral is tractor trailers and *233tractors. Further factual development and briefing would be necessary before the Court could determine whether (1) Chase’s collateral is such that Chase assumed a greater risk before the bankruptcy; and (2) if so, whether that greater pre-petition risk is consistent with the greater risk allocated to Chase by the Plan’s one-year longer payout (6 years versus 5 years).
For these reasons, the Court cannot presently make a final ruling on Chase’s “unfair discrimination” objection. Further factual development, and possibly an evi-dentiary hearing, and briefing, would be required. All of this is unnecessary at present, however, because the Court must deny confirmation of BWP’s Plan on other grounds, discussed below, and will allow BWP to file a new plan. Whether this “unfair discrimination” issue will recur when BWP files a new plan remains to be seen.
2. Chase’s objection that BWP is a “solvent” debtor whose plan does not meet the requirements imposed on solvent debtors
As noted above, one of the requirements for confirmation on a “cramdown” basis under § 1129(b) is that the Plan “is fair and equitable, with respect to each class of claims ... that is impaired under, and has not accepted the plan.” 11 U.S.C. § 1129(b)(1). Chase argues that BWP’s Plan is not “fair and equitable” to Chase.
Chase argues that BWP is a “solvent” Chapter 11 debtor. The Sixth Circuit has held that when the debtor is solvent, the “fair and equitable” requirement for confirmation and the “absolute priority rule” mean that, “absent compelling equitable considerations,” the Chapter 11 plan must pay creditors in full, in accordance with their pre-petition rights, including all of their contractual rights. See In re Dow Corning Corp., 456 F.3d 668, 679 (6th Cir. 2006). This means full payment of each secured and unsecured claim, with post-petition interest at the rate specified in the parties’ contracts, including any default rate of interest. See id. at 678 (quoting legislative history), 680. Thus, in a solvent-debtor case, there is a presumption that even unsecured claims must be paid default-rate interest. Id. at 680. And even unsecured claims “may recover their attorneys’ fees, costs, and expenses from the estate of a solvent debtor where they are permitted to do so by the terms of their contract and applicable non-bankruptcy law.” Id. at 683. And such fees, costs and expenses are not necessarily “limited to those incurred in enforcing the contract.” Id. at 685. That depends on the terms of the parties’ contract and what the applicable non-bankruptcy law say on that subject. But “[b]ankruptcy courts remain free, of course, to limit recovery to those attorneys’ fees, costs and expenses which are reasonable under the circumstances.” Id. at 686 n. 4 (italics in original).
Chase argues that because BWP is a solvent debtor, the Dow case requires the Plan to pay Chase in full with interest at its contractual default rates of interest, and to pay Chase for its attorney fees and expenses, as permitted by Chase’s contracts and by Michigan law. Because the Plan does not propose this, Chase says, the Plan is not “fair and equitable” and therefore may not be confirmed under § 1129(b).
At the confirmation hearing, BWP’s attorney would not take a position as to whether or note BWP is a solvent debtor, arguing that this is an “open question.” But he argued that even if BWP is solvent, BWP’s Plan meets Dow’s requirements for solvent debtors, described above.
*234The Court finds that BWP is a “solvent” debtor in the sense that term is used in Dow. And the Court finds that the Plan’s treatment of Chase does not meet Dow’s requirements for such a solvent debtor. As a result, BWP’s Plan cannot be confirmed.
a. BWP is a “solvent” debtor.
In the Dow case, the Sixth Circuit did not define what it means for a Chapter 11 debtor to be “solvent.” In Dow, the parties agreed that the debtor was at all times “fully solvent.”17 The Court presumes that Dow used the word “solvent” to mean not “insolvent,” as the term “insolvent” is defined in the Bankruptcy Code. In pertinent part, Bankruptcy Code § 101(32) defines “insolvent” this way:
(32) The term “insolvent” means—
(A) with reference to an entity other than a partnership and a municipality, financial condition such that the sum of such entity’s debts is greater than all of such entity’s property, at a fair valuation, exclusive of—
(i) property transferred, concealed, or removed with intent to hinder, delay, or defraud such entity’s creditors; and
(ii) property that may be exempted from property of the estate under section 522 of this title;
11 U.S.C. § 101(32)(A) (emphasis added).
BWP is “solvent,” therefore, if the “sum of [its] debts” is not “greater than all of [its] property, at a fair valuation.”18 BWP has admitted facts showing that when this case was filed, and also when BWP filed its Plan, the value of BWP’s assets greatly exceeded the sum of its debts. BWP’s schedules, filed on September 17, 2010,19 show this. And BWP’s liquidation analysis, attached as Exhibit A to its Plan,20 shows this.
BWP’s schedules listed BWP’s assets and their values, as of the date this case was filed on September 3, 2010, as having values totaling $7,745,000.00. The sched*235ules listed BWP’s priority, secured, and unsecured debts as totaling $3,645,997.97.21 Using these numbers, as of the petition date, the value of BWP’s property exceeded its debts by over $4 million ($7,745,-000.00 - $3,645,997.97 = $4,099,002.03).
The liquidation analysis that BWP attached to its Plan, filed April 20, 2011, states what the creditors in this case would receive upon a hypothetical liquidation under Chapter 7 occurring as of the effective date of the plan.22 In doing so, BWP listed two “liquidation distribution” scenarios: one that valued BWP’s assets at “Fair Market Value” and one that valued the assets at “Liquidation.” The Court interprets BWP’s “Liquidation” values as values under a forced-sale scenario. Because the Bankruptcy Code’s definition of “insolvent” requires using the value of a debtor’s assets “at a fair valuation,” and because BWP clearly is a “going concern” rather than a business “on [its] deathbed,” the Court concludes that it should use the value of BWP’s assets at “Fair Market Value,” rather than under a forced-sale basis. See Global Technovations, Inc. v. Onkyo U.S.A. Corp., (In re Global Technovations, Inc.), 431 B.R. 739, 772 (Bankr. E.D.Mich.2010), aff'd, 2011 WL 1297356 (E.D.Mich.2011) (when a business is a “going concern,” “assets are valued at their market rather than distress (i. e., liquidation) value”) (citing Heilig-Meyers Co. v. Wachovia Bank, N.A. (In re Heilig-Meyers Co.), 319 B.R. 447, 457-58, 463 (Bankr.E.D.Va.2004), aff'd, 328 B.R. 471 (E.D.Va.2005)).
The “Fair Market Value” of BWP’s assets, according to BWP, is such that after deducting the value of all liens in BWP’s assets, BWP has equity in its assets (called “TOTAL EQUITY”) of $3,731,851.89. Taking this total value, BWP subtracts the “Total Priority Claims” of $34,942.12, and the “Total Unsecured Claims” of $985,982.16.23 These debts total $1,020,924.28. Subtracting that sum from the “Fair Market Value” of BWP’s assets leaves a surplus of $2,710,927.61. Thus, BWP’s liquidation analysis shows that its assets, at a “fair valuation,” exceed its debts by $2.7 million.24
*236From the foregoing admissions by BWP, the Court concludes that BWP was solvent when it filed this case, and was solvent when it filed its Plan.25
b. Given the Court’s conclusion that BWP is solvent, the Court concludes that the Plan does not treat Chase’s claims as Dow requires.
Because BWP is a solvent debtor, and based on the Dow case discussed above, the Court concludes that BWP cannot confirm a plan over Chase’s objection, unless the plan proposes to pay Chase in full with interest at its contractual default rates of interest, and to pay Chase for its attorney fees and expenses, as permitted by Chase’s contracts and by Michigan law. BWP does not argue, and the Court does not find, that there are any “compelling equitable considerations” for requiring less than this from BWP. Dow Corning Corp., 456 F.3d at 679. But, as Dow permits, and as Michigan law requires,26 the Court will limit Chase’s attorney fees and expenses to amounts that are “reasonable” under the circumstances. See id. at 686 n. 4.
BWP’s counsel argued at the confirmation hearing that BWP’s Plan meets the requirements of Dow. The Court disagrees.
First, BWP’s counsel is incorrect in arguing that the two interest rates in the Plan provide Chase with the equivalent of Chase’s contractual default-interest rates. The parties have not presented any calculations on this specific issue, but the Court has done some calculations.
As noted earlier, BWP’s Plan proposes to pay Chase’s secured claim, which the Plan sets at $1,531,500.00, in full over 6 years, with interest at 6.25%. The Plan proposes to pay Chase’s unsecured claim, which the Plan sets at $478,672.64, in full over 5 years, with interest at 7.575%.
But BWP’s debt to Chase consists of four major parts, each with a different contractual default rate of interest. Chase filed an amended proof of claim on May 24, 2011. As labeled and described in the first attached page to Chase’s amended claim, the claim includes the four following parts, with the following default rates of interest: 27
Chase claim and
default interest rates default interest rate:
BWP Note 6.25%
principal balance (prime plus 3%) $711,075.41
interest through 8-27-10 $ 25,029.20
late fees and charges $ 333.26
*237total: $736,437.87
Trust Note A 9.15%
principal balance $611,594.00
interest through 8-26-10 $ 21,075.00
late fees and charges $ 1,567.32
total: $634,236.32
Trust Note B 6%
principal balance $366,910.21 (prime minus .25 3%)
interest through 8-26-10 $ 25,587.00
late fees and charges $ 1,444.26
total: $393,941.47
Trust Note C 10.275%
principal balance $226,441.00
interest through 8-26-10 $ 16,129.00
late fees and charges $ 1,009.50
total: $243,579.50
These debt amounts total $2,008,195.16, but they do not include pre-petitiori interest from August 26, 2010 to the petition date of September 3, 2010, and they do not include any post-petition interest. Nor do they include Chase’s claim for attorney fees, discussed below.
The Court has done some calculations to see whether the interest that BWP’s Plan would pay Chase is equal to or greater than the interest that Chase would receive at its contractual default rates. The Court has calculated the total interest that Chase would receive in the first year of BWP’s Plan, and compared that to the total interest that Chase would receive on its four-part claim using Chase’s contractual default rates of interest listed above. The Court calculated all of the interest using a 5-year amortization — i.e., assuming that each component of Chase’s debt is paid over 5 years. Even though the Plan proposes to pay part of Chase’s claim — the secured claim — over 6 years, in order to fairly compare the interest that would be paid in Year 1 under the two scenarios (BWP Plan rates vs. Chase contract rates), all have to be amortized over the same length of time.28
For comparison purposes, another, minor adjustment had to be made, in the amount of Chase’s unsecured claim under the BWP Plan. That is because the total amount of Chase’s claim being used in this comparison is slightly higher in the BWP Plan ($2,010,172.64) than it is in Chase’s amended proof of claim (adjusted for this exercise, as described above) ($2,008,-195.16). The Court therefore adjusted the Plan’s amount of Chase’s unsecured claim downward by the amount of this difference ($1,977.48), to $476,695.16.
The Court’s comparison shows that BWP’s plan would pay Chase total interest of $121,408.20 in Year 1. If Chase’s default interest rates were used for each of the four parts of Chase’s claim, on the other hand, Chase would be paid total interest of $141,020.93 in Year 1. The Plan, therefore, would fall $19,612.73 short of paying inter*238est at the default rates in Year 1. The following chart shows the Court’s calculations:
Plan's blended Interest rate» vs* contractual default rates:
Yearl interest
BWP Platt: Interest rate: @ 5 year amort.
secured claim $1,531*500.00 6.25% $88,089.86
unsecured claim $476,695.16 7.575% $33,318.34
Tctal: $2,010,172.64 $121,408,20
Chase claim and default interest rates Year 1 interest
default interest rate: @ 5 year amort.
BWP Note 6.25%
principal balance $711,075.4! (prims plus 3%)
interest through 8-27-10 $25,029.20
late fees and charges $333.26
total: $736,437*87 $42,358.93
Trust Note A 9.15%
principal balance $611,594.00
interest through 8-26-10 $21,075.00
late fees and charges $1,567.32
total: $634,236.32 $53,708.47
Trust Note B 6%
principal balance $366,910.21 (prime - .25 plus 3%)
interest through 8-26-10 $25,587.00
late fees and charges $1,444.26
total: $393,941.47 $21,741,81
Trust NoteC 10.275%
principal balance $226,441.00
interest through S-26-10 $16,129.00
late fees and charges $1,009.50
total: $243,579.50 $23,211.72
Total of Chase's claim, at petition date: $2,008,195,16
Tolal interest at default rates, Year 1: $141,020,93
BWP Plan's interest pays less in Year 1
to Chase by this amount: $19,612,73
This demonstrates that BWP’s Plan proposes to pay interest to Chase that is materially less than the contractual default rate of interest.
Nor does BWP’s Plan propose to pay Chase any attorney fees. BWP has not disputed that if BWP is solvent, as the Court has now found, the Plan must pay Chase its reasonable attorney fees as part of its allowed claim, under Dow, because Chase is contractually entitled to such fees. Chase claims that its attorney fees total $64,256.90 as of May 19, 2011.29 Such claimed fees may or may not be reason*239able, but the important point here is that BWP’s plan does not propose to pay Chase any attorney fees. So BWP’s plan clearly does not satisfy Dow’s requirements for a solvent debtor.
BWP’s counsel indicated at the confirmation hearing that BWP may be willing to pay Chase’s reasonable attorney fees. But there is no provision for them in BWP’s Plan. The Plan says nothing about them, and the total amount of BWP’s claim as set by the Plan, secured plus unsecured, does not include any attorney fees. The Plan’s total amount for BWP’s claim obviously was taken directly from Chase’s originally-filed proof of claim, the first page of which stated a total claim amount of $2,010,172.64.30 Chase’s “Statement of Interest or Additional Charges,” on the second page of that proof of claim, however, makes clear that this claim amount includes no specific dollar amount for attorney fees.31 It requested reasonable attorney fees without quantifying them.
3. Chase’s other objections
Chase objected to confirmation of BWP’s Plan on additional grounds, not discussed above, and also objected to final approval of BWP’s disclosure statement. The Court finds it unnecessary to discuss these other objections now, for the following reasons. First, the Court is denying confirmation on other grounds, for the reasons stated in this opinion. Second, the Court will allow BWP another opportunity to try to confirm a plan, by filing a new plan and disclosure statement. The Court anticipates that BWP will file a plan and disclosure statement that will make some or all of BWP’s other objections moot. Third, at least some of Chase’s other objections may be mooted, and some of the important facts underlying some of the objections may have changed, in the time after the confirmation hearing. Important post-hearing developments include the Lickwala’s filing of their Chapter 7 case, and recent events in that case.
IV. Conclusion
For the reasons stated in this opinion, the Court will deny confirmation of BWP’s Plan. The Court will enter a separate order. The order will allow BWP to file a new plan and disclosure statement, and will set a deadline for doing so.
*240UNITED STATES BANKRUPTCY APPELLATE PANEL FOR THE
EIGHTH CIRCUIT
DECISIONS WITHOUT PUBLISHED OPINIONS
Appeal from
Docket and Citation
Title Number Date Disposition (if reported)
Ladika, In re; Ladika v. Luker ... 98-6056 08/28/1998 Affirmed E.D.Ark.
215 B.R. 720
McCormick, In re; McCormick v.
Diversified Collection Services,
Inc. 00-6094EM 01/24/2001 Affirmed E.D.Mo.
McCormick, In re; McCormick v.
Diversified Collection Service,
Inc. 01-1975 09/07/2001 Affirmed BAP
259 B.R. 907
. Debtor's Third Amended Combined Plan of Reorganization and Disclosure Statement (Docket # 128) at 32.
. Docket # 128 (the "BWP Plan” or the "Plan”).
. Docket # 138.
. Docket #147.
. Id. at ¶ 5.
. Docket # 149.
. Docket # 154.
. See Docket ## 132, 143, 144 in the Lickwa-la case (Case No. 11-55831).
. Plan (Docket # 128) at 12.
. According to the Plan, Chase's collateral has the following values: Accounts Receivable $1,400,0000; Office Equipment and Furnishings $91,500.00; Computers and Software $20,000.00; and Tools $20,000.00. Id.
. Id. at 12, 13.
. Plan at 12-13, § G.4. The “Effective Date” is defined to mean 30 days after entry of a "Final Order confirming” the Plan, and a "Final Order” means, in essence, an order that is no longer appealable. Id. at 3, §§ A.19, A.21.
. Id. at 20-21, § G.11.
. Id. at 18-19, § G.8.
. Id. at 19-21, §§ G9-G12.
. See Ballot Summary (Docket # 136).
. “Unlike most debtors in bankruptcy, Dow Corning was fully solvent at the time it filed its bankruptcy case; it has remained so throughout the proceedings and has never disputed its ability to pay all its creditors.” 456 F.3d at 671.
. In this opinion, the Court does not include the value of either of the types of property described in § 101(32)(A)(i) and (ii), which must be excluded for purposes of determining if an entity's debts exceed the value of its property. The BWP property values considered in this opinion do not include the value of any property of BWP that may have been transferred to another entity fraudulently. (And neither BWP nor Chase have identified any such property in their confirmation arguments, in any event.) Rather, the Court considers only the value of property still owned by BWP at the relevant time(s), not including the value of any possible fraudulent transfer claims that BWP or the bankruptcy estate may own or have owned.
And being a corporation, BWP has no exemptions under Code § 522. Only an “individual” debtor may claim exemptions under § 522, see 11 U.S.C. § 522(b)(1), and "individual” as that term is used in the Bankruptcy Code means a human being. It does not include a corporation. See, e.g., Friedman v. Comm’r, 216 F.3d 537, 548 n. 7 (6th Cir.2000) (“individual” as used in Code § 727(a)(1) does not include a corporation); In re Sayeh, 445 B.R. 19, 27 (Bankr.D.Mass.2011) (“individual” as used in Code § 362(k) means a human being, and does not mean an entity); In re JAC Family Found., 356 B.R. 554, 556-57 (Bankr.N.D.Ga.2006) ("individual” as used in Code § 109(e) means a natural person); Farm Fresh Poultry, Inc. v. Hooton Co. (In re Hooton Co.), 43 B.R. 389, 390-91 (Bankr. N.D.Ala.1984) (“individual” as used in Code §§ 523 and 1141(d)(2) means a human being, and not a corporation or partnership).
. Docket #24. This case was filed on September 3, 2010.
. Docket # 128, Ex. A, entitled "Liquidation Distribution.”
. Docket # 24: Summary of Schedules, and Schedules B, D, E, and F.
. BWP's liquidation statement was designed, at least in part, to help BWP demonstrate that its Plan met the confirmation requirement of 11 U.S.C. § 1129(a)(7)(A), that each holder of a claim or interest in each impaired, non-accepting class under the Plan would "receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date.”
. This $985,982.16 figure consists of "Unsecured Claims” ("Filed and Listed Claims”) of $205,047.85 plus "Deficiency Claims” of Chase and the Small Business Administration totaling $780,934.31. From this, and from the Plan's sections regarding the bifurcation and treatment of the claims of Chase and the Small Business Administration, and its provisions stating that all of BWP's other secured creditors are fully secured (i.e., that the value of their collateral exceeds their claims,) it is clear that BWP’s statement of the "Fair Market Value” of its “TOTAL EQUITY” in its assets is not meant to imply that either Chase or the Small Business Administration are fully secured.
.In addition, the Court notes, as something of a reality-check on its solvency analysis, the following. In the projections that BWP filed with its Plan, it projects that BWP will at all times during the life of the Plan have a substantial cash reserve, after making its proposed plan payments each month. That reserve was projected to be $414,097.60 after the first month of plan payments, post-confirmation, in May 2011. And that cash reserve was projected to grow steadily, reaching $1,751,474.15 by the approximate time of the Plan's projected end, in December 2016. See Plan Exhibit B (Docket # 128).
. The Court also notes that it has reviewed the monthly operating reports that BWP filed for the months after BWP filed its plan, (Docket## 131, 139, 142, 148, 153, 155, 159, 160,) and the Court does not find anything in those reports to indicate that BWP is no longer solvent today.
. Under Michigan law, provisions in commercial contracts for payment of attorney fees and expenses are enforceable, to the extent the fees and expenses are reasonable. See Central Transport, Inc. v. Fruehauf Corp., 139 Mich.App. 536, 362 N.W.2d 823, 829 (1984).
.As noted in the chart, some of Chase’s default interest rates are tied to the prime interest rate, and Chase’s amended proof of claim assumes a prime rate of 3.25%. The Court notes that at all times relevant to its calculations, including the date of the confirmation hearing, the date of Chase's amended proof of claim, and at all times since then, the Wall Street Journal prime rate has been 3.25%. See Bankrate.com, at http://www. bankrate.com/rates/interest-rates/prime-rate. aspx.
. This is because if the Court assumed that part of Chase’s debt is to be paid over 6 years, rather than 5 years, in the same proportion that the BWP Plan proposes, there would not be any non-arbitrary way to decide which of file four components of Chase's debt (each with a different default interest rate) to assign to a 6-year amortization, as opposed to a 5-year amortization.
. See Chase's amended proof of claim, no. 9-2, filed May 24, 2011, atp. 2.
. See Chase's proof of claim, filed December 14, 2010 (Claim 9-1) atp. 1, Box 1.
. See id. at p. 2, part (E). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494454/ | *244
MEMORANDUM DECISION REGARDING APPLICATIONS FOR APPROVAL OF COMPENSATION BY COUNSEL FOR DEBTOR
S. MARTIN TEEL, JR., Bankruptcy Judge.
This addresses the First Interim Application for Approval of Compensation by Counsel for Debtor (Dkt. No. 443, filed December 1, 2009) and the Second and Final Application for Approval of Compensation by Counsel for Debtor (Dkt. No. 839, filed March 25, 2010). For the reasons that follow, I will grant in part and deny in part the applications.
I
On February 25, 2009, the debtor commenced the above-captioned case under chapter 11 of the Bankruptcy Code and on March 3, 2009, Tighe, Patton, Armstrong, Teasdale, LLC, filed a disclosure of compensation (Dkt. No. 15) and the debtor, as a debtor in possession exercising the powers of a trustee under 11 U.S.C. §§ 1101(1) and 1107(a), filed an application under 11 U.S.C. § 327 to employ that law firm as its counsel (Dkt. No. 16). The application to employ Tighe Patton1 was a bare-bones, five-paragraph filing. In substance, it disclosed that (1) the firm would bill at a maximum rate of $450 per hour; (2) it had received a prepetition retainer of $2,990.00, from which $1,951.00 in prepetition fees and $1,039 in fifing fees were paid; (3) the firm held $50,000 in its trust account as an advance retainer; (4) the firm, its members, and employed attorneys were “disinterested persons within the meaning of 11 U.S.C. § 101(14)” and that “neither [the firm] nor any member or employed attorney represented] or ha[d] any connection with or [held] or represented] any interest adverse to the estate of the Debtor, its attorneys or accountants ... ”; and (5) that the employment of the firm was in the best interest of the debtor and the estate. The declaration of Kermit A. Rosenberg filed with the application under Fed. R. Bankr.P. 2014(a) recited that no member of his firm “has any connection with or represents any interest adverse to the debtor herein, its creditors, or any other party in interest herein, their attorneys, the United States Trustee, or any person employed in the Office of the United States Trustee,” but disclosed the forgiveness of fees incurred by the debtor prepet-ition.
Prior to the fifing of any responses to its application to employ, Tighe Patton filed an amended disclosure of compensation, clarifying that of the $50,000 retainer, it had remitted $5,000 to the debtor for deposit in the debtor in possession account for administrative expenses. Tighe Patton also disclosed that it had waived $109,488.55 in prepetition legal fees not related to the bankruptcy.
Robert Patterson objected to Tighe Patton’s application to employ on the basis that the firm suffered from impermissible conflicts of interest. In support of his objection, Patterson alleged that Tighe Patton had previously represented the debtor and its principal owner and CEO, David Castiel, in various litigation in New York and Washington D.C., and that upon the filing of the bankruptcy petition, the debtor’s position vis-a-vis Castiel had become adverse. Patterson further contended that several oversights in the debtor’s petition and schedules indicated that Tighe Patton was “a party in concealing the debtor’s assets and exaggerating the Debt- *245or’s obligations.” Based on these and other allegations, Patterson concluded that Tighe Patton was under Castiel’s domination and control and would not act in the best interest of the estate.
In response to Patterson’s objection, Tighe Patton filed a reply wherein it made additional disclosures relevant to its application to employ. First, with respect to Castiel, Tighe Patton disclosed that its representation of Castiel was limited to his official capacity as an employee and officer of Ellipso. Second, Tighe Patton disclosed that the debtor had paid it $5,000 for non-bankruptcy, prepetition services. The reply did not state the date on which the payment was made. Third, Tighe Patton disclosed that it had represented and continued to represent Virtual Geosatellite LLC2 in non-bankruptcy matters.
The court held a hearing on Tighe Patton’s application to employ at which Kermit Rosenberg, a member of Tighe Patton, appeared and presented testimony in support of the application. With respect to the firm’s relationship to Castiel, Rosenberg disclosed that Tighe Patton had represented Ellipso and Castiel in his capacity as an officer for the company in other litigation for more than a year prior to the bankruptcy, but that the litigation in which it had previously represented Castiel had concluded and that the firm did not currently represent him.3 With respect to Virtual Geosatellite LLC, Rosenberg disclosed that Tighe Patton had previously represented the company, that the company held most of the valuable patents, and that these patents would be the source of any reorganization by the debtor. Rosenberg further stated that Tighe Patton had not provided any services for Virtual Geo-satellite LLC since the petition date and that Ellipso had always paid for any services rendered to Virtual Geosatellite LLC. With respect to fees, Rosenberg disclosed that Tighe Patton had actually received $60,000 from the debtor as a retainer, but had remitted $15,000 of that back to the debtor upon the debtor’s request for use to pay administrative expenses.4 Rosenberg also disclosed that the $5,000 payment Tighe Patton had received for non-bankruptcy, prepetition work was a check from the debtor that it received prior to the bankruptcy filing but that the check did not clear until after the case was filed.5 Finally, Rosenberg disclosed that all of the amounts paid to Tighe Patton came from the sale of securities in an account the debtor held at TD Ameritrade.
Patterson, John Mann, and Martha Davis, on behalf of the United States Trustee, appeared at the hearing on Tighe Patton’s application to employ and voiced objections. Patterson reiterated the arguments set forth in his written objection and expressed concern that the source of Tighe Patton’s retainer was an account on which he, as a creditor, held an attachment. Davis expressed concern that the amount received by Tighe Patton had increased to $60,000 and that Virtual Geosa-tellite LLC was an account debtor to El-*246lipso in the amount of $2.2 million. Davis also expressed concern about the sequential release of information by Tighe Patton and argued that this alone was a ground to deny its application for employment.
Ultimately, I granted Tighe Patton’s application based upon Rosenberg’s testimony and representations at the hearing. With respect to the conflict stemming from a prior representation of Castiel, I found that Castiel’s waiver of the conflict cured the issue. With respect to Tighe Patton’s failure to take a position with regards to whether Castiel should be held personally liable for a judgment in the District Court, I found that the debtor had not waived any rights against Castiel at that point, and, in any event, any tension that might exist because of that relationship was insufficient to disqualify Tighe Patton as counsel for the debtor. With respect to the source of the funds, I overruled Patterson’s objection because there was no evidence that Patterson’s writ of attachment had been served on TD Ameritrade prior to the transfer. Finally,, with respect to the piecemeal nature of Tighe Patton’s disclosures, I found Rosenberg’s explanation sufficient, but made approval of Tighe Patton’s retention subject to Tighe Patton filing an amended disclosure of compensation that sufficiently set forth the total amount of money it received from the debtor’s TD Ameritrade account and how it distributed those funds. Tighe Patton filed its amended disclosure of compensation on April 13, 2009, and I entered the order approving its appointment on May 6, 2009.
On December 1, 2009, Tighe Patton filed its first interim application for approval of compensation and reimbursement of expenses as an administrative claim against the estate under 11 U.S.C. §§ 330(a) and 503(b)(2). In that application, Tighe Patton sought $148,689.00 for services rendered and $1,496.14 for out-of-pocket expenses for the period of February 25, 2009, through November 30, 2009. This consisted of 406.1 attorney hours at an average rate of $366.14 per hour.
John Page objected to Tighe Patton’s fee application on the grounds that it had several non-disclosed prior representations of the debtor’s affiliates and misfeasance during the case. With respect to the nondisclosure, Page contended that Tighe Patton had failed to disclose that it was counsel to two of the debtor’s affiliates, Virtual Geosatellite Holdings, Inc., and Mobile Communications Holdings, Inc., in Draim v. Virtual Geosatellite Holdings, Inc., Case No. 01-cv-02690 (D.D.C.2001). Page also contended that Virtual Geosatellite Holdings, Inc., in contrast to Virtual Geo-satellite LLC, owned 10% of Ellipso’s equity interest and that Mobile Communications Holdings, Inc. had two potential claims against the debtor. With respect to Tighe Patton’s misfeasance, Page contended, among other things, that Tighe Patton had made unauthorized payments to Linda Awkard, had wasted estate resources in unnecessary discovery disputes, had assisted Castiel in putting forth a phony funding scheme for the debtor’s plan, and had filed frivolous objections to claims.
Robert Patterson, John Mann, Mann Technologies, LLC, and The Registry Solutions Company, like Page, all objected to Tighe Patton’s fee application on the general bases that it held impermissible conflicts of interest and had provided no benefit to the estate. Further, Patterson, et al., additionally objected to the fee application on the basis that Tighe Patton’s $450 per hour fee was unreasonable.
In response to the creditors’ objections, Tighe Patton filed a supplemental disclosure to its initial application to employ. In that supplement, Tighe Patton disclosed five previously-undisclosed additional rep*247resentations that it had undertaken of the debtor, its principal, and affiliates:
• Representation of Castiel, Virtual Geosa-tellite Holdings, Inc., and Mobile Communications Holdings, Inc., in Draim v. Virtual Geosatellite Holdings, Inc., Case No. 1:01-cv-2690 (D.D.C.2009). Tighe Patton began its representation in January 2005. Castiel was dismissed as a party from the litigation in March 2006, but Tighe Patton continued as counsel of record for Virtual Geosatellite Holdings and Mobile Communications Holdings until September 2009.
• Representation of Ellipso and Virtual Geosatellite LLC in Ellipso Inc. v. Draim, Case no. 1:06-cv-1373 (D.D.C. 2006). The representation in that case was from April 18, 2008, through April 28, 2008.
• Representation of Ellipso, Castiel, and Virtual Geosatellite LLC in SST Global Technology, LLC v. Chapman, Case No. 02-7687 (S.D.N.Y.2006). The representation in that case was from September 2003 until July 2005, when the case was terminated pursuant to a settlement agreement.
• Representation of Ellipso, Castiel, Virtual Geosatellite LLC, Mobile Communications Holdings, Inc., and Virtual Geosatellite Holdings, Inc., in Sahagan v. Castiel, Case No. 603117 (Sup.Ct., N.Y. 2007). The representation in that case was from May 2008 to September 2008 and related to an alleged breach of the settlement agreement in SST Global Technology, LLC v. Chapman, set forth above.
• Representation of Ellipso, Virtual Geosa-tellite Holdings, Inc., and Mobile Communications Holdings, Inc., in Ellipso, Inc. v. Inciardi, Case No. 02-433 (D.D.C.2002). The representation lasted for two days, until the case was dismissed by stipulation in accordance with the settlement agreement in SST Global Technology, LLC v. Chapman, set forth above.
Tighe Patton also disclosed that in June, July, and August 2008, it received $34,896.60 in fees from Ellipso,6 but had received no payments since that time from any of the parties for those cases.
At the same time Tighe Patton filed its supplemental disclosure to the application to employ it filed a motion to withdraw as counsel to the debtor in possession, citing an impermissible conflict of interest with the debtor. That alleged conflict arose as follows. Shortly after Tighe Patton filed its application for compensation, Patterson, Mann, Mann Technologies, and The Registry Solutions Company filed a suit in the District Court against, among others, Tighe Patton and the debtor. In that suit, Patterson, et al., asserted fraud and civil RICO counts against both parties. The suit sought $30,000,000 in treble damages and $10,000,000 in punitive damages against the defendants. In its motion to withdraw, Tighe Patton contended that the RICO suit put it in a position adverse to the estate because, if it were found liable, it would have an administrative claim against the estate for indemnification. Tighe Patton further contended that in light of the creditors’ opposition to its application for compensation and the RICO suit, it had an incentive to make sure that no plan was confirmed and could no longer act solely in the best interest of the estate. On January 5, 2010, I denied Tighe Patton’s motion. Tighe Patton thereafter filed a motion to reconsider the order de*248nying its motion for leave to withdraw, again citing to the District Court RICO lawsuit and its potential indemnification rights against the debtor as creating an impermissible conflict and, thus, necessitating its withdrawing as counsel for the debtor.
Prior to ruling on Tighe Patton’s motion to reconsider, the United States Trustee filed a motion to remove the debtor as debtor in possession and appoint a trustee to oversee the estate. The Trustee filed its motion based on the inordinate level of conflict that had arisen in the case. At a hearing on January 19, 2010,1 granted the United States Trustee’s motion and directed the appointment of a chapter 11 trustee. In light of this, I granted in part Tighe Patton’s motion to reconsider, requiring it to continue representing the debtor (which was no longer acting as a debtor in possession with fiduciary duties) with respect to carrying out its remaining duties as merely a debtor under the Bankruptcy Code but allowing Tighe Patton to represent its own interest in the case (e.g., objecting to confirmation of the Mann Plan).
On March 25, 2010, Tighe Patton filed is Second and Final Application for Approval of Compensation by Counsel for Debtor. The application sought $18,872.19, consisting of $17,745 in attorneys’ fees and $1,127.19 in costs as an administrative claim against the estate. Consistent with the court’s order granting it authority to withdraw its representation of the debtor, Tighe Patton did not seek fees from the estate for services after December 22, 2009, other than for reviewing and filing the debtor’s monthly operating reports required of it as a debtor in possession for months prior to the appointment of a trustee.
The creditors also filed an objection to Tighe Patton’s second fee application. Creditors Mann Technologies, The Registry Solutions Company, John Mann, and Robert Patterson’s objection was substantively identical to their objection to Tighe Patton’s first application. Creditor John Page’s objection incorporated the grounds in his original objection but added, as an additional ground, Tighe Patton’s alleged continued malfeasance during the case.
The court held a hearing on the fee applications on May 18, 2010. Tighe Patton, the creditors, and Martha Davis, on behalf of the United States Trustee, appeared at the hearing. The United States Trustee joined in objecting to the application. After the presentation of evidence, I took the matter under advisement. This represents the court’s findings of fact and conclusions of law.
II
The creditors challenge Tighe Patton’s fee applications on three broad bases: impermissible conflicts under § 328, charging for services that were not beneficial to the estate, and failure to disclose all of its connections with the debtor prior to appointment as counsel. The United States Trustee joined with the creditors as to the third basis. The creditors also challenge Tighe Patton’s hourly rates. I will address each contention in turn.
A
Creditors John Page, Robert Patterson, John Mann, Mann Technologies LLC, and The Registry Solutions all challenge Tighe Patton’s fee application on the basis that its prepetition and postpetition representation of Castiel and affiliated entities of the debtor created a conflict of interest that preclude it from receiving fees for its work in the case. With respect to Castiel, the creditors contend that Tighe Patton’s prior representation of Castiel has caused it to place his interest above the interest of the *249estate. Specifically, the creditors cite to the following acts: (1) “refusing to advocate placing any responsibility on D. Castiel for his actions which caused the bankruptcy of debtor”; (2) “refusing to take any actions to recover any moneys from D. Castiel for his malfeasances”; (3) filing “numerous false and materially misleading pleadings and schedules herein listing fraudulent claims; non existent creditors; false valuation of assets; and scurrilous accusations against Creditors and others who have questioned the conduct of D. Castiel”; (4) “opposing any and every effort by the Creditors to obtain information concerning Debtor’s operations or financial status”; and (5) “extend[ing] this case by submitting false Plans and Disclosure Statements purportedly on behalf of the debtor, but in reality on behalf of D. Cas-tiel.” Joint Opp., DE 496, at 8. With respect to Tighe Patton’s representation of the debtor’s affiliates, the creditors urge that the Tighe Patton’s postpetition representation of Virtual Geosatellite Holdings, Inc., and Mobile Communications Holdings in the Draim case created a conflict that should preclude its receiving compensation because VGHI was equity interest holder in Ellipso and Mobile Communications Holdings, Inc. held an unscheduled claim against the debtor.
Sections 327 through 331 of the Bankruptcy Code govern the employment and compensation of attorneys for the debtor in possession. Pursuant to § 327(a) of the Bankruptcy Code, the debt- or in possession is entitled to employ an attorney to represent and assist it in carrying out its duties under the Bankruptcy Code. The debtor may generally select the attorney of its choice, so long as the attorney does not “hold or represent an interest adverse to the estate” and is disinterested. 11 U.S.C. § 327(a). Pursuant to § 328(c) of the Bankruptcy Code, “the court may deny allowance of compensation for services and reimbursement of expenses of a professional person ... if, at any time during such professional person’s employment under section 327 ... such professional person is not a disinterested person, or represents or holds an interest adverse to the interest of the estate with respect to the matter on which such professional person is employed.” Section 101(14) of the Bankruptcy Code defines “disinterested person” to mean:
a person that—
(A) is not a creditor, an equity security holder, or an insider;
(B) is not and was not, within 2 years before the date of the filing of the petition, a director, officer, or employee of the debtor; and
(C) does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason.
The scope of § 328(c) is limited by § 327(c), which provides that a person is not precluded from employment “solely because of such person’s employment by or representation of a creditor, unless ... there is an actual conflict of interest.” Importantly, a party objecting to an application for compensation on the basis of a conflict of interest bears the burden of establishing the conflict. In re Leslie Fay Companies, Inc., 222 B.R. 718, 721 (S.D.N.Y.1998); In re Huntco Inc., 288 B.R. 229, 236-37 (Bankr.E.D.Mo.2002) (“Specifically, the representation of a debt- or in possession’s affiliate is not a per se representation of an interest that is adverse to the estate. Rather, the objecting party must identify some conflict between the affiliate and the debtor in possession apart from the affiliate relationship.”); see *250also In re AOV Industries, Inc., 798 F.2d 491, 495-96 (D.C.Cir.1986) (under 11 U.S.C. § 1103(b), once an attorney has formally stated that it has complied with that section, the burden is on the party alleging conflict of interest to produce evidence to support its claim).
The objecting creditors have failed to show that Tighe Patton was not a “disinterested person” as that term is defined in the Bankruptcy Code up until the point at which it sought to withdraw as counsel for the debtor. Up until the point that Patterson and Mann filed the RICO complaint in the District Court, Tighe Patton was neither a “creditor, an equity security holder, [n]or an insider” of the debtor. Indeed, prior to seeking employment, Tighe Patton waived all of its prepetition fees and agreed to return the one postpetition payment it received. Further, up until the filing of the RICO suit, Tighe Patton had no interest materially adverse to the estate: it was only upon the filing of the RICO complaint that it became in the firm’s interest to oppose confirmation and move against the Mann Plan.
Likewise, the creditors have failed to show that Tighe Patton represented an interest adverse to the estate. With respect to Castiel, Rosenberg testified at both the hearing on Tighe Patton’s fee application and the debtor’s application to employ the firm, that the firm’s representation of Castiel was limited to his official capacity as an officer of the debtor and the debtor’s affiliates. Given this limitation, the interests of Ellipso and Castiel were aligned and no impermissible conflict exists.
Notwithstanding this, the objecting creditors contend that certain of Tighe Patton’s acts within the case show that an impermissible conflict existed. For example, the objecting creditors made much of the fact that Tighe Patton declined to take a position on behalf of the debtor in the district court litigation on whether Castiel should be held personally liable for the so-called “bad faith judgment.” This, however, is not the conflict itself, but would be the result of any alleged conflict. The same is true of the list of acts that the creditors detail in their objections: these would be all the end result of any conflict.7 In all cases, the result is not enough. Rather, the creditors bore the burden of showing what position Tighe Patton took in representing Castiel was adverse to the estate. They have come forward with none, and thus this basis for disallowing the firm’s compensation fails.
Similarly, with respect to Tighe Patton’s representation of Virtual Geosa-tellite Holdings, Inc., the creditors have provided no evidence that the firm’s representation of that entity was adverse to the estate. The mere representation of an affiliate of the debtor that has a potential claim in the bankruptcy is insufficient to disallow Tighe Patton’s compensation. In re Global Marine, Inc., 108 B.R. 998, 1004 (Bankr.S.D.Tex.1987) (“[M]ere existence of an intercompany claim does not in and of itself constitute an impermissible conflict of interest that would justify disqualification or denial of compensation.”). While Virtual Geosatellite Holdings, Inc. as an equity holder of the debtor potentially held an interest that was adverse to the estate, *251the representation of a party that held an adverse interest is not enough. Rather, Tighe Patton would have had to represent Virtual Geosatellite Holdings, Inc. with respect to that adverse interest. The distinction is important. The Bankruptcy Code does not bar the representation of an entity with an interest adverse to the estate but, rather, the representation of an interest adverse to the estate. 11 U.S.C. § 328(c), § 327(c). The creditors have presented no evidence that Tighe Patton’s representation of Virtual Geosatellite Holdings, Inc. was with respect to its equity interest in Ellipso or that its representation in either the Draim, Sahagan, or Inciardi litigation was contrary to the interests of the debtor. Absent such evidence, Tighe Patton’s prior representation of Virtual Geosatellite Holdings, Inc. standing alone is not a basis for disallowing its application for compensation.
Tighe Patton’s representation of Mobile Communications Holdings, Inc. is more problematic. First, as a preliminary matter, as with Tighe Patton’s previous representation of Virtual Geosatellite Holdings, Inc. the mere representation of an affiliate of the debtor that has a potential claim in the bankruptcy is insufficient to disallow Tighe Patton’s compensation. In re Global Marine, Inc., 108 B.R. at 1004. Again, rather, Tighe Patton would have had to represent Mobile Communications Holdings, Inc. with respect to that adverse interest. In his objection to Tighe Patton’s application for compensation, John Page contends this was the case.
As detailed in the debtor’s Second Amended Disclosure Statement, pursuant to a 2002 stock purchase agreement Mobile Communications Holdings, Inc. was to transfer its interest in an entity known as ESBH to ICO Global in exchange for approximately 1.5 million shares of ICO Global stock. While Tighe Patton did not represent the debtor or Mobile Communications Holdings, Inc. in that transaction, it did represent both entities in a later lawsuit stemming from that transaction. Ultimately, that suit settled for approximately $3 million in May 2008. In his objection to Tighe Patton’s application for compensation, John Page contends that the proceeds of the settlement went to Ellipso and that in light of the structure of the stock purchase agreement the proceeds of the settlement should have gone to Mobile Communications Holdings, Inc. Accordingly, Page concludes, the interests of the entities were adverse and, thus, Tighe Patton was precluded from representing the debtor in this proceeding. At the hearing on the Tighe Patton’s fee application, however, Page presented no evidence to this effect. Without evidence relating to the structure of the settlement, whether Mobile Communications Holdings, Inc. received consideration for any transfer of the ICO Global stock to Ellipso, and the nature of Tighe Patton’s representation as it relates to the settlement agreement, I cannot say that an actual conflict existed. , Accordingly, this basis for disallowing Tighe Patton’s application for compensation also fails.
B
The objecting creditors next contend that the court should deny Tighe Patton’s fee application because the fees its seeks were not reasonable. Under § 330(a), the court is given wide discretion to review the reasonableness of fees. In determining reasonableness, the court may consider (i) the time spent, (ii) the rates charged, (iii) whether the services performed were necessary or beneficial to the completion of the case, (iv) whether the time spent on the services were “commensurate with the complexity, importance, and nature of the problem, issue, or task addressed,” (v) the skill of the person seeking compensation, *252and (vi) whether the compensation sought is reasonable “based on the customary compensation charged by comparably skilled practitioners in cases other than cases under this title.” 11 U.S.C. § 330(a)(3). Moreover, under § 330(a)(4), the court may disallow compensation for either unnecessary or duplicative services or services that were not reasonably likely to benefit the estate or necessary to the administration of the estate. At the hearing on Tighe Patton’s application, the objecting creditors focused on the third factor: whether the services performed were necessary or beneficial to the estate.
In determining whether to grant an application for compensation for attorneys’ fees, “courts objectively consider whether the services rendered were reasonably likely to benefit the estate from the perspective of the time when such services were rendered.” In re Value City Holdings, Inc., 436 B.R. 300, 305 (Bankr. S.D.N.Y.2010). In contrast to challenges as to disinterestedness and conflicts of interest, the burden of proof as to reasonableness rests upon the applicant. In re Vu, 366 B.R. 511, 521 (D.Md.2007). “To satisfy this burden, a claimant must justify its charges with detailed, specific, itemized documentation.” In re Bennett Funding Group Inc. 213 B.R. 234, 244 (Bankr. N.D.N.Y.1997). Moreover, “[t]his burden is not to be taken lightly, especially given that every dollar expended on legal fees results in a dollar less that is available for distribution to the creditors or for use by the debtor.” In re Williams, 378 B.R. 811, 822 (Bankr.E.D.Mich.2007) (quoting In re Pettibone Corp. 74 B.R. 293, 299 (Bankr. N.D.Ill.1987)).
The objecting creditors point to five specific matters in the case which they contend were not beneficial to the estate.
First, the objecting creditors take issue with Tighe Patton’s actions regarding John Mann’s motion to shorten exclusivity. Prior to the expiration of the exclusivity period, John Mann filed a motion to shorten the exclusivity period to allow him to file his own plan and preserve estate assets. (Dkt. No. 76, filed May 8, 2009). The debtor filed an opposition to the motion (Dkt. No. 114), and Mann subsequently withdrew the motion based on the debt- or’s alleged representation that it would not seek to extend the period (Dkt. No. 127). Rosenberg testified at the hearing on Tighe Patton’s fee application that Tighe Patton advised the debtor to oppose Mann’s motion because it “looked to be contrary to the interest of Ellipso and its creditors and looked like nothing more than a shell game to move the assets away from the creditors.” I find Rosenberg’s testimony credible in this respect.
The plan Mann filed with his motion to limit the exclusivity period transferred ownership of the company to Mann and provided limited payments to unsecured creditors: “The Plan provides for transfer of all equity interest in Debtor to Mann, reorganization of the business and for payment of administrative expense claims, deferred cash payments on secured claims and priority tax claims, and pro rata payments on claims of unsecured creditors.” Unsecured creditors would receive not less than 10% of their allowed claims, payable pro rata from “Distributable Cash” over a five year term. “Distributable Cash” was not defined in the plan. Without this integral term, I agree that Mann’s plan did not look to be in the best interest of creditors and Tighe Patton’s opposition provided a benefit to the estate.
Next, the creditors contend that Tighe Patton’s actions with respect to the funding of Ellipso’s plan were not beneficial to the estate. On the day prior to the termination of the exclusivity period the *253debtor filed its first plan. The debtor’s plan provided for a $600,000 stalking horse bid by David Castiel, which was subject to higher and better offers by third parties. In formulating the plan, Tighe Patton rejected a higher stalking-horse offer for $750,000 by John Page. Ultimately, Cas-tiel’s funding did not come through and the debtor was forced to withdraw its plan. The objecting creditors contend that Tighe Patton’s rejection of John Page’s bid was in bad faith and, thus, the fees incurred in connection with the debtor’s plan should be disallowed.
At the hearing on Tighe Patton’s fee application, Rosenberg testified that the debtor went with Castiel’s offer because the funding was verifiable. Rosenberg also testified that the debtor was up against a deadline to file the plan before the exclusive period expired and that Page’s offer was constantly changing in the days leading up to the deadline for the debtor to file its plan. Ultimately, Rosenberg continued, Castiel opted to go with his funding source for the plan and not Page’s because he did not believe Page’s funding source was solid.8 Rosenberg conducted no due diligence on Page’s offer, instead relying on Castiel to look into Page’s financials. Rosenberg further noted that because the plan was subject to higher and better offers, Page, or anyone else for that matter, could have put in a higher and better bid at any time and the debtor would have gone with that offer to fund its plan.
While I am sympathetic to Page’s plight in getting his bid accepted as a stalking horse offer, I cannot say that in opting for Castiel’s offer Tighe Patton did not provide a benefit to the estate. The disdain with which the firm treated Page was unbecoming of the standards to which professionals before this court should aspire.9 Nevertheless, given the looming exclusivity deadline, the lack of evidence regarding the viability of Page’s funding source, and the fact that Castiel’s offer was subject to higher and better offers, Tighe Patton’s actions with respect to the debtor’s plan provided a benefit to the estate and were justified under the circumstances, though the manner in which it treated Page was not. Accordingly, I will overrule the creditors’ objection in this regard.
Third, the objecting creditors contend that Tighe Patton’s work on drafting an objection to John Mann’s plan and disclosure statement that was never filed provided no benefit to the estate and, thus, should not be compensable. After the exclusivity period expired on the debt- or’s plan, John Mann filed his proposed plan. This plan was amended from the plan he had attached to his motion to shorten exclusivity in that it provided for a combination of cash and redeemable warrants to unsecured creditors. Contrary to the creditors’ assertion, however, Tighe Patton did file the objection to the plan and disclosure statement. In sub*254stance, the objection contended that the disclosure statement failed to provide adequate information. At the hearing on Mann’s disclosure statement, I agreed with the debtor’s arguments in this respect, but thought both Mann’s plan and the debtor’s plan should be permitted to go forward at the same time. This, I reasoned, would allow creditors to resolve the uncertainty contained in the Mann Plan by opting for the debtor’s lump-sum payoff plan. Nevertheless, I granted Mann leave to file an amended plan if he saw fit. Mann opted to stay with his initial plan.
In light of the fact that Tighe Patton actually filed the objection to the Mann Plan and in light of the fact that I ultimately agreed with its contentions, I do not find that the fees it seeks with respect to the objection were not of benefit to the estate. Indeed, if the debtor had not filed a competing liquidating plan, I would have likely required Mann to amend his plan to provide more information to creditors. Accordingly, I will overrule the creditors’ objection in this regard.
Fourth, the objecting creditors contend that the time Tighe Patton spent contesting the creditors’ discovery requests did not provide a benefit to the estate. Over the course of the case, the objecting creditors attempted on numerous occasions to get access to the debtor’s business and financial records. Tighe Patton billed 29.4 hours relating to these discovery requests. Of this, only 4.4 of the hours Tighe Patton spent were in conferring to attempt to resolve the disputes. Less that amount, this resulted in total fees billed to the estate of $8,760. When asked about these actions on the stand, Rosenberg’s only justification was that it was based upon Patterson’s prior felony conviction, and, with respect to requests for documents by Mann and Page, their affiliation with Patterson.
This explanation is insufficient to carry Tighe Patton’s burden to show the fees incurred in opposing the discovery requests were reasonable. The fact that a party requesting documents had previously been convicted of a felony or, even more tenuous, that the party was affiliated with a person convicted of a felony does not provide a sound basis for denying discovery. Most of the time Tighe Patton billed opposing the objecting creditors discovery requests related to technical violations of the discovery rules. Ultimately, Tighe Patton’s policy of resisting discovery to these creditors resulted in nothing more than running up fees against the estate and delaying the inevitable. More than mere distrust or dislike of a creditor is required to justify such actions. Accordingly, I will disallow the $8,760 in fees Tighe Patton billed for in engaging in these acts.
Finally, the objecting creditors contend that by filing a motion to convert after the debtor was unable to secure funding for its plan and by objecting to the creditors’ claims Tighe Patton was only trying to “play spoiler to the Mann Plan” and, thus, providing no benefit to the estate. On both counts I disagree. After the debtor’s plan fell through, filing a motion to convert was the most responsible action the debtor could have taken.10 Indeed, to this day I am at a loss as to why this case remains in Chapter 11 and the trustee has not pressed for its conversion. With respect to the objections to claims, the fact that this court has upheld them is *255alone sufficient to demonstrate their benefit to the estate. That the debtor might have been selective in choosing which objections to pursue first does not mean those that it did pursue were wasted efforts. Accordingly, I will overruling this objection as well.
C
The creditors’ final basis for disallowing Tighe Patton’s fees relates to the piecemeal nature of Tighe Patton’s disclosures in this case. The United States Trustee joins in this portion of the creditors’ objection.
Under Fed. R. Bankr.P. 2014, an attorney or firm seeking to be appointed as counsel to the debtor in possession has a duty to disclose “to the best of the applicant’s knowledge, all of the person’s connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee.” Failure to make such disclosures can result in revocation of the order authorizing the firm’s employment and a denial of compensation. In re Crivello, 134 F.3d 831, 836 (3d Cir.1998). If the nondisclosure is intentional, the court “[sjhould not hesitate to order the denial of all compensation.” In re Midway Indus. Contractors, Inc., 272 B.R. 651, 663 (Bankr. N.D.Ill.2001); see also Crivello, 134 F.3d at 839. Where, however, the failure to disclose is unintentional, whether to disallow fees is within the court’s discretion. In re Raymond Prof'l Grp., Inc., 421 B.R. 891, 906 (Bankr.N.D.Ill.2009). In determining whether it is appropriate to disallow fees, courts have weighed five factors:
• Whether the connections at issue would have created a disqualifying interest under section 327(a);
• the materiality of the information omitted;
• counsel’s efforts to correct the deficiency;
• the benefits provided to the estate by counsel; and
• whether the failure to disclose was inadvertent or intentional.
In re American Int’l Refinery, Inc., 436 B.R. 364, 380 (Bankr.W.D.La.2010) (setting forth the factors and citing cases).
At the hearing on Tighe Patton’s application, Kermit Rosenberg provided testimony regarding Tighe Patton’s connections with the debtor, its principal and affiliates, and the firm’s failure to disclose those connections with its application to employ and initial disclosures. With respect to the firm’s disclosures in its application to employ, Rosenberg testified as follows:
• At the time Ellipso retained Tighe Patton to serve as its bankruptcy counsel, Rosenberg ran a standard conflicts check through the firm’s conflicts database on Ellipso, Castiel, and the affiliated entities. That conflicts check only came back with the firm’s prior representation of Ellipso and Castiel, and its ongoing representation of Virtual Geosatellite LLC with respect to the sale of its intellectual property. It did not reveal the firm’s ongoing representation of Virtual Geosatellite Holdings, Inc., and Mobile Communications Holding, Inc., in the Draim case, or the firms previous representation of the debtor, Castiel and the debtor’s affiliates in the pre-bankruptcy cases.
• As part of the conflicts check procedure, all attorneys in the firm were emailed regarding the proposed representation of the debtor in this bankruptcy case. No attorneys responded to the email.
• Rosenberg approached Thomas Patton, the attorney representing Virtual Geosa-*256tellite LLC, to inquire about that matter. Patton informed him that the Virtual Geosatellite LLC matter was ongoing and was related to the sale of its intellectual property. Patton said that he could not think of any other Ellipso-related entities that the firm was representing. Thomas Patton was the attorney representing both Virtual Geosatellite Holdings, Inc., and Mobile Communications Holdings, Inc., in the ongoing Draim case and had represented the entities listed in the other cases disclosed in the supplemental disclosure.
• At the time Tighe Patton filed its application for employment, the Draim matter had been largely concluded, though some work was done postpetition.11
• Rosenberg knew that there were over $100,000 in fees owed to the firm, but did not inquire as to what entities were involved in accruing those fees and assumed they related to the entities revealed in the conflicts check.
• Rosenberg first became aware of Tighe Patton’s representation of Virtual Geosa-tellite Holdings, Inc., and Mobile Communications Holdings, Inc., upon the filing of the creditors’ objection to Tighe Patton’s first application for compensation.
• Upon being alerted to the issue, Tighe Patton ran an extended search on the federal courts’ PACER database to see if any other representation by Tighe Patton of the debtor, Castiel, or the debtor’s affiliated entities came up. This resulted in Tighe Patton’s supplement to its initial application to employ.
Weighing the five factors set forth by the bankruptcy court in American International Refinery, I find it appropriate to disallow a portion of Tighe Patton’s fees.
First, I do not find that the connections at issue would have created a disqualifying interest under section 327(a). As previously stated, that provision only prohibits that representation of an interest adverse to the estate, not the representation of a entity that happens to hold an adverse interest. There has been no evidence that the firm represented any entity with respect to an interest adverse to the estate.
Second, I do find that the information Tighe Patton failed to disclose was material. Although Tighe Patton did not represent an interest adverse to the estate in the prior and ongoing litigation, it did represent entities that potentially held such interests. Mobile Communications Holdings, Inc. held a potential claim against the estate based upon the Sahagan settlement proceeds having gone to Ellipso. Virtual Geosatellite Holdings, Inc. held an equity interest in the debtor. A firm’s prior representation of a creditor and equity holder of the debtor would raise a red flag in any case that would require a close look by the court to insure there were no conflicts.
Third, I find that counsel’s efforts to correct this deficiency were inadequate. From the moment Tighe Patton sought to be appointed as counsel, the objecting creditors contended that there were serious conflict issues surrounding its previous representation of the debtor, Castiel, and the debtor’s affiliates. Although, to be sure, the creditors did not initially explicitly detail those conflicts, their initial and continuing objections throughout the case certainly put the firm on notice. Indeed, Robert Patterson’s objection to Debtor’s *257application to appoint Tighe Patton alerted it to the Sahagan case (Dkt. No. 35, filed March 17, 2009), even including with the opposition a copy of the Sahagan settlement agreement that listed the affiliated entities of the debtor. At a minimum, this should have put Tighe Patton on notice that it needed to take a closer look at its prior representations. It was not until after the creditors objected in December 2009 to its fees, however, that Tighe Patton did this. This is not a model of diligence.
Fourth, I do find that the Tighe Patton provided considerable benefits to the estate. The firm navigated through a hotly-costed case and, for the most part, did so economically. The quality of its work was first-rate and it worked diligently towards seeing the case to completion. Except for its ill-advised discovery disputes with the creditors, it ably administered the case.
Finally, I find based on Rosenberg’s testimony that the failure to disclose was inadvertent. The creditors contend that Tighe Patton’s failure to disclose its prior and ongoing representations was driven by its desire to move the debtor quickly through bankruptcy and then continue its long-standing relationship with the debtor. I impute no such motives to the firm. Rather, I find that the failure is more a result of the confluence of a poor conflicts check system and poor intra-firm communications that amount to gross negligence.
With respect to the conflicts check system, only two plausible explanations exist for its failure to flag the firm’s prior and ongoing representations, none of which reflect favorably on Tighe Patton. First, Rosenberg could have failed to run all the entities through the system. He, however, testified that this was not the case. Alternatively, the attorneys who represented the affiliated entities could have failed to enter their names in the system. Regardless of the explanation, someone at the firm dropped the ball.
What I find the most troubling, however, is that the previous representations were not revealed through Rosenberg’s direct communications with Thomas Patton. Rosenberg testified that he asked Thomas Patton about any prior or ongoing representation of the debtor or its affiliates. At no time in the course of those discussions did the cases disclosed in Tighe Patton’s supplemental disclosure come up. With respect to cases that had concluded years before, this is understandable (and more the reason every firm needs adequate conflicts databases and procedures in place that ensure all represented entities are included). With respect to the ongoing Draim matter or cases that had terminated more recently, however, how Thomas Patton could have overlooked them remains unexplained.
It is inexcusable that Thomas Patton did not show up for the hearing on Tighe Patton’s fee application. The creditors’ objections focused heavily on the firm’s failure to disclose these prior and ongoing representations, so Tighe Patton knew it would be a central issue. Had Patton appeared and testified to the effect that he had merely overlooked the affiliated entities because he always thought of Ellipso as the client, he could have allayed many of the court’s concerns. Instead, and in the face of the creditors’ very clear objections, Tighe Patton opted not to have him present testimony. The only inference to be drawn from this is negative and leads me to find that there was extreme gross negligence by Patton in his responding to Rosenberg’s inquiries. This results in greater disallowance than I would have otherwise provided
In light of the foregoing, I will disallow an additional 40% of Tighe Patton’s fees.
*258D
The objecting creditors last contend that the hourly rates charged by Tighe Patton for its work on behalf of the debtor in possession were unreasonable. The lion’s share of the fees were charged by Kermit Rosenberg and Neal Goldfarb. Rosenberg, a member of the firm, bills at an hourly rate of $450. He has been a member of the bar since 1975 and has actively practiced before this court for as many years. Goldfarb, senior counsel at Tighe Patton, bills at an hourly rate of $300. He has been a practicing attorney since 1980. At the hearing on Tighe Patton’s applications, Rosenberg testified that the rates charged by the firm were within the range of attorneys with similar experience in the District of Columbia and were well below the $465 per hour rate published by the United States Attorney’s Office for the District of Columbia Laffey matrix. The objecting creditors presented no evidence in contravention.
I find the rates charged by Tighe Patton reasonable and consistent with those charged by attorneys practicing before this court in similar cases. This was a complicated case, requiring debtor in possession counsel with sufficient expertise to navigate the myriad difficult issues that arose. The hourly rates charged by Tighe Patton were well within the range of that which the court has come to expect of attorneys competent to undertake such representation. Accordingly, I will overrule the creditors’ objection in this respect.
Ill
For the foregoing reasons I will disallow $64,741.60 of the attorneys’ fees Tighe Patton seeks in its initial application ($8,760 + (($148,689.00 - $8,760) * 40%)), and $7,098 of the attorneys’ fees it seeks in its second and final application ($17,745 * 40%), for a total disallowance of $71,839.6. The firm shall be entitled to all of the out-of-pocket expenses it seeks in its applications.
A separate order follows.
. In the spring of 2009, Tighe, Patton, Armstrong, Teasdale, merged with another firm. The firm is now known and Butzel, Long, Tighe, Patton. For ease of reference I will continue to refer to the firm in this opinion as Tighe Patton.
. There are two Virtual Geosatellite companies at issue in this proceeding: Virtual Geo-satellite LLC and Virtual Geosatellite Holdings, Inc. Tighe Patton only initially made disclosures with respect to Virtual Geosatel-lite LLC.
. At the hearing Castiel waived any conflict with respect to Tighe Patton’s prior representation of him.
. Rosenberg testified that Castiel requested this additional amount so that the debtor could fund ongoing expenses of the company and that the $15,000 included $5,000 that Tighe Patton had previously remitted and that had proven insufficient.
. Rosenberg agreed to return these funds to the debtor.
. In its prior disclosure, Tighe Patton had represented this amount as the "approximatefy $30,000” received in June 2008.
. Some of these acts include the Tighe Patton’s failure to use John Page's offer to purchase the company as the stalking horse bid, the failure of Tighe Patton to object to Cas-hel's bonus and wage claim (although the deadline for filing that objection had not yet passed), the actions taken by Tighe Patton to prevent the objecting creditors from obtaining discovery from the debtor, and "allowing” David Castiel to sell off assets of the debtor, among others.
. In opting for Castiel’s offer, Rosenberg relied on the representations of Linda Awkard, special counsel to the debtor with respect to finding funding for the plan, that "she had first-hand knowledge and that she had seen strong evidence of their ability to fund this $600,000 in cash and in fact they would.”
. This case aptly demonstrates the untenable position in which counsel for a debtor in possession can be placed with respect to representing a debtor in possession charged with protecting the interests of the estate but being required to ascertain the debtor in possession's decisions from the debtor’s management whose goals may deviate from the best interests of the estate. This, however, should not be construed as implying that Tighe Patton was representing Castiel in this case or, for that matter, an interest adverse to the estate. Castiel’s views regarding exclusivity were not demonstrably adverse to the estate.
. The debtor later requested that the hearing on its motion to covert be deferred, and has not requested that a hearing be re-set.
. Upon review of the docket in the District Court, the only work done in that case postpe-tition was the filing by Thomas Patton of a motion to extend time to file an appeal of Judge Facciola’s findings of facts and conclusions of law in the proceeding and a reply to Draim’s opposition to the motion. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494456/ | BOROFF, Bankruptcy Judge.
BAC Home Loans Servicing, LP (“BAC”)1 appeals from a judgment of the United States Bankruptcy Court for the District of Maine in favor of Pasquale Per-rino, chapter 7 trustee (the “Trustee”), and against BAC as to their competing interests in certain real estate. BAC asserts an equitable interest in the subject real property arising from a mutual mistake (among BAC’s predecessor in interest and the Debtors, defined below) when the correct property description in a prepetition mortgage now held by BAC was omitted. The bankruptcy court concluded that the Trustee, given the status of a hypothetical lien creditor by § 544(a) of the Bankruptcy Code,2 was an intervening party with an interest superior to the equitable claims of BAC. For the reasons set forth below, we agree and AFFIRM.
BACKGROUND
A. Stipulated Facts3
Sara and Douglas Trask (the “Debtors”) are record owners of an unimproved sixteen-acre lot in a subdivision in Winter-port, Maine, known as “Lot # 6, James R. *272Greene Subdivision, Map File 10, Page 224” (“Lot # 6”). They are also record owners of an abutting 1.74-acre lot on which their residence is located (the “House”).
In April 2007, the Debtors refinanced their first mortgage on the House (“Old Mortgage”) with Home Loan Center, Inc. (“Home Loan”). By the refinancing, the previous mortgage loan was paid and the Old Mortgage was discharged. In one of two mortgage loans related to the refinancing,4 the Debtors executed and delivered to Home Loan a promissory note in the amount of $195,000.00. To secure the new note, the Debtors executed and delivered, inter alia, a mortgage (the “New Mortgage”) to Mortgage Electronic Registration Systems, Inc., acting solely as nominee for Home Loan. The promissory note and the New Mortgage were subsequently assigned to BAC.
Although the Old Mortgage described the intended collateral as the House, the New Mortgage erroneously employed the description for Lot # 6. It is undisputed that both the Debtors and BAC’s predecessor, Home Loan, intended the mortgaged property to be the House. The error was not discovered until shortly before the filing of the bankruptcy case in the spring of 2009.
B. Bankruptcy Proceedings
The Debtors filed a chapter 7 petition on December 14, 2009. In March 2010, the Debtors commenced an adversary proceeding to determine the extent and validity of BAC’s security interest in the House in light of the erroneous property description in the New Mortgage; the trustee later joined in the complaint. In its answer, BAC asserted several counterclaims, including equitable reformation and equitable subrogation. Thereafter, the parties filed a stipulated factual record and separate briefs setting forth their respective legal positions.
After hearings on March 31, 2011, and June 2, 2011,5 the bankruptcy court issued a bench decision opining that the Trustee, having been given the status of a lien creditor under § 544(a), was an intervening party with an interest superior to the equitable claims of BAC. The bankruptcy court issued an order and a separate judgment consistent with its decision. This appeal followed.
JURISDICTION
Before addressing the merits of an appeal, the Panel must determine that it has jurisdiction, even if the issue is not raised by the litigants. See Boylan v. George E. Bumpus, Jr. Constr. Co. (In re George E. Bumpus, Jr. Constr. Co.), 226 B.R. 724 (1st Cir. BAP 1998). The Panel has jurisdiction to hear appeals from: (1) final judgments, orders and decrees; or (2) with leave of court, from certain interlocutory orders. 28 U.S.C. § 158(a); Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (1st Cir. BAP 1998). A decision is considered final if it “ends the litigation on the merits and leaves nothing for the court to *273do but execute the judgment,” id. at 646 (citations omitted), whereas an interlocutory order “only decides some intervening matter pertaining to the cause, and requires further steps to be taken in order to enable the court to adjudicate the cause on the merits.” Id. (quoting In re American Colonial Broad. Corp., 758 F.2d 794, 801 (1st Cir.1985)). The Panel has jurisdiction over the bankruptcy court’s final judgment in favor of the Trustee and against BAC as to their competing interests in the House.
STANDARD OF REVIEW
Appellate courts apply the clearly erroneous standard to findings of fact and de novo review to conclusions of law. See Lessard v. Wilton-Lyndeborough Coop. School Dist., 592 F.3d 267, 269 (1st Cir. 2010). As there are no material facts in dispute, the Panel’s review is de novo.
DISCUSSION
I. Equitable Reformation
BAC argues that the bankruptcy court erred as a matter of law in determining that, because the Trustee was an intervening party, the New Mortgage should not be equitably reformed to express the intended agreement of the parties that the House be the mortgaged property.
A. The Power to Reform
Bankruptcy courts are courts of equity. Katchen v. Landy, 382 U.S. 323, 336, 86 S.Ct. 467, 15 L.Ed.2d 391 (1966); Thinking Machs. Corp. v. Mellon Finan. Servs. Corp. (In re Thinking Machs. Corp.), 67 F.3d 1021, 1028 (1st Cir.1995). Accordingly, they have the power to reform written instruments, including deeds and mortgages, under applicable state law to effectuate the intent of the parties.6 Even as a court of equity, however, the bankruptcy court’s discretion is limited and cannot be used in a manner inconsistent with the commands of the Bankruptcy Code. See In re Plaza de Diego Shopping Ctr., Inc., 911 F.2d 820, 830-31 (1st Cir. 1990).
Although the Trustee’s status is crafted by federal law, the effect of those rights against other parties claiming a competing interest is determined by applicable state law. See Soto-Rios v. Banco Popular de Puerto Rico (In re Soto-Rios), No. 10-2270, 2011 WL 5865656 (1st Cir. Nov. 23, 2011); see also Abboud v. Ground Round, Inc. (In re Ground Round, Inc.), 482 F.3d 15, 20 (1st Cir.2007); Maine Nat’l Bank v. Morse (In re Morse), 30 B.R. 52, 54 (1st Cir. BAP 1983). Section 544(a) does not give the Trustee any greater rights than he, or any person, would have as a bona fide purchaser or judicial lien creditor under applicable state law. Morse, 30 B.R. at 54. For example, the Trustee’s rights do not override state recording statutes or permit avoidance of any interest of which a trustee would have had constructive notice under state law. Thus, although a trustee’s actual knowledge will not preclude bona fide status, constructive notice, as determined by state law, will “defeat the Trustee’s rights under § 544(a)(3) just as such notice would defeat the rights of any bona fide purchaser of real property.” Lawrence P. King, Collier Bankruptcy Manual ¶ 544.02, at 544-11, 12 (3d ed. 1996).
Under Maine law, a deed or mortgage may be reformed in equity if the *274petitioner shows a mutual mistake of fact. See In re Pribish, 25 B.R. 403 (Bankr.D.Me.1982) (citing Williams v. Libby, 118 Me. 80, 105 A. 855 (1919)); see also Baillargeon v. Estate of Daigle, 8 A.3d 709, 714 (Me.2010); Dumais v. Gagnon, 433 A.2d 730, 735 (Me.1981). It is well settled, however, that the Maine courts will not exercise their power to reform documents if the result will prejudice third parties or if the rights of third parties have intervened. Putterbaugh v. Robinson (In re Robinson), 38 B.R. 255 (Bankr.D.Me.1984) (citing Williams, 105 A. at 857; In re Morse, 30 B.R. at 56; In re Pribish, supra).
B. Intervening Third Party
1. Section 544(a)
As of the date of case commencement, the Trustee held all of the rights and powers of a judicial lien holder and/or hypothetical bona fide purchaser with respect to all of the Debtors’ property. See 11 U.S.C. § 544(a).7 Thus, pursuant to § 544(a), the Trustee may subordinate BAC’s secured claim to the Debtors’ estate if, under applicable state law, a hypothetical lien holder would have prevailed over the claim as of the date of the bankruptcy case filing. Clark v. Kahn (In re Dlott), 43 B.R. 789, 792-93 (Bankr.D.Mass.1983). Bankruptcy court decisions denying motions to reform deeds or mortgages based on a chapter 7 trustee’s status as an intervening lienholder or bona fide purchaser under § 544(a) are legion. See, e.g., Tomsic v. Beaulac (In re Beaulac), 298 B.R. 31 (Bankr.D.Mass.2003) (no reformation of mortgage where rights of intervening lien-holders, such as trustees, would be prejudiced); Northeastern Bank of Pa. v. Clark (In re White Beauty View, Inc.), 81 B.R. 290 (Bankr.M.D.Pa.1988); Chase Manhattan Bank, N.A. v. Edmondson (In re Cunningham), 48 B.R. 509 (Bankr.M.D.Tenn. 1985); First Nat’l Bank of Poplar Bluff v. R & J Constr. Co., Inc. (In re R & J Constr. Co., Inc.), 43 B.R. 29 (Bankr. E.D.Mo.1984); In re Dlott, 43 B.R. at 793-94; In re Robinson, 38 B.R. at 257; In re Pribish, 25 B.R. at 404; Mountain Empire Bank v. Lancaster (In re Hunt), 18 B.R. 504 (Bankr.E.D.Tenn.1982). Indeed, it is difficult to identify a purpose for § 544(a) other than to achieve the result of which BAC complains. BAC argues, however, that the facts here provide a distinguishing factor: that is, matters of record giving even an intervening lien creditor or bona fide purchaser constructive notice of BAC’s competing interest. This is the crux of BAC’s argument; it contends that even the holder of an intervening interest would have had constructive notice of BAC’s mortgage.
*2752. Notice
Generally, there are two kinds of notice: actual and constructive. The First Circuit explained in detail the different kinds of notice in Stern v. Continental Assurance Co. (In re Ryan), 851 F.2d 502 (1st Cir.1988).
It would seem that one might properly be said to have actual notice when he has information in regard to a fact, or information as to circumstances an investigation of which would lead him to information of such fact, while he might be said to have constructive notice when he is charged with notice by a statute or rule of law, irrespective of any information which he might have, actual notice thus involving a mental operation on the person sought to be charged, and constructive notice being independent of any mental operation on his part.... Constructive notice is an essential element of the land recording system: if a deed is properly recorded, all future purchasers have constructive knowledge of the deed.
Id. at 507 (citations omitted).
Under Maine law, an unrecorded conveyance of real estate is not effective “against any person except the grantor, his heirs and devisees, and persons having actual notice thereof ...” Me.Rev.Stat. Ann. tit. 33, § 201 (emphasis added). In this regard, “actual notice”:
necessarily involves the rule that a purchaser before buying should clear up the doubts which apparently hang upon the title, by making due inquiry and investigation. If a party has knowledge of such facts as would lead a fair and prudent man, using ordinary caution, to make further inquiries, and he avoids the inquiry, he is chargeable with the notice of the facts which by ordinary diligence he would have ascertained. He has no right to shut his eyes against the light before him. He does a wrong not to heed the “signs and signals” seen by him. It may be well concluded that he is avoiding notice of that which he in reality believes or knows. Actual notice of facts which, to the mind of a prudent man, indicate notice — is proof of notice.
In re Morse, 30 B.R. at 55 (citing Maine cases). In Kobritz v. Severance, 912 A.2d 1237 (Me.2007), the Supreme Judicial Court of Maine stated:
While a creditor is not required to periodically search the registry of deeds “if no circumstance has transpired which should put him on inquiry,” a creditor is required to exercise due diligence. If there are facts that would alert a creditor to inquire about the property, then the creditor must do so, and if a reasonable inquiry would have led to the discovery of the fraud, the creditor is charged with notice of the fraud. We have said that “[o]ne who has knowledge of such facts as would lead a fair and prudent man, using ordinary caution, to make further inquiries is chargeable with notice of the facts which by ordinary diligence he would have ascertained.”
Id. at 1242 (citations omitted).
BAC maintains that inquiry notice is the same as actual notice for purpose of the Maine statute, and the Trustee should be held to have inquiry notice in this case.8 According to BAC, *276although the Old Mortgage included the property description for the House and the New Mortgage contained a property description for Lot # 6, both mortgages described the mortgaged property as located at 51 Stream Road, Winterport, Maine, which BAC claims is the street address for the House. BAC contends that because the mortgages used a common street address but provided different property descriptions, any potential buyer would have been placed on inquiry notice of an irregularity in title, and an inquiry would have quickly revealed the error.
The Trustee counters that reference to a street address in the body of a mortgage deed is irrelevant under Maine title law and would not place a purchaser on constructive or actual inquiry notice of a title problem that a reasonable person would investigate further. According to the Trustee, under Maine law, title is based upon the legal description of the parcel to be encumbered and street addresses are irrelevant to Maine title practice. “[A] description of land to be conveyed should be clear enough for a person who reads it to draw a sketch of it, either by the wording of the deed itself or by reference to the lot on a recorded plan ...” Caspar F. Cowan and J. Gordon Scannell, Jr., Maine Real Estate Law and Practice, § 7.1 (2d ed. 2007). Furthermore, “[t]o convey a piece of real estate, the description should identify that piece and no other.” Id. The Trustee also notes that there is nothing in the appellate record establishing that both mortgages employed the same street address.
We believe that the Trustee has the better of the argument for two distinct reasons. First, we conclude that the use of the same street address to describe two abutting parcels would not be sufficient to constitute inquiry notice. There was nothing in the New Mortgage that would have directed a judicial lien creditor or bona fide purchaser to any inquiry. What appeared of record was a description of property to which a street address was assigned. Street addresses are provided by local government, not title examiners, and may very well be combined for separate but adjoining parcels. And one of those parcels may be encumbered without changing the street address of the others. Consequently, it would not necessarily be apparent to a diligent title searcher that because the property description of Lot # 6 used the same street address as the House, that description was in any way suspect.
Second, and here more important, there is nothing in the record that supports BAC’s assertion that the Old Mortgage and the New Mortgage do, in fact, contain the same street address. Neither party included in the record copies of the Old Mortgage to demonstrate that the street address was the same as the New Mortgage, and the parties did not stipulate to any facts from which the trial court (or we) could rely in reaching that conclusion.9 Accordingly, the fact on which BAC would have us base a conclusion as to inquiry notice has not been properly put before us by BAC. See Torres Martinez v. Arce (In re Torres Martinez), 397 B.R. 158, 166-67 (1st Cir. BAP 2008) (“The responsibility *277for voids in the appellate record must reside with the party whose claim of error depends for its support upon any portion of the record of the proceedings below which was omitted.”); see also Campos-Orrego v. Rivera, 175 F.3d 89, 93 (1st Cir.1999) (parties seeking appellate review “must furnish the court with the raw materials necessary to the due performance of the appellate task”); In re Abijoe Realty Corp., 943 F.2d 121, 123 n. 1 (1st Cir.1991) (explaining that court would only evaluate the claims of error to extent permitted by limited record on appeal); Cambio v. Mattera (In re Cambio), 353 B.R. 30, 36 (1st Cir. BAP 2004) (citing Cowan v. United States, 148 F.3d 1182, 1192 (10th Cir. 1998) (when appellate record fails to include copies of the documents necessary to decide an issue on appeal, bankruptcy appellate panel is unable to rule on that issue)).
II. Equitable Subrogation
BAC also argues that the bankruptcy court erred as a matter of law in finding that the Trustee, as a lien creditor under § 544(a), holds a superior interest to an equitable subrogation interest claimed by BAC. According to BAC, when its predecessor extended a loan to the Debtors to pay off the Old Mortgage, it became the holder of the rights and remedies under that mortgage by subrogation with priority above all other interests.
The traditional doctrine of equitable subrogation “enables ‘[o]ne who pays, otherwise than as a volunteer, an obligation for which another is primarily liable,’ to be ‘given by equity the protection of any lien or other security for the payment of the debt to the creditor,’ and to ‘enforce such security against the principal debtor or collect the obligation from him.’ ” See Chase Manhattan Bank, USA, N.A. v. Taxel (In re Deuel), 594 F.3d 1073, 1079 (9th Cir .2010) (quoting McClintock on Equity 332 (2d ed.1948)). The Supreme Judicial Court of Maine has stated that equitable subrogation is “a device adopted by equity to compel the ultimate discharge of an obligation by him who in good conscience ought to pay it.” Nappi v. Nappi Distribs., 691 A.2d 1198 (Me.1997) (quoting United Carolina Bank v. Beesley, 663 A.2d 574, 576 (Me.1995)). It is “a concept derived from principles of restitution and unjust enrichment.” Id. (citing North East Ins. Co. v. Concord Gen. Mut. Ins. Co., 433 A.2d 715, 719 (Me.1981)). Under the doctrine, when one, not a volunteer, loans money to another and takes a mortgage to discharge a first mortgage, it may be proper to apply the doctrine and to subrogate the lender to the discharged mortgage. Beesley, 663 A.2d at 576; Federal Land Bank of Springfield v. Smith, 129 Me. 233, 151 A. 420 (1930). The doctrine requires that the equities of the parties be weighed and balanced. Beesley, 663 A.2d at 576. “Subrogation, itself a creature of equity, must be enforced with due regard for the rights, legal or equitable, of others. It should not be invoked so as to work injustice, or defeat a legal right, or to overthrow a superior or perhaps equal equity, or to displace an intervening right or title.” Id.; see also Federal Land Bank, 151 A. at 422.
We are able to treat with dispatch BAC’s reliance on the doctrine of equitable subrogation. As set forth above, the doctrine of equitable subrogation applies only when the party seeking to rely on the doctrine makes payment other than as a volunteer. BAC’s predecessor may not have intended to take the wrong property as collateral, but it surely intended to make the instant loan and take the instant mortgage for security. It did so voluntarily. Accordingly, the doctrine of equitable subrogation is here inapplicable.
*278
CONCLUSION
For the reasons set forth above, the Judgment of the United States Bankruptcy Court for the District of Maine is AFFIRMED.
.Although BAC participated in the adversary proceeding and filed the notice of appeal, Bank of America, N.A. filed the appellant’s brief, claiming that it is successor by merger of BAC. As all of the relevant documents refer to BAC, and nothing was filed with the Panel requesting a substitution of parties, we continue to refer to the appellant as BAC.
. Unless expressly stated otherwise, all references to “Bankruptcy Code” or to specific statutory sections shall be to the Bankruptcy Reform Act of 1978, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA”), Pub.L. No. 109-8, 119 Stat. 23, 11 U.S.C. §§ 101, et seq.
. The matter was submitted to the bankruptcy court upon a Statement of Stipulated Facts.
. As part of the refinancing, the Debtors provided Home Loan with a second note in the amount of $25,450.00, payment of which was secured with a second mortgage having the same infirmity as the first. The second note and mortgage were not assigned to BAC and therefore are not at issue in this appeal.
. At a status conference immediately before the hearing, the parties agreed that BAC’s equitable claim was valid as against the Debtors and that the Debtors were no longer asserting an exemption in their residence. As a result, the sole dispute at trial was between the trustee as an intervening lien creditor under § 544(a) and BAC as the holder of an equitable claim.
. See generally In re Bailey, 999 F.2d 237 (7th Cir. 1993) (mortgage); American Employers Ins. Co. v. St. Paul Fire & Marine Ins. Co., Ltd., 594 F.2d 973, 977 (4th Cir. 1979) (insurance policy); Wells Fargo Home Mortg. v. Leach (In re Leach), Civil No. 10-449, 2010 WL 3038794, 2010 U.S. Dist. LEXIS 77234 (W.D.Pa. Jul. 20, 2010) (mortgage); United Virginia Bank v. Cleveland (In re Cleveland), 53 B.R. 814, 817 (Bankr.E.D.Va.1985) (deed).
. Section 544(a) provides:
The trustee shall have, as of the commencement of the case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by—
(1)a creditor that extends credit to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists;
(2) a creditor that extends credit to the debtor at the time of the 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; or
(3) a bona fide purchaser of real property, other than fixtures, from the debtor, against whom applicable law permits such transfer to be perfected, that obtains the status of a bona fide purchaser and has perfected such transfer at the time of the commencement of the case, whether or not such a purchaser exists.
11 U.S.C. § 544(a).
. As the First Circuit noted in Ryan, “inquiry notice” is not really a third distinct type of notice, but a corollary of both actual and constructive notice. "Inquiry notice follows from the duty of a purchaser, when he has actual or constructive notice of facts which would lead a prudent person to suspect that another person might have an interest in the property, to conduct a further investigation of *276the facts.” In re Ryan, 851 F.2d at 507 (citations omitted).
. BAC directs our attention to the New Mortgage included in the record as an exhibit to its Answer in the adversary proceeding and attaches the New Mortgage again as an exhibit to its Reply Brief. But in neither instance does BAC provide a copy of the Old Mortgage so that we can establish how the property there was described, nor do the stipulated facts ever clearly state that the Old Mortgage contained the same street address as the New Mortgage. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494457/ | *279MEMORANDUM OF DECISION
WILLIAM C. HILLMAN, Bankruptcy Judge.
I. INTRODUCTION
The matters before the Court are the “Defendant Carl W. Tucci’s Motion for Summary Judgment Pursuant to Fed. R.Civ.P. 56” (the “Motion for Summary Judgment”) filed by the debtor, Carl W. Tucci (the “Debtor”) and the “Brief of Plaintiff, Sampson Lumber Co., Inc., in Opposition to Motion for Summary Judgment of Defendant, Carl W. Tucci” (the “Opposition”) filed by the plaintiff, Sampson Lumber Co., Inc. (the “Plaintiff’). Through the Motion for Summary Judgment, the Debtor seeks a determination that the Plaintiffs claim is dischargeable. Because the claim cannot satisfy the elements of 11 U.S.C. § 523(a)(2), I will grant the Motion for Summary Judgment.
II. PROCEDURAL MATTERS
Pursuant to Local Rule 56.1 (“Local Rule 56.1”) of the United States District Court for the District of Massachusetts, adopted and made applicable to proceedings in the Bankruptcy Court by Massachusetts Local Bankruptcy Rule (“MLBR”) 7056-1, motions for summary judgment must include “a concise statement of material facts of record as to which the moving party contends there is no genuine issue to be tried, with page references to affidavits, depositions, and other documentation.”1 Failure to include such a statement constitutes grounds for denial of the motion.2 Oppositions to summary judgment must similarly be accompanied by a statement of material facts to which the opposing party contends that there exists a genuine issue to be tried, with supporting references to the record.3 All referenced documents must be filed as exhibits to the motion or opposition.4 Material facts set forth in the moving party’s statement are deemed admitted for purposes of summary judgment if not controverted by an opposing statement.5
The Debtor filed a statement pursuant to Local Rule 56.1, “Defendant Carl W. Tucei’s Concise Statement of Material Facts in Support of Motion for Summary Judgment,” (the “Statement of Material Facts”) on September 14, 2011.6 The Plaintiff did not file an opposing statement of facts together with the Opposition. Accordingly, the facts set forth in the Debt- or’s Statement of Material Facts are deemed admitted for purposes of summary judgment.
III. BACKGROUND7
The Plaintiff is a seller of lumber and building supplies with its place of business in Pembroke, Massachusetts.8 The Debt- or had been a customer of the Plaintiff for a period of time prior to August 8, 2003, during which he paid for his purchases by *280cash or check.9 On August 8, 2003, the Debtor completed a credit application (the “Application”) to apply for a credit account with the Plaintiff.10 The Debtor hand wrote the Application and listed Star Realty Trust (the “Trust”) as the business seeking credit.11 The Application requested information for “All Owners” of the Trust, and the Debtor wrote only his name and address (the “Statement of Ownership”) (emphasis in original).12 The Debt- or, however, owned only 65% of the beneficial interest in the Trust.13 The Debtor did not disclose that Robert Carey Jr. owned the remaining 35% interest.14 The Plaintiff checked the credit references provided by the Debtor, and approved the Application.15
The Debtor purchased materials from the Plaintiff on credit, and then was unable to pay his credit account.16 The Plaintiff alleges in the Complaint that the Debtor represented that he was unable to pay because he was still awaiting payment from a third party for an earlier job.17 The Plaintiff filed a collection action (the “Plymouth Action”) in Plymouth District Court against the Debtor on January 2, 2007, asserting three claims: (1) breach of contract, (2) goods sold and delivered, and (3) quantum meruit.18 No claims of fraud were brought in the Plymouth Action or addressed by the Plymouth District Court.19 The Plaintiff alleges that during the Plymouth Action, the Debtor’s counsel made statements to the effect that the Debtor was not liable for debts of the Trust.20 Nevertheless, the Plymouth District Court found that because the Debtor had no authority to act on the Trust’s behalf when he submitted the Application, the Debtor was liable for the Trust’s debt to the Plaintiff to the extent the Trust could not pay.21 The Plymouth District Court entered judgment against the Debt- or in the amount of $55,801.97, including interest and attorney’s fees.22 The Debtor subsequently filed a voluntary Chapter 7 petition on February 16, 2010.23
On June 11, 2010, the Plaintiff filed a complaint (the “Complaint”) against the Debtor and his wife, co-debtor Yvette Tuc-ci (collectively, the “Debtors”), seeking to establish the nondischargeability of the judgment awarded against the Debtor pur*281suant to 11 U.S.C. § 523(a).24 The Plaintiffs Complaint argues that three false statements attributable to the Debtor are grounds for nondischargeability: (1) the Debtor’s written Statement of Ownership, (2) the Debtor’s oral representation that he could not pay his credit account because he was awaiting payment from a third party for an earlier job, and (3) the Debt- or’s counsel’s oral statements made during the Plymouth Action to the effect that the Debtor was not liable for debts of the Trust.25 The Complaint raises both 11 U.S.C. § 523(a)(2)(A) and 11 U.S.C. § 523(a)(2)(B) as grounds for nondis-chargeability.26
On September 14, 2011, the Debtors each filed separate motions for summary judgment. The Motion for Summary Judgment addresses both 11 U.S.C. § 523(a)(2)(A) and 11 U.S.C. § 523(a)(2)(B).27 Nevertheless, the Plaintiffs Opposition, filed on September 21, 2011, failed to oppose the Motion for Summary Judgment with regard to § 523(a)(2)(A). In fact, the Plaintiff stated in a footnote that the Debtor’s reliance on Palmacci v. Umpierrez,28 which establishes the elements of an 11 U.S.C. § 523(a)(2)(A) claim, is inapposite because “[t]hat case deals with a different section of the Bankruptcy Code.”29 Accordingly, the Plaintiff has waived any potential claim under 11 U.S.C. § 523(a)(2)(A). I held a hearing on September 30, 2011, at which time I granted Yvette Tucci’s Motion for Summary Judgment and took the Motion for Summary Judgment under advisement. Accordingly, Carl Tucci is the sole remaining defendant.
IV. POSITIONS OF THE PARTIES
The Debtor
The Debtor argues that the Plaintiff cannot establish the elements required for a determination of nondischargeability under 11 U.S.C. § 523(a)(2)(B). First, the Debtor contends that he never made any false statement.30 The Debtor states that because the beneficiary of a nominee trust is an owner of the trust, and at all relevant times he held a 65% beneficial interest in the Trust, the Statement of Ownership was not false.31 Further, the Debtor argues that because the statements made by his counsel in the Plymouth Action were not made personally by him and were merely legal arguments, they cannot be grounds for nondischargeability.32 Second, the Debtor contends that even if a false statement was made, the requisite evidence of intent to deceive the Plaintiff is lacking.33 Third, the Debtor argues that none of the alleged false statements affected the Plaintiffs decision to extend credit to the Debt- or, and accordingly the element of reliance cannot be satisfied.34 Finally, the Debtor contends that the Plaintiffs reliance on issue preclusion is misplaced, as the issue *282of fraud was neither addressed nor decided in the Plymouth Action.35
The Plaintiff
The Plaintiff argues in its Opposition that the elements of 11 U.S.C. § 523(a)(2)(B) have been met, and accordingly a determination of nondischargeability is appropriate.36 The Plaintiff also argues that the Plymouth District Court addressed the issue of the Debtor’s fraud, and therefore issue preclusion should prevent this Court from revisiting the issue of whether the Debtor made a false statement.37
V. DISCUSSION
A. The Summary Judgment Standard
Pursuant to Fed.R.Civ.P. 56, a “court shall grant summary judgment if the mov-ant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”38 “A ‘genuine’ issue is one supported by such evidence that a ‘reasonable jury, drawing favorable inferences,’ could resolve it in favor of the nonmoving party.”39 Material facts are those having the potential to affect the outcome of the suit under the applicable law.40
A party asserting that a fact cannot be or is genuinely disputed must support the assertion by:
(A) citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials; or (B) showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact.41
A genuine issue cannot be established by “conclusory allegations, improbable inferences, and unsupported speculation.”42 The Court must view the record in the light most favorable to the nonmoving party and draw all reasonable inferences in its favor.43
B. 11 U.S.C. § 523(a)(2)(B)
A Chapter 7 debtor generally may obtain a discharge of his pre-bankruptcy filing debts.44 Some debts incurred as a result of the debtor’s fraud, however, cannot be discharged in bankruptcy.45 Section 523(a)(2)(B) of the Bankruptcy Code states that a debt is nondischargeable if *283obtained by “use of a statement in writing (i) that is materially false; (ii) respecting the debtor’s ... financial condition; on which the creditor to whom the debtor is liable for such money, property, services, or credit reasonably relied; and (iv) that the debtor caused to be made or published with intent to deceive [emphasis added].” I will first address whether any of the allegedly false statements made by the Debtor concern the Debtor’s “financial condition.”
There is disagreement among courts as to the definition of the phrase “financial condition” with respect to 11 U.S.C. § 523(a)(2)(B). Some cases within the First Circuit define the phrase narrowly, so that financial condition means “a balance sheet and/or profit and loss statement or other accounting of an entity’s overall financial health and not a mere statement as to a single asset or liability.”46 Other cases define the phrase “financial condition” broadly, so that something less than a “formal financial statement” may qualify as a statement of financial condition.47 I, however, have previously held in In re Soderlund48 that the narrow definition of “financial condition” is the proper interpretation of 11 U.S.C. § 523(a)(2)(B), and I have not altered my view.
Applying the narrow definition to the present case, the Statement of Ownership does not qualify as a statement of financial condition because it was a statement of ownership of a single asset, and not an assessment of the Debtor’s overall financial health. Accordingly, the Statement of Ownership does not satisfy the “financial condition” element of 11 U.S.C. § 523(a)(2)(B). The Plaintiff does not allege any other written statement made by the Debtor. Having found that it is impossible for the Plaintiff to satisfy the “financial condition” element required for a non-dischargeability determination under 11 U.S.C. § 523(a)(2)(B), I need go no further in addressing the Plaintiffs other arguments.
VI. CONCLUSION
In light of the foregoing, I will enter an order granting the Motion for Summary Judgment.
. LR, D. Mass. 56. 1, adopted and made applicable to proceedings in the Bankruptcy Court by MLBR 7056-1.
. Id.
. Id.
. Id.
. Id.
. Statement of Material Facts, Docket No. 42.
. I take judicial notice of the docket in the present case, as well as those of related cases before this Court. See Rodi v. Southern New England School of Law, 389 F.3d 5, 17-19 (1st Cir.2004) (citations omitted).
. Findings of Fact & Rulings of Law, Plymouth District Court, 200759CV00031 (August 1, 2008), Docket No. 1, Exhibit B.
. Statement of Material Facts, Docket No. 42 at ¶ 6.
. Id. at ¶ 8.
. Complaint, Docket No. 1, Exhibit A.
. Id.
. Statement of Material Facts, Docket No. 42 at ¶ 4.
. Findings of Fact & Rulings of Law, Plymouth District Court, 200759CV00031 (August 1, 2008), Docket No. 1, Exhibit B.
. Statement of Material Facts, Docket No. 42 at ¶ 11.
. Findings of Fact & Rulings of Law, Plymouth District Court, 200759CV00031 (August 1, 2008), Docket No. 1, Exhibit B.
. Complaint, Docket No. 1 at ¶ 9.
. Statement of Material Facts, Docket No. 42 at ¶¶ 16-17.
. Findings of Fact & Rulings of Law, Plymouth District Court, 200759CV00031 (August 1, 2008), Docket No. 1, Exhibit B.
. Complaint, Docket No. 1 at ¶ 12.
. Findings of Fact & Rulings of Law, Plymouth District Court, 200759CV00031 (August 1, 2008), Docket No. 1, Exhibit B.
. Id.
. Chapter 7 Voluntary Petition, Docket No. 1, Case No. 10-11451-WCH.
. Complaint, Docket No. 1.
. Id.
. Id. at ¶ 4.
. Motion for Summary Judgment Filed by Carl Tucci, Docket No. 41 at ¶ 1.
. 121 F.3d 781 (1st Cir.1997).
. Opposition, Docket No. 50, FN 1.
. Statement of Material Facts, Docket No. 42 at ¶ 15.
. Motion for Summary Judgment Filed by Carl Tucci, Docket No. 41 at ¶ 1.
. Id. at ¶ 4.
. Brief in Support of Motion for Summary Judgment Filed by Carl Tucci, Docket No 45 at 11.
. Id. at 10.
. Id. at 2.
. Opposition, Docket No. 50 at 1.
. Id. at 2.
. Fed.R.Civ.P. 56(a) made applicable in adversary proceedings by Fed. R. Bankr.P. 7056.
. Triangle Trading Co. v. Robroy Indus., Inc., 200 F.3d 1, 2 (1st Cir.1999) (quoting Smith v. F.W. Morse & Co., 76 F.3d 413, 427 (1st Cir.1996)).
. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); McCarthy v. Northwest Airlines, Inc., 56 F.3d 313, 315 (1st Cir.1995); Nereida-Gonzalez v. Tirado-Delgado, 990 F.2d 701, 703 (1st Cir.1993).
. Fed.R.Civ.P. 56(c)(1).
. Griggs-Ryan v. Smith, 904 F.2d 112, 116 (1st Cir.1990) (quoting Medina-Munoz v. RJ. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir. 1990)).
. Nicolo v. Philip Morris, Inc., 201 F.3d 29, 33 (1st Cir.2000).
. See 11 U.S.C. § 727.
. 11 U.S.C. § 523(a)(2).
. Bal-Ross Grocers, Inc. v. Sansoucy (In re Sansoucy), 136 B.R. 20, 23 (Bankr.D.N.H. 1992); See also Zimmerman v. Soderlund (In re Soderlund), 197 B.R. 742 (Bankr.D.Mass. 1996); Benjelloun v. Robbins (In re Robbins), 178 B.R. 299, 304 (Bankr.D.Mass. 1995).
. Connecticut Nat’l Bank v. Panaia (In re Panaia), 61 B.R. 959, 960 (Bankr.D.Mass. 1986).
. In re Soderlund, 197 B.R. at 745-746. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494458/ | MEMORANDUM OF DECISION
WILLIAM C. HILLMAN, Bankruptcy Judge.
I. INTRODUCTION
The matter before the Court is the “Plaintiff, Donna DiMare’s Motion for *289Summary Judgement [sic]” (the “Motion for Summary Judgment”) filed by Donna M. DiMare (the “Debtor”), the “Defendant Option Mortgage Corp.’s Opposition to the Plaintiffs Motion for Summary Judgment [sic] Cross-Motion for Partial Summary Judgment” (the “Cross-Motion”) filed by the defendant Option One Mortgage Corporation (“Option One”), and the “Plaintiff, Donna DiMare’s Opposition to Defendant Option One Mortgage Corp.’s Cross-Motion for Summary Judgement [sic]” (the “Opposition”) filed by the Debtor. Through her motion, the Debtor seeks summary judgment with respect to all seven counts set forth in her Verified Adversary Complaint (the “Complaint”), while Option One seeks judgment as a matter of law on all counts but one.1 For the reasons set forth below, I will deny the Motion for Summary Judgment on all counts, grant the Cross-Motion with respect to Counts I, II, IV, V, VI, and VII, and schedule an evidentiary hearing with respect to Count III.
II. PRELIMINARY MATTERS
Before delving into the merits of the pleadings now before me, I must address several preliminary matters.
First, the Debtor argues that the Cross-Motion is untimely and should be denied on that basis. Pursuant to my pretrial order dated March 17, 2011, the parties were to file dispositive motions, if any, by July 20, 2011. According to Massachusetts Electronic Filing Rule (“MEFR”) 3(c), where the Court orders that a filing must be completed by a specific date but does not specify the time, electronic filing must be completed by 4:30 p.m. to be deemed timely ,2 Here, the Cross-Motion was filed at 8:22 p.m. While the Debtor is technically correct, I find that under the circumstances denial of the Cross-Motion on this basis is unnecessary and inefficient. There is no question that the Debtor suffered no prejudice from the marginally late filing. Moreover, to the extent that the Cross-Motion contains a timely opposition to the Motion for Summary Judgment, I must consider it at least on that basis. In any event, where appropriate, I may grant summary judgment to a nonmovant so long as the other party had a reasonable opportunity to respond.3 As the Debtor filed the Opposition, she cannot claim prejudice.
Second, the parties each filed a concise statement of undisputed material facts of record pursuant to Local Rule 56.1 of the United States District Court for the District of Massachusetts,4 as well as responses to each other’s statements of undisputed material facts.5 Having reviewed these *290statements carefully, it appears that, aside from how some facts are characterized, the parties largely agree as to the facts of this case. While there are six statements regarding the Debtor’s interactions with representatives from Aegis to which Option One claims to be without sufficient information to admit or deny, they are deemed admitted by virtue of Option One’s failure to expressly controvert them as required by LR, D. Mass. 56.1.6
I note, however, that while the Debtor attached 30 exhibits to the Motion for Summary Judgment, many of which are not self-evident,7 her statement of undisputed material facts references only 8 of those exhibits. Many of these documents are nonetheless cited in support of statements made in her memorandum. This is indicative of a larger problem; namely, that the Debtor’s statement of undisputed material facts does not actually contain all the facts necessary to determine the Motion for Summary Judgment in her favor. Indeed, each section of her memorandum includes a plethora of new facts not previously asserted.
I am reminded that the United States Court of Appeals for the First Circuit has explained that LR, D. Mass. 56.1 “is intended to prevent parties from shifting to the ... court the burden of sifting through the inevitable mountain of information generated by discovery in search of relevant material.”8 “Such rules are designed to function as a means of ‘focusing a ... court’s attention on what is — and what is not — genuinely controverted.’ ”9 The Debtor’s failure to cite to her own exhibits in her statement of undisputed material facts not only leaves me to “grope unaided for factual needles in a documentary haystack,”10 but further confuses matters in an already complicated case. Moreover, by asserting and relying on facts not contained in the statement of undisputed material facts, the Debtor has created an incomplete and incoherent narrative of events to which Option One was not required to respond statement by statement. For this reason alone, the Motion for Summary Judgment should be denied.
This, however, does not resolve the difficulties associated with my review of the Cross-Motion and the Opposition. The Opposition, in similar fashion to the Motion for Summary Judgment, simply introduces additional factual assertions, albeit with citations to the record, mixed *291with argument. Local Rule 56.1 only prevents a nonmovant from disputing the material facts in the movant’s statement and does not preclude the nonmovant from offering additional evidence in opposition to summary judgment.11 Unfortunately, LR, D. Mass. 56.1 does not set forth any procedure or restrictions on how the nonmovant presents such evidence. Therefore, to the extent that the Opposition contains properly supported factual assertions that augment the record, I am left to do the Debt- or’s homework for her as I must consider them with respect to the Cross-Motion.
For these reasons, my recitation of the facts in this memorandum must be divided into two sections. The first, to be considered with respect to the Motion for Summary Judgment, is taken only from the parties competing statements.12 The second will include, to the extent necessary and appropriate, additional facts set forth in the Opposition to be considered in conjunction with the Cross-Motion.
Lastly, the Debtor appears seek summary judgment on several theories not actually asserted in the Complaint, including breach of the implied covenant of good faith and fair dealing and violations of Mass. Gen. Laws chs. 93A and 183C. It is apodictic that one cannot obtain judgment as a matter of law on a claim was not brought. Therefore, these arguments will not be addressed further.
III. BACKGROUND
A. Procedural History13
The present dispute is the latest iteration of a drawn out battle between the Debtor and her mortgage lenders over their efforts to foreclose her property at 19 Alcine Lane, in Burlington, Massachusetts (the “Property”). On December 15, 2006, the Debtor filed her first Chapter 13 petition.14 Shortly after Option One filed a motion for relief from the automatic stay, the Debtor commenced an adversary proceeding against Option One, Ameriquest Mortgage Company (“Ameriquest”), and Aegis Lending Corporation (“Aegis”) on August 22, 2007 (the “First Adversary Proceeding”).15 The First Adversary Proceeding arose out of two loan refinancing transactions with respect to the Property: one with Ameriquest in 2004, and the other with Option One in 2005 where Aegis acted as the mortgage broker. The Debtor asserted claims for negligence, fraud, emotional distress, breach of contract, and violations of state and federal truth in lending statutes. In October 2007, Option filed an answer to the Debtor’s complaint while Ameriquest filed a motion to dismiss, arguing that the claims were untimely, not factually supported, and not plead with *292sufficient particularity.16 Judge Feeney held a hearing on the matter, and subsequently took it under advisement. Prior to the issuance of a decision, however, the Debtor’s bankruptcy case was dismissed on January 2, 2008, for failure to make plan payments. As a result the First Adversary Proceeding was dismissed on January 23, 2008, for lack of jurisdiction.
On January 29, 2008, the Debtor filed her second Chapter 13 petition.17 The present adversary proceeding followed on March 9, 2008. The Debtor’s Complaint contains identical factual allegations and arises from the same events as the First Adversary Proceeding. This time, however, Aegis was not named as a defendant. Through the Complaint, the Debtor sought recovery from Ameriquest and Option One on the following counts: Count I — Negligence; Count II — Promissory Fraud; Count III — Violations of the Federal and/or State Truth in Lending Acts; Count IV — Borrower’s Interest; Count V — Unconscionability; Count VI — Restitution; Count VII — Emotional Distress. On November 6, 2008, I granted a motion to dismiss filed by Ameriquest, dismissing Counts I, II, IV, V, VI, and VII.18 Subsequently, I granted Ameriquest’s motion for summary judgment as to the remaining count on December 22, 2009.19 Accordingly, Option One is now the only defendant in this adversary proceeding.
After an extended period of inactivity, the Debtor filed the Motion for Summary Judgment on July 11, 2011.20 Option One filed the Cross-Motion on July 20, 2011, and the Opposition followed on August 1, 2011. I conducted a hearing on the matter on August 17, 2011, at the conclusion of which, I took the matter under advisement.
B. The Undisputed Material Facts of Record
The Debtor resides at the Property.21 She acquired full ownership of the Property following her divorce in 2001.22 At that time, the Property was. encumbered by a mortgage held by Washington Mutual Bank (“WAMU”).23 In order to remove her former husband’s name from the WAMU mortgage, the Debtor refinanced the Property with Ameriquest on February 20, 2004.24 The Ameriquest loan had *293variable interest rate with a minimum interest rate of 7.750% and a maximum of 13.750%.25 During the initial two year period before the first interest rate adjustment, the Debtor’s monthly mortgage payment was $1,339.70.26
Approximately five months later, the Debtor defaulted on the Ameriquest loan.27 On July 8, 2004, she received a Notice of Intent to Foreclose from Ameriquest.28 The Debtor then engaged in discussions with Ameriquest to bring the loan current and entered into a forbearance agreement, requiring her to make one monthly payment by July 26, 2004, in the amount of $1,695 and six subsequently monthly payments in the amount of $1,959.50.29 Ultimately, she was unable to cure the arrear-age.30 Accordingly, the Debtor received additional foreclosure notices on November 22, 2004 and June 2, 2005.31
Around May 2005, the Debtor contacted East West Mortgage seeking to refinance the Property, but her request was turned down.32 In July 2005, however, the Debtor received a phone call from a representative of Aegis who told her that he was contacting “victims” of Ameriquest to assist them in refinancing their homes.33 Based upon this representative’s knowledge of Ameri-quest’s lending and closing practices, which reflected her own experiences with Ameriquest,34 she grew to trust him.35
On July 25, 2005, the same Aegis representative visited her at the Property for two hours, at which time she stated that she needed a 30-year fixed interest rate loan with a monthly payment lower than what she was currently paying, which was close to $1,800.36 During her meeting with *294the Aegis representative, the Debtor completed a refinancing loan application with Aegis.37 On her application, the Debtor disclosed that her only income consisted of alimony and child support payments totaling $3,466.66 per month.38
After the meeting with the Aegis representative, the Debtor spoke to him on the phone regarding the refinancing on more than five other occasions.39 According to the Debtor, during one of these calls, the Aegis representative informed her that she was approved for a 30-year fixed interest rate loan with a monthly payment approximately $200 less than her current monthly payment.40 She did not inquire whether that monthly payment amount included the payment of taxes and insurance, but assumed it was based upon her prior conversations with the Aegis representative.41 Up until the day of the closing, which took place on August 8, 2005, the Debtor had had no contact, with Option One and believed that Aegis was would act as lender and finance the transaction.42
At the closing, the same Aegis representative was accompanied by Attorney Ryan Bailey (“Attorney Bailey”), who conducted the closing.43 In addition to discovering that Option One would be financing the loan, the Debtor learned at the closing that the terms of the mortgage were different and the mortgage payment amount would be higher than what she had been promised by the Aegis representative.44 Specifically, the Debtor testified at her deposition that the Aegis representative told her that the interest rate had gone up and that *295the loan would be a 30-year fixed interest rate loan of 7.5%.45 Additionally, with the inclusion of taxes and insurance, the monthly payment required under the loan was $1,781.65.46
The Debtor was very upset that the interest rate had changed.47 According to the Debtor, the Aegis representative repeatedly told her that she did not need to sign the new loan papers, but that she would be homeless if she did not.48 Just six days before the closing, she had received yet another Notice of Intent to Foreclose from Ameriquest.49 At her deposition, the Debtor testified that she went forward with the closing because she was terrified of the prospect of being homeless by the end of the week.50
During the closing, the Debtor asked that all the loan documents presented to her be explained.51 All of her questions were answered by either the Aegis representative or Attorney Bailey.52 The Debt- or read all the loan documents presented to her and had a good understanding of the interest rate being applied to the loan, the amount of the monthly mortgage payment, and the maturity of the loan.53 In the end, she executed a note (the “Note”) in favor of Option One and granted it a mortgage (the “Mortgage”) to secure the obligation.54 As a result, the Ameriquest loan was paid off in full and the impending foreclosure was averted.55 About a week after the closing, the Debtor received a package of unsigned loan documents which she confirmed were consistent with what she was told at the closing.56
*296Although the parties have produced a Notice of Right to Cancel form (the “NORC”) with a signed acknowledgment of delivery (the “Acknowledgment”) in this case, the Debtor asserts that it does not contain her signature and that she was never presented with such a form at the closing.57 Not surprisingly, Option One denies her allegations and submitted an affidavit from Alan T. Robillard, an expert in handwriting comparisons, in which he avers that the signature on the Acknowledgment is authentic.58 Option One concedes that it did not provide the Debtor with any closing documents or the NORC, but rather instructed Attorney Bailey to do so.59 Moreover, Option One admits that its own closing file contains only a single copy of the NORC.60
At his deposition, Attorney Bailey testified that he had no recollection of the Debtor’s closing or the documents associated with it.61 Additionally, while he stated that he follows the closing procedures for each mortgage lender he represents, he could not recall specifically the procedures of any particular lender, including Option One.62 In the same vein, Attorney Bailey could not remember how the closing package was provided to him, but testified that he was “almost positive” that Option One generally gave him the closing packages, which generally contained additional copies of the NORC for the borrower.63 Attorney Bailey testified that when he received a closing package last minute, he generally would leaf through the package to make sure that the major documents were included.64 It was also his general practice to provide two copies of the NORC to the borrower at the closing along with all the other loan documents and to have the borrower sign two copies of the NORC.65
C. The “Augmented” Record66
As explained above, the Debtor raises several additional facts in her Opposition. *297First, the Debtor points to loan prequalifi-cation forms sent by Aegis to Option One on July 11, 2005, and a “call log” between Aegis and Option One from July 28, 2005, as evidence of Option One’s involvement throughout the entire sales process.67 Second, she avers that she received certain pre-closing disclosures that, consistent with her experience at the closing, did not reflect the final terms of the Option One loan. It is not entirely clear, however, when she received these disclosures. Third, the Debtor states that the HUD-1 Settlement Statement (the “HUD-1”) from the Option One loan reflects that she received only $5,199 from the closing compared to the $12,967.65 in settlement charges.68 Upon further review of the HUD-1, I note that the total principal amount of the Option One loan was $210,000, with Ameriquest having received a payoff in the amount of $191,833.35.69 Fourth, the Debtor calls my attention to various foreclosure notices sent to her by Option One, indicating that she defaulted on her first payment due under the Option One loan and Option One sent its first Notice of Intent to Foreclose by October 25, 2005.70
IV. POSITIONS OF THE PARTIES
The Debtor
With respect to Count I, the Debtor contends that “Option One was negligent in the handling and processing of her mortgage and Option One owed [her] a duty of care.”71 She asserts that the Aegis representative won her “trust and confidence creating a fiduciary relationship and duty of care between DiMare and Aegis and ultimately, Option One.”72 In her Opposition, she argues that Option One is liable for the actions of Aegis because Aegis was working with Option One “[f]rom the outset of the loan process” and Option One knew that it would be providing the loan through Aegis “throughout the entire sales process.”73 As a result of Option One’s breach of its duty and her trust, the Debtor represents that she suffered extreme stress and property damage because she was unable to spend money on necessary repairs and the Property has since deteriorated.
The primary thrust of the Debtor’s argument in regards to Count II is that “[h]ad it not been for the promise of a lower monthly mortgage payment that Di-Mare replied [sic] on, DiMare would not have agreed to refinance her mortgage.”74 She asserts that Option One knowingly made material misrepresentations and false promises to her with respect to the terms of the loan she would be receiving. In support, she points to the Aegis representative’s statement that she had been approved for a 30-year fixed interest rate loan with a monthly payment approxi*298mately $200 less than her current monthly payment and the various pre-closing documents she received that are wholly inconsistent with the Option One loan.
Through Count III, the Debtor asserts that Option One committed several violations of the Truth in Lending Act (“TILA”)75 and its enabling regulations (“Regulation Z”),76 as well as its state law analog, the Massachusetts Consumer Credit Cost Disclosure Act (the “CCCDA”).77 In her Complaint, the Debt- or cites Option One’s failure to provide pre-closing disclosures that reasonably reflected the legal obligations between the parties as required by 12 C.F.R. § 226.17. In her memorandum in support of summary judgment, the Debtor further argues that she did not receive any pre-closing disclosures until after the closing and that some disclosures were never provided. Additionally, the Debtor argues that she did not receive the required number of copies of the NORC and that the signature on the Acknowledgment is not hers.78
In Count IV, the Debtor argues that the Option One loan was not in her interest within the meaning of Mass. Gen. Laws ch. 183, § 28C. In support, she cites the fact that she did not receive cash out of the transaction in excess of the closing fees, there was no change in the amortization period, and the monthly payment required under the Option One loan was substantially higher than the pre-default payment due under the Ameriquest loan. Moreover, she contends that even the terms that improved, such as the .25% reduction in the interest rate and the change from a variable rate to a fixed rate, were insufficient to make the loan in her interest. Lastly, the Debtor asserts that the Option One loan did not enable her to avoid foreclosure, but merely delay it.
With respect to Count V, the Debtor contends that the Option One loan was unconscionable because it is “unfair and deceptive in violation of Mass. Gen. Laws ch. 183 § 28C and in violation of Mass. Gen. Laws ch. 140D § 34, and therefore a violation of chapter 93A.”79 In her memorandum, she discusses the facts surrounding a payment issue that led to Option One sending her notices of intent to foreclose, and concludes that Option One’s tactics and behavior are unconscionable, unfair, and deceptive. In the Opposition, the Debtor argues that the Option One loan was unconscionable because the terms of the loan at the closing were different than what she was promised and that she felt as though she had no alternative but to close in light of the impending foreclosure.
Through Count VII, the Debtor asserts that she suffered emotional distress as a result of Option One’s predatory lending practices, including the stressful events at the closing, her subsequent dealings with Option One representatives, and having been forced into foreclosure. Because she suffers from fibromyalgia, she alleges the stress is magnified. Indeed, as a result, the Debtor contends that she has lost sleep and has been forced to take additional medication to control her pain.
The Debtor offers no explanation as to why she is entitled to summary judgment with respect to Count VI or why summary *299judgment should not enter in favor of Option One.
Option One
To start, Option One argues that both Counts I and II must fail as a matter of law because the Debtor had no contact with it prior to the closing and she has not provided any evidence to impute the allegedly wrongful conduct of Aegis to Option One. In particular, Option One cites the complete absence of evidence of an agency relationship between the two. Option One also asserts that the Debtor’s claim for negligence must fail because she has not identified any duty owed to her in connection with the making of the loan.
With respect to Count III, Option One only seeks summary judgment to the extent that the Debtor’s claim is premised on Option One’s failure to provide her with pre-closing disclosures required under the CCCDA, because there is no such requirement with respect to refinancing transactions. Option One contends that the remainder of her claim, namely, that she did not receive the required number of copies of the NORC, is a question of fact for trial. While the Debtor asserts that the signature on the Acknowledgment is a forgery, Option One has produced a report from a handwriting expert who contends that the signature is authentic.
Next, Option One asserts that it is entitled to judgment as a matter of law with respect to Count IV because the Option One loan was in the Debtor’s best interest. In support, Option One cites the reduction in her monthly mortgage payment, the change in the interest rate from variable to fixed, the reduction in the interest rate, and the cancellation of an imminent foreclosure. Option One argues that the Debt- or’s assertion that her monthly payment was not reduced is unavailing because the monthly payment disclosed on the Truth in Lending Disclosure was merely an estimate because the Ameriquest loan had an adjustable rate. Moreover, Option One notes that the Debtor admitted that the amount due under the Ameriquest loan at the time of the Option One closing was close to $1,800, which is less than the monthly payment due under the Option One loan.
With respect Count V, Option One contends that the Debtor’s claim that the Option One loan was unconscionable must fail as a matter of law because the Debtor has not demonstrated that the loan was procedurally and substantively unfair. In fact, Option One points out that the Debtor’s arguments completely fail to address the required elements. In any event, Option One argues that the Option One loan was not the product of unfair surprise because she admits that the terms were thoroughly explained to her and that she was repeatedly told that she did not have to close. To the contrary, Option One asserts that it was the impending Ameri-quest foreclosure, not any action on its part, that induced her to enter into the loan. Additionally, the Debtor cannot show substantive unconscionability because she benefitted from the transaction by paying off her prior loan, decreasing her monthly mortgage payment, and avoiding foreclosure.
Similarly, Option One argues that the Debtor is not entitled to restitution under Count VI because she has not demonstrated that Option One was unjustly enriched. Furthermore, Option One asserts that she is estopped from bring this claim because a contract exists between the parties, giving her an adequate remedy at law.
Lastly, Option One seeks summary judgment with respect to Count VII on the basis that the Debtor has failed to prove each element of the cause of action, regardless of whether she intended to bring a claim for intentional or negligent inflic*300tion of emotional distress. In particular, Option One argues that there is no evidence in the record that its conduct was extreme or outrageous, or that there is any causal relationship between its conduct and her injuries. Alternatively, Option One contends that dismissal of Count VII is mandated because this Court lacks jurisdiction to hear a personal injury claim.
V. DISCUSSION
A. The Summary Judgment Standard
Pursuant to Fed.R.Civ.P. 56, “the court shall grant summary judgment if the mov-ant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”80 “A ‘genuine’ issue is one supported by such evidence that ‘a reasonable jury, drawing favorable inferences,’ could resolve it in favor of the nonmoving party.”81 Material facts are those having the potential to affect the outcome of the suit under the applicable law.82 The absence of a material factual dispute is a “condition necessary,” but not a “condition sufficient” to summary judgment.83
The party seeking summary judgment “always bears the initial responsibility ... of identifying those portions of ‘the pleadings, depositions, answers to interrogatories, and admissions on filed, together with the affidavits, if any,’ which demonstrate the absence of a genuine issue of material fact.”84 The nonmoving party must then “produce ‘specific facts, in suitable eviden-tiary form, to ... establish the presence of a trialworthy issue.’ ”85 A trialworthy issue cannot be established by “conclusory allegations, improbable inferences, and unsupported speculation.”86 The court must view the record in the light most favorable to the nonmoving party and draw all reasonable inferences in its favor.87 Therefore, when deciding cross-motions for summary judgment, the court must consider each motion separately.88
It is worth noting that when seeking summary judgment, a defendant may either affirmatively produce evidence negating an essential element of the plaintiffs claim89 or identify materials suggesting that the plaintiff cannot produce any evi-*301denee as to an essential element of its claim.90 With respect to the latter, the Supreme Court has explained that:
[T]he plain language of Rule 56[ ] mandates the entry of summary judgment, after adequate time for discovery and upon motion, against a party who fails to make a showing sufficient to establish the existence of an element essential to that party’s case, and on which that party will bear the burden of proof at trial. In such a situation, there can be “no genuine issue as to any material fact,” since a complete failure of proof concerning an essential element of the nonmoving party’s case necessarily renders all other facts immaterial. The moving party is “entitled to a judgment as a matter of law” because the nonmov-ing party has failed to make a sufficient showing on an essential element of her case with respect to which she has the burden of proof.91
Accordingly, “the burden on the moving party may be discharged by ‘showing’ that is, pointing out to the [trial] court that there is an absence of evidence to support the nonmoving party’s case.”92 After such a showing, “Rule 56[] therefore requires the nonmoving party[, who will bear the burden of proof at trial on a dispositive issue,] to go beyond the pleadings and by [his or] her own affidavits, or by the ‘depositions, answers to interrogatories, and admissions on file,’ designate ‘specific facts showing that there is a genuine issue for trial.’ ”93
B. Count I — Negligence
The First Circuit has explained the standard for proving claim of negligence under Massachusetts law:
To prevail on a negligence claim under Massachusetts law, “a plaintiff must show by a preponderance of the evidence (1) a legal duty owed by defendant to plaintiff; (2) a breach of that duty; (3) proximate or legal cause; and (4) actual damage or injury.”94
Notably, the Debtor does not identify any duty owed to her by Option One. Instead, she asserts that the conduct of the Aegis representative won her “trust and confidence creating a fiduciary relationship and duty of care between DiMare and Aegis and ultimately, Option One.”95 There are two problems with this theory. First, there is no evidence in the record that warrants imputing the conduct of Aegis to Option One.96 Second, even assuming it were appropriate to do so, “under Massachusetts law the relationship between a lender and a borrower, without more, does *302not establish a fiduciary relationship.”97 Although “Massachusetts case law does allow some room for unusual facts in which one side invites, and the other side reposes, a special trust and reliance,”98 the Debtor has failed to articulate any facts or cite any authority to suggest that this was anything other than an average refinancing transaction. It is irrelevant that Aegis won her trust and confidence unless it was knowingly accepted. Put simply, “[a] plaintiff alone ... cannot create a fiduciary relationship.”99
Therefore, the Debtor having failed to establish the presence of a trialworthy issue with respect to this element of her claim, I find that Option One is entitled to judgment as a matter of law as to Count I of the Complaint.100
C. Count II — Promissory Fraud
Under Massachusetts law, to prove fraud in the inducement, a plaintiff is “required to establish the elements of common law deceit, which include ‘misrepresentation of a material fact, made to induce action, and reasonable reliance on the false statement to the detriment of the person relying.’ ”101 It is well established that the parol evidence rule will not apply to bar evidence of prior misrepresentations in an action for fraud in the inducement.102 Nonetheless, the plaintiffs reliance on the prior misrepresentation must be reasonable.
Here, the Debtor summarizes her argument by stating, “[h]ad it not been for the promise of a lower monthly mortgage payment that DiMare replied [sic] on, Di-Mare would not have agreed to refinance her mortgage.”103 Even if that were true, such reliance would be grossly unreasonable. The Debtor concedes that prior to signing the Note and Mortgage, she was well aware that the terms of the loan were not what she had been promised by the Aegis representative.104 Indeed, she had the mortgage terms explained to her, her *303questions answered, and a good understanding of the of the applicable interest rate, monthly mortgage payment, and maturity of the Option One loan before signing the Note and Mortgage.105 Nevertheless, the Debtor went forward with the closing.106 While I am not unsympathetic to the pressures that the Debtor was under given Ameriquest’s impending foreclosure, she simply has not stated a cause of action for fraud in the inducement. Accordingly, Option One is entitled to judgment as a matter of law with respect to Count II of the Complaint.
D. Count III — Violations of the Federal and/or State Truth in Lending Acts
Having reviewed the Complaint, the Motion for Summary Judgment, the Cross-Motion, and the Opposition, I find that neither party has demonstrated that they are entitled to judgment as a matter of law with respect to Count III. First, while the Debtor contends that the signature on the Acknowledgment is not hers, Option One has come forward with sufficient evidence in the form of a handwriting expert’s report indicating that the signature is authentic to demonstrate that a material fact is in dispute. Accordingly, the issue of whether the Debtor received the requisite number of copies of the NORC necessitates a trial.
With respect to the remainder of the Debtor’s claim under Count III, I find that both the record and the parties arguments are too inadequately developed for summary judgment to be appropriate. According to the Complaint, this portion of the Debtor’s claim arises from Option One’s failure to provide accurate pre-clos-ing disclosures as required by 12 C.F.R. § 226.17. In the Motion for Summary Judgment, however, the Debtor appears to argue that she did not receive any pre-closing disclosures until after the closing. Moreover, she asserts that some disclosures were never provided, but it is unclear whether she is referring to required pre-closing disclosures or the closing documents themselves. The Debtor contends that “[t]he documents DiMare received are different than the documents produced by Option One....”107 Additionally, she seems to argue contrary to the agreed facts by asserting that “the loan appears to be a variable rate” and that she was entitled to disclosures required for adjustable rate mortgages.108
In the Cross-Motion, Option One states that it was not required to provide the Debtor with pre-closing disclosures because a refinancing is not a “residential mortgage transaction” as that term is defined.109 In support, Option One cites 209 C.M.R. § 32.19(1)(a), but this section relates to the disclosures required by 209 C.M.R. § 32.18, the analog to 12 C.F.R. § 226.18, not 12 C.F.R. § 226.17. In the Opposition, the Debtor simply quotes sev*304eral sections of Regulation Z and the Massachusetts analog without expressly explaining their relevance.
Having struggled to understand the parties arguments and failed, I find that a trial with additional briefing is necessary to resolve this matter. Recognizing that the parties first attempt to explain the facts and articulate their legal contentions was far from successful and wanting to avoid having to do their homework for them, I will provide detailed briefing instructions in my amended pre-trial order.
E. Count VI — Borrower’s Interest
Mass. Gen. Laws ch. 183, § 28C, colloquially known as the “borrower’s interest” statute, provides in relevant part:
A lender shall not knowingly make a home loan if the home loan pays off all or part of an existing home loan that was consummated within the prior 60 months or other debt of the borrower, unless the refinancing is in the borrower’s interest.110
The statute expressly states that the “ ‘borrower’s interest’ standard shall be narrowly construed,” and places the burden on the lender to demonstrate a refinancing meets that standard.111 The statute further provides a nonexclusive list of factors to be considered in determining whether the refinancing is in the borrower’s interest:
(1)the borrower’s new monthly payment is lower than the total of all monthly obligations being financed, taking into account the costs and fees;
(2) there is a change in the amortization period of the new loan;
(3) the borrower receives cash in excess of the costs and fees of refinancing;
(4) the borrower’s note rate of interest is reduced;
(5) there is a change from an adjustable to a fixed rate loan, taking into account costs and fees; or
(6) the refinancing is necessary to respond to a bona fide personal need or an order of a court of competent jurisdiction.112
The corresponding regulations identify an additional factor: “the time it takes to recoup the costs of refinancing, taking into account the costs and fees.”113
Notably, the borrower’s interest statute does not specifically set forth a remedy for a violation of any of its provisions, but nevertheless suggests that a borrower would be entitled to costs and attorneys’ fees for successfully bringing such an action against a lender.114 As the borrower’s interest statute was enacted through the same legislation115 that created the Predatory Home Loan Practices Act,116 it is possible that the legislature intended that violations of the borrower’s interest statute would similarly constitute a violation of Mass. Gen. Laws ch. 93A.117 This, however, is mere speculation. Only a handful of cases even cite to this provision and there is no reported decision in which a borrower prevailed on such a cause of action.
*305Although there is little guidance with respect to the borrower’s interest statute, based upon the factors identified, it appears that the standard is a comparative one such that one must look to the prior transaction that is being refinanced through the new transaction. That is, the statute does not require the refinancing to be an independently provident decision, but only that under the circumstances, the refinancing is in the borrower’s interest when compared with the transaction it refinanced. Still, the “borrower’s interest” is undefined. Therefore, in the absence of an express definition, I conclude that the legislature must have intended the most common meaning of the phrase — simply that the benefit to borrower resulting from the prospective refinancing outweighs any corresponding burden.
Certainly, the Debtor had a “bona fide personal need,” namely, the avoidance of Ameriquest’s impending foreclosure. This was unquestionably the single most important factor in motivating the Debtor, and Option One contends that this “need” weighs in favor of the loan having been in her interest. As the Debtor does not argue otherwise, I will accept Option One’s contention that avoiding foreclosure was in the Debtor’s interest.118
While there was no change in the amortization period of the new loan and the Debtor did not receive cash in excess of the closing fees and costs, it is undisputed that the Option One loan had a fixed interest rate that was lower than the Ameri-quest loan’s adjustable rate. The Debtor asserts that these are not meaningful differences because the Ameriquest loan’s rate was fixed at the time of her default and was only .25% higher than that of the Option One loan. I disagree. While the improvement may not have been immediately significant, it was nevertheless an improvement over the terms of the Ameri-quest loan and in her interest.
Admittedly, the monthly payments involved present a closer and more difficult issue. The Ameriquest loan’s monthly payments during its initial fixed rate period were substantially lower than those required under the Option One loan. Nonetheless, the Debtor was in default at the time the Option One loan closed and she concedes that the payments that she was actually required to make at that time were higher than those under the Option One loan. I further note that this all occurred before the first upward rate adjustment under the Ameriquest loan. On a practical level, this created a situation where the Debtor was unable to take advantage of the then lower contractual rate under the Ameriquest loan because she could not make the higher payments to cure her default. In this sense, the Option One loan provided her a better opportunity to retain her home than she had under the prior loan. I concede, however, that in light of the Debtor’s inability to make the lower contractual rate payments under the Ameriquest loan in the first instance, it was unlikely at best that she could stay current with a higher payment, even if it was less than what was required to cure her default. Ultimately, I do not find that this factor tips in favor of either party.
Although not listed as a factor in the statute, I note that the record before me suggests that the Debtor lacked viable refinancing alternatives. Consideration of this factor goes hand in hand with both the Debtor’s bona fide personal need and the *306relative benefit provided by the Option One loan’s mortgage payment. Part of the Debtor’s argument is that the Option One loan was not in her interest is because she needed a substantially better loan. It is undisputed, however, that the Debtor contacted other parties seeking to refinance the Ameriquest loan and was rejected. While impending foreclosures do not give lenders carte blanche to force oppressive terms on hard pressed borrowers under the guise of helping them, I must consider that the Option One loan may have been the only loan available to the Debtor. Moreover, to the extent that the Debtor alleged that her alimony and child support income would terminate in 2011, there appears to be a serious question as to her ability to repay any loan. In this sense, refinancing may not have been in the Debtor’s interest in the first place. Nevertheless, neither party has argued this, rather arguing, either implicitly or explicitly, that refinancing was in the Debtor’s interest.
Under the totality of the circumstances and weighing the factors identified by the statute, I find that the Debtor has not rebutted Option One’s showing that the refinancing transaction was in her interest as contemplated by Mass. Gen. Laws ch. 183, § 28C. While not perfect, the Option One loan offered the Debtor a chance, though admittedly slim, to keep her home and as such, was a benefit to her. That being said, the Debtor correctly notes that “a lender may run afoul of Chapter 93A by knowingly setting up a borrower for default.”119 Unfortunately, she did not allege a violation of Mass. Gen. Laws ch. 93A in the Complaint. Regardless, the Debtor has offered no reason why summary judgment should not enter in favor of Option One with respect to Count IV as pled.
F. Count V — Unconscionability
In Waters v. Min Ltd.,120 the Massachusetts Supreme Judicial Court observed that:
The doctrine of unconscionability has long been recognized by common law courts in this country and in England. “Historically, a [contract] was considered unconscionable if it was ‘such as no man in his senses and not under delusion would make on the one hand, and as no honest and fair man would accept on the other.’ Later, a contract was determined unenforceable because unconscionable when ‘the sum total of its provisions drives too hard a bargain for a court of conscience to assist.’ ”
Gross disparity in the values exchanged is an important factor to be considered in determining whether a contract is unconscionable. “[C]ourts [may] avoid enforcement of a bargain that is shown to be unconscionable by reason of gross inadequacy of consideration accompanied by other relevant factors.”121
The United States District Court for the District of Massachusetts in United Companies Lending Corp. v. Sar *307geant further explained the application of the doctrine of unconscionability under Massachusetts law:
Unconscionability is a question of law to be assessed at the time the contract was executed by the parties. See Zapatha v. Dairy Mart, Inc., 381 Mass. 284, 291, 408 N.E.2d 1370 (1980). It is a case-specific assessment. “Because there is no clear, all-purpose definition of ‘unconscionable,’ nor could there be, uncon-scionability must be determined on a case by case basis, giving particular attention to whether, at the time of the execution of the agreement, the contract provision could result in unfair surprise and was oppressive to the allegedly disadvantaged party.” Id. 381 Mass. at 292-93, 408 N.E.2d 1370 (internal citations omitted)....
Under Massachusetts law, the doctrine of unconscionability recognizes procedural and substantive unconscionability. See Zapatha, 381 Mass. at 292-93, 294 n. 13, 408 N.E.2d 1370. Procedural uncon-scionability evaluates the circumstances under which the contract was executed to determine if it is the product of unfair surprise. Substantive unconscionability evaluates the actual terms of the contract to determine if they are substantively unfair. “If the sum total of the provisions of a contract drive too hard a bargain, a court of conscience will not assist its enforcement.” Waters, 412 Mass. at 68, 587 N.E.2d 231 (citing Campbell Soup Co. v. Wentz, 172 F.2d 80, 84 [3d Cir.1948])....
The fact that this conduct constitutes an unfair or deceptive practice, however, does not mean that this conduct was unconscionable.122
As recognized by Judge Feeney of this district, “[t]he test [for unconscionability] is a conjunctive one,” and the plaintiff must prove both procedural and substantive unconscionability to prevail.123
Despite the fact that unconsciona-bility is an intensely factual question with both procedural and substantive components, the Debtor has made no effort to argue the elements of her cause of action or otherwise identify facts that would suggest the existence of a trialworthy issue. Indeed, in the section of her memorandum in support of summary judgment dealing with unconscionability, the Debtor states in a conclusory manner that “DiMare’s loan is unfair and deceptive in violation of Mass. Gen. Laws ch. 183 § 28C and in violation of Mass. Gen. Laws ch. 140D § 34, and therefore a violation of chapter 93A,”124 and rather than discussing the closing, vaguely discusses the circumstances leading to Option One sending her foreclosure notices. Despite Option One having identified this problem in the Cross-Motion, the Opposition does little to correct it. In response, she states:
The actions of Aegis and Option One taken together as a whole during the entire loan process including the closing and servicing of the loan that [sic] constitutes the fraud and unconscionability.... While expectations were set during the loan application process, Di-Mare’s troubles began at her loan clos*308ing, and it was at this closing that she learned her mortgage was with Option One. It was at the closing that she was told the rate and payment amount would be higher than promised. It was at the closing that she learned she would not be able to afford her new mortgage and it was at the closing that she was told if she did not sign the papers she would be homeless and it was at the closing that DiMare felt that she did not have any alternative but to sign the mortgage papers.125
The only fact that the Debtor points to is that at the closing, she learned that the interest rate and payment would be higher than expected. This, however, does not constitute an “unfair surprise.”126 Moreover, it is not clear that the Aegis representative’s warnings about the consequences of not going through with the transaction rose to the level of “[h]igh pressure sales tactics” in light of Ameri-quest’s impending foreclosure.127 Even assuming, arguendo, that the Debtor has satisfied the requirement of procedural un-conscionability, or at least demonstrated the existence of a trialworthy issue, she has failed to point to any oppressive terms. Accordingly, Option One is entitled to judgment as a matter of law with respect to Count V.
G. Count VI — Restitution
From the outset, the Court notes that restitution is not a cause of action, but an equitable remedy to prevent unjust enrichment of the defendant to the detriment of the plaintiff.128 “Unjust enrichment is defined as ‘retention of money or property of another against the fundamental principles of justice or equity and good conscience.’ ”129 To demonstrate unjust enrichment, the plaintiff must show: “(1) an enrichment, (2) an impoverishment, (3) a relation between the enrichment and the impoverishment, (4) the absence of justification and (5) the absence of a remedy provided by law.”130
In her Complaint, the Debtor alleged that “the defendants received money in circumstances in which it would be un*309just and unfair to allow them to retain it.”131 In particular, she alleged that the “fees and costs of the loans were excessive in relation to the standards of the mortgage loan market.”132 The Debtor, however, did not address this count in either the Motion for Summary Judgment or the Opposition. On the other hand, Option One argues in the Cross-Motion that the Debtor failed to demonstrate any unjust enrichment or the absence of an adequate remedy at law. To the extent that the Debtor has not cited any facts or legal authority in support of her allegations, summary judgment must enter in favor of Option One with respect to Count VI.
H. Count VII — Emotional Distress
In her Complaint, the Debtor asserted that “[t]he actions of the defendants, as described herein, caused the plaintiff to suffer emotional distress of a nature and degree that is outrageous and intolerable in a civilized society.”133 She did not, however, differentiate between negligent or intentional infliction of emotional distress.134 While I agree with Option One’s contention that the Debtor has failed to satisfy the applicable standard for either,135 the infliction of emotional distress pled as an independent cause of action is a personal injury tort claim over which the bankruptcy court has no jurisdiction.136 Accordingly, Count VII must be dismissed.
VI. CONCLUSION
In light of the foregoing, I will enter an order denying the Motion for Summary Judgment, granting the Cross-Motion with respect to Counts I, II, IV, V, VI, and VII, and scheduling a trial with respect to Count III.
. The Complaint asserts the following counts: Count I — Negligence; Count II — Promissory Fraud; Count III — Violations of the Federal and/or State Truth in Lending Acts; Count IV — Borrower’s Interest; Count V — Uncon-scionability; Count VI — Restitution; Count VII — Emotional Distress. I further note that in the Complaint, the Debtor labeled both her unjust enrichment and emotional distress counts as "Count VI." Therefore, I have relabeled the emotional distress count as "Count VII.”
. See MEFR 3(c), adopted by Massachusetts Local Bankruptcy Rule ("MLBR") 9036-1.
. See Fed.R.Civ.P. 56(f)(1), made applicable to adversary proceedings by Fed. R. Bankr.P. 7056.
. LR, D. Mass. 56.1, adopted and made applicable to proceedings in the bankruptcy court by MLBR 7056-1.
. See Local Rule 7056-1 Statement of Undisputed Material Facts of Record in Support of Plaintiff’s Motion for Summary Judgment ("Plaintiff's Undisputed Facts”), Docket No. 148; Defendant Option One Mortgage Corp.’s Response to Plaintiff's Local Rule 7056-1 Statement of Undisputed Material Facts ("Defendant’s Response to Facts”), Docket No. *290157; Defendant Option One Mortgage Corp.'s Local Rule 7056-1 Statement of Undisputed Material Facts in Support of Its Cross-Motion for Partial Summary Judgment ("Defendant's Undisputed Facts”), Docket No. 159; Plaintiff, Donna DiMare’s Response to Defendant Option One Mortgage Corp.’s Statement of Undisputed Material Facts ("Plaintiff's Response to Facts”), Docket No. 169.
. LR, D. Mass. 56.1 ("Material facts of record set forth in the statement required to be served by the moving party will be deemed for purposes of the motion to be admitted by opposing parties unless controverted by the statement required to be served by opposing parties.”).
. Additionally, several exhibits appear to be many separate documents. For example, Plaintiff's Exhibit 8 includes, among other things, a signed copy of the Note, as well as various pre-closing documents. Although it is difficult to be certain, several documents also appear to be attached several times as part of different exhibits. This, of course, is precisely why LR, D. Mass. 56.1 exists.
. Rios-Jimenez v. Principi, 520 F.3d 31, 39 (1st Cir.2008).
. Caban Hernandez v. Philip Morris USA, Inc., 486 F.3d 1, 7 (1 st Cir.2007) (quoting Calvi v. Knox County, 470 F.3d 422, 427 (1st Cir. 2006)).
. Id. at 8.
. See Euromodas, Inc. v. Zanella, Ltd., 368 F.3d 11, 15-16 (1st Cir.2004) (construing analogous local rule in District of Puerto Rico).
. See Caban Hernandez v. Philip Morris USA, Inc., 486 F.3d at 8 (court does not abuse its discretion by enforcing anti-ferreting rules); see also Fed.R.Civ.P. 56(c)(3) (“The court need only consider the cited materials....”), made applicable to adversary proceedings by Fed. R. Bankr.P. 7056.
. I take judicial notice of the docket in the adversary proceeding, as well as that of the main case pending before this Court and the Debtor's prior cases. See Rodi v. Southern New England School of Law, 389 F.3d 5, 18-19 (1st Cir.2004) (citations omitted). Unless otherwise stated, all docket references shall be to the above captioned adversary proceeding.
. See In re Donna M. DiMare, Case No. 06- . 14772-JNF.
. See DiMare v. Ameriquest Mortg., et al., Adv. P. No. 07-1338.
. Aegis did not appear to answer or otherwise defend in the First Adversary Proceeding.
. See In re Donna M. DiMare, Case No. 08-10598-WCH.
. Dimare v. Ameriquest Mortg. Co. (In re Dimare), No. 08-1046, 2008 WL 4853382 (Bankr.D.Mass. Nov. 06, 2008).
. See Dimare v. Ameriquest Mortg. Co. (In re Dimare), No. 08-1046, 2009 WL 5206628 (Bankr.D.Mass. Dec. 22, 2009).
. After Ameriquest was dismissed from this adversary proceeding, the docket reflects no activity until July 19, 2010, when the Debtor moved to reopen the case after it was administratively closed in error that same day. Once the case was reopened, the Debtor did not request a pre-trial status conference until January 25, 2011, which Option One opposed on the basis that it intended to file a motion for summary judgment. Despite numerous continuances and a pre-trial status conference held on March 17, 2011, the parties did not file their respective motions until July, 2011.
. Plaintiff’s Undisputed Facts, Docket No. 148 at ¶ 1; Defendant’s Response to Facts, Docket No. 157 at ¶ 1.
. Defendant's Undisputed Facts, Docket No. 159 at ¶ 1; Plaintiff’s Response to Facts, Docket No. 169 at ¶ 1.
. Defendant’s Undisputed Facts, Docket No. 159 at ¶ 2; Plaintiffs Response to Facts, Docket No. 169 at ¶ 2.
. Defendant's Undisputed Facts, Docket No. 159 at ¶ 3; Plaintiff’s Response to Facts, Docket No. 169 at ¶ 3.
. Defendant's Undisputed Facts, Docket No. 159 at ¶ 4; Plaintiffs Response to Facts, Docket No. 169 at ¶ 4.
. Id.; Solomon Affidavit, Docket No. 165, Ex. C.
. Defendant's Undisputed Facts, Docket No. 159 at ¶ 5; Plaintiff's Response to Facts, Docket No. 169 at ¶ 5.
. Defendant’s Undisputed Facts, Docket No. 159 at ¶ 6; Affidavit of Nathalie K. Solomon in Support of Defendant Option One Mortgage Corp.’s Opposition to Plaintiff's Motion for Summary Judgment and Defendant, Option One Mortgage Corp.’s Cross-Motion for Partial Summary Judgment ("Solomon Affidavit”), Docket No. 165, Ex. A2 at 77:19-23; 78:1-4 ("Q. Is it fair to say you received it via certified mail in or around July 2004? A. Yes.”); but see Plaintiff's Response to Facts, Docket No. 169 at ¶ 6 ("Denied as worded. DiMare stated that the letter looked familiar. DiMare did not admit that she actually received a copy of the notice of Intent to Foreclose”).
. Defendant’s Undisputed Facts, Docket No. 159 at ¶¶ 7-9; Plaintiff's Response to Facts, Docket No. 169 at ¶¶ 7-9.
. Defendant’s Undisputed Facts, Docket No. 159 at ¶¶ 10; Plaintiff's Response to Facts, Docket No. 169 at ¶¶ 10.
. Defendant’s Undisputed Facts, Docket No. 159 at ¶¶ 11-12; Plaintiff’s Response to Facts, Docket No. 169 at ¶¶ 11-12.
. Defendant's Undisputed Facts, Docket No. 159 at ¶ 15; Plaintiff’s Response to Facts, Docket No. 169 at ¶ 15.
. Plaintiff’s Undisputed Facts, Docket No. 148 at ¶ 3; Defendant's Response to Facts, Docket No. 157 at ¶ 3 ("Option One is without information sufficient to admit or deny the allegations contained in Paragraph 3”); Defendant’s Undisputed Facts, Docket No. 159 at ¶¶ 16-17; Plaintiff’s Response to Facts, Docket No. 169 at ¶¶ 16-17.
. See In re Dimare, 2009 WL 5206628 at *1-2; In re Dimare, 2008 WL 4853382 at *1-2.
. Plaintiff’s Undisputed Facts, Docket No. 148, Ex. 2 at ¶¶ 3-4; Defendant’s Response to Facts, Docket No. 157 at ¶ 3-4 ("[Option One] is ... without information sufficient to admit or deny the allegations ...").
. Defendant’s Undisputed Facts, Docket No. 159 at ¶ 18-20; Plaintiff's Response to Facts, *294Docket No. 169 at ¶ 18-20 ("20. Denied as worded. DiMare stated to the Aegis representative that her payment had to be lower than they [sic] currently were ... DiMare never stated if she was referring to her regular monthly mortgage payment or the payment amount that she was supposed to pay under the forbearance agreement.
. Defendant’s Undisputed Facts, Docket No. 159 at ¶ 13; Plaintiff's Response to Facts, Docket No. 169 at ¶ 13; Plaintiff's Undisputed Facts, Docket No. 148 at ¶ 4, Ex. 1; Defendant’s Response to Facts, Docket No. 157 at ¶ 4.
. Plaintiff's Undisputed Facts, Docket No. 148 at ¶ 4, Ex. 1; but see Defendant’s Response to Facts Docket No. 157 at ¶ 4 ("Option One admits that DiMare filled out a loan application with Aegis. Plaintiff [sic] is otherwise without information sufficient to admit or deny the allegations contained in Paragraph 4.”). Although not raised in either statement of undisputed material facts, in her Complaint, the Debtor alleged that pursuant to her divorce agreement, her alimony would terminate in 2011 while the child support payments would end when her son completes his education or leaves college, which could have been before 2011. Complaint, Docket No. 1 at ¶ 16.
. Defendant's Undisputed Facts, Docket No. 159 at ¶ 21; Plaintiff's Response to Facts, Docket No. 169 at ¶ 21.
. Defendant's Undisputed Facts, Docket No. 159 at ¶ 22; Plaintiff's Response to Facts, Docket No. 169 at ¶ 22.
. Defendant's Undisputed Facts, Docket No. 159 at ¶ 23; Plaintiff's Response to Facts, Docket No. 169 at ¶ 23; Plaintiff's Undisputed Facts, Docket No. 148 at ¶¶ 5-6; Defendant’s Response to Facts, Docket No. 157 at ¶¶ 5-6 ("Option One is without information sufficient to admit or deny the allegations contained in Paragraph^] [5 and 6].”).
. Defendant's Undisputed Facts, Docket No. 159 at ¶¶ 24-25; Plaintiff's Response to Facts, Docket No. 169 at ¶¶ 24-25; Plaintiff’s Undisputed Facts, Docket No. 148 at ¶¶ 7-8; Defendant's Response to Facts, Docket No. 157 at ¶¶ 7-8.
. Defendant's Undisputed Facts, Docket No. 159 at ¶ 26; Plaintiff's Response to Facts, Docket No. 169 at ¶ 26.
. Plaintiff's Undisputed Facts, Docket No. 148 at ¶ 9; Defendant's Response to Facts, Docket No. 157 at ¶ 9 ("Option One is without information sufficient to admit or deny the allegations contained in Paragraph 9.").
. Defendant's Undisputed Facts, Docket No. 159 at ¶¶ 27, 33; Plaintiffs Response to Facts, Docket No. 169 at ¶¶ 27, 33.
. Defendant's Undisputed Facts, Docket No. 159 at ¶¶ 34-36; Plaintiff's Response to Facts, Docket No. 169 at ¶¶ 34-36.
. Defendant's Undisputed Facts, Docket No. 159 at ¶ 28; Plaintiff's Response to Facts, Docket No. 169 at ¶ 28.
. Plaintiff's Undisputed Facts, Docket No. 148 at ¶ 10; Defendant’s Response to Facts, Docket No. 157 at 1110 ("Option One is without information sufficient to admit or deny the allegations contained in Paragraph 10.”).
. Defendant’s Undisputed Facts, Docket No. 159 at ¶ 14; Plaintiff's Response to Facts, Docket No. 169 at ¶ 14.
. Plaintiff's Undisputed Facts, Docket No. 148 at ¶ 11; Defendant's Response to Facts, Docket No. 157 at ¶ 11 ("Admitted that Di-Mare executed a Note, Mortgage, and other loan documents on August 8, 2005. Option One otherwise denies the allegations contained in Paragraph 11.”). While the record demonstrates that Ameriquest had sent the Debtor several Notices of Intent to Foreclose, there is no evidence that Ameriquest had scheduled a foreclosure sale. Nonetheless, for the purposes of summary judgment, Option One assumes the truth of that allegation.
. Defendant’s Undisputed Facts, Docket No. 159 at ¶ 29; Plaintiff’s Response to Facts, Docket No. 169 at ¶ 29.
. Defendant’s Undisputed Facts, Docket No. 159 at 1130; Plaintiff's Response to Facts, Docket No. 169 at ¶ 30.
. Defendant's Undisputed Facts, Docket No. 159 at ¶¶ 31-32; Plaintiff's Response to Facts, Docket No. 169 at ¶¶ 31-32 ("31. Denied as worded. DiMare stated that she read the documents presented to her to the best of her ability.” (underline in original)).
. Plaintiff's Undisputed Facts, Docket No. 148 at ¶ 11; Defendant’s Response to Facts, Docket No. 157 at ¶ 11 ("Admitted that Di-Mare executed a Note, Mortgage, and other loan documents on August 8, 2005. Option One otherwise denies the allegations contained in Paragraph 11.”).
. Defendant’s Undisputed Facts, Docket No. 159 at ¶ 39; Plaintiff’s Response to Facts, Docket No. 169 at ¶ 39.
. Defendant’s Undisputed Facts, Docket No. 159 at ¶¶ 37-38; Plaintiff's Response to Facts, Docket No. 169 at ¶¶ 37-38.
. Plaintiff's Undisputed Facts, Docket No. 148 at ¶¶ 12-13, 30.
. Defendant’s Response to Facts, Docket No. 157 at ¶¶ 12-13, 30; Affidavit of Alan T. Robillard, Docket No. 166 at ¶ 4. Notably, the Defendant does not cite to this affidavit in support of its bare denial of the Debtor's allegations in the Defendant’s Response to Facts.
. Plaintiff's Undisputed Facts, Docket No. 148 at ¶ 14; Defendant's Response to Facts, Docket No. 157 at ¶ 14.
. Plaintiff's Undisputed Facts, Docket No. 148 at ¶ 26; Defendant’s Response to Facts, Docket No. 157 at ¶ 26.
. Plaintiff's Undisputed Facts, Docket No. 148 at ¶¶ 19, 23; Defendant’s Response to Facts, Docket No. 157 at ¶¶ 19, 23.
. Plaintiff's Undisputed Facts, Docket No. 148 at ¶¶ 15-16, 20; Defendant’s Response to Facts, Docket No. 157 at ¶¶ 15-16, 20.
. Plaintiff's Undisputed Facts, Docket No. 148 at ¶¶ 17-18; Defendant's Response to Facts, Docket No. 157 at ¶¶ 17-18. Option One denies that Attorney Bailey was "unsure” how the closing package was provided to him and whether it provided him with a separate copy for the Debtor. Instead, Option One states that he merely said he could not remember. No matter how parties phrase it, the result is the same — Attorney Bailey does not know.
. Plaintiff's Undisputed Facts, Docket No. 148 at ¶21; Defendant’s Response to Facts, Docket No. 157 at ¶ 21.
. Plaintiff's Undisputed Facts, Docket No. 148 at ¶¶ 24-25; Defendant's Response to Facts, Docket No. 157 at ¶¶ 24-25.
. This section contains properly supported factual assertions included as part of the Debtor’s arguments in the Opposition but not in her statement of undisputed material facts. As such, they will only be considered with respect to the Cross-Motion for the purpose *297of determining whether the Debtor has established the presence of a trialworthy issue.
. See Opposition, Docket No. 169 at Exs. A, D; Motion for Summary Judgment, Docket No. 148 at Ex. 23. I note that the "call log" document is clearly a call log, but is otherwise completely incomprehensible.
. Plaintiff's Motion for Summary Judgment, Docket No. 148 at Ex. 10.
. Id.
. Opposition, Docket No. 169 at p. 11; Plaintiff’s Motion for Summary Judgment, Docket No. 148 at Ex. 7.
. Memorandum in Support of Plaintiffs Motion for Summary Judgment ("Plaintiff’s Memorandum”), Docket No. 148 at p. 3.
. Id. at p. 4.
. Opposition, Docket No. 169 at p. 4.
. Plaintiff's Memorandum, Docket No. 148 at p. 6.
. 15 U.S.C. § 1601 et seq.
. 12 C.F.R. § 226.1 et seq.
. Mass. Gen. Laws ch. 140D, § 1 et seq.
. The Debtor also objects to Option One's handwriting expert's report, but her objection speaks to the weight of the evidence, which is ultimately an issue for trial.
.Plaintiff’s Memorandum, Docket No. 148 at p. 18.
. Fed.R.Civ.P. 56(a) made applicable in adversary proceedings by Fed. R. Bankr.P. 7056.
. Triangle Trading Co. v. Robroy Indus., Inc., 200 F.3d 1, 2 (1st Cir.1999) (quoting Smith v. F.W. Morse & Co., Inc., 76 F.3d 413, 427 (1st Cir. 1996)).
. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); McCarthy v. Northwest Airlines, Inc., 56 F.3d 313, 314-315 (1st Cir.1995); Nereida-Gonzalez v. Tirado-Delgado, 990 F.2d 701, 703 (1st Cir.1993).
. Desmond v. Varrasso (In re Varrasso), 37 F.3d 760, 764 (1st Cir.1994).
. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. at 248, 106 S.Ct. 2505.
. Triangle Trading Co., 200 F.3d at 2 (quoting Morris v. Gov’t Dev. Bank of Puerto Rico, 27 F.3d 746, 748 (1 st Cir.1994)).
. Griggs-Ryan v. Smith, 904 F.2d 112, 115 (1st Cir.1990) (quoting Medina-Munoz v. R.I. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir. 1990)).
. Nicolo v. Philip Morris, Inc., 201 F.3d 29, 33 (1st Cir.2000).
. Reich v. John Alden Life Ins. Co., 126 F.3d 1, 6 (1st Cir. 1997).
. Anderson v. Liberty Lobby, Inc., 477 U.S. at 242, 106 S.Ct. 2505 (considering the quantum of evidence required to oppose a motion for summary judgment where the defendant supported his motion with an affidavit affirmatively producing evidence negating an essential element of the plaintiff's complaint).
. Celotex Corp. v. Catrett, 477 U.S. at 320, 106 S.Ct. 2548.
. Id. at 322-323, 106 S.Ct. 2548.
. Id. at 325, 106 S.Ct. 2548.
. Id. at 324, 106 S.Ct. 2548.
. Primus v. Galgano, 329 F.3d 236, 241 (1st Cir.2003) (quoting Heinrich v. Sweet, 308 F.3d 48, 62-63 (1st Cir.2002) (internal quotations omitted)). See Frappier v. Countrywide Home Loans, Inc., 645 F.3d 51, 58 (1st Cir.2011); Jorgensen v. Mass. Port Auth., 905 F.2d 515, 522 (1st Cir. 1990).
. Plaintiff’s Memorandum, Docket No. 148 at p. 4.
. The only evidence of any contact between Option One and Aegis are loan prequalification forms sent by Aegis to Option One on July 11, 2005, and an incomprehensible document the Debtor states is a “call log” between Aegis and Option One from July 28, 2005. See Opposition, Docket No. 169 at Exs. A, D; Motion for Summary Judgment, Docket No. 148 at Ex. 23. Neither establish what the Debtor failed to even allege in her complaint; namely, an agency relationship between the two.
. Frappier v. Countrywide Home Loans, Inc., 645 F.3d at 59 (quoting FAMM Steel, Inc. v. Sovereign Bank, 571 F.3d 93, 102 (1st Cir. 2009)). See Clark v. Rowe, 428 Mass. 339, 346, 701 N.E.2d 624 (1998); Urman v. South Bos. Sav. Bank, 424 Mass. 165, 168, 674 N.E.2d 1078 (1997); Superior Glass Co. v. First Bristol Cnty. Nat'l Bank, 380 Mass. 829, 832, 406 N.E.2d 672 (1980); Nat’l Shawmut Bank of Bos. v. Hallett, 322 Mass. 596, 602, 78 N.E.2d 624 (1948).
. Frappier v. Countrywide Home Loans, Inc., 645 F.3d at 59 (emphasis added).
. Sullivan v. Decision One Mortg. (In re Sullivan), 346 B.R. 4, 20 (Bankr.D.Mass. 2006) (citing Broomfield v. Kosow, 349 Mass. 749, 212 N.E.2d 556 (1965)).
. While I need not reach this issue in light of the Debtor’s failure to demonstrate that Option One owed her a duty, I note that she has also failed to clearly and coherently explain how the duty she alleged existed was breached.
. Commerce Bank & Trust Co. v. Hayeck, 46 Mass.App.Ct. 687, 693, 709 N.E.2d 1122 (1999) (quoting Hogan v. Riemer, 35 Mass. App.Ct. 360, 365, 619 N.E.2d 984 (1993)). See Storie v. Household Intern., Inc., No. 03-40268-FDS, 2005 WL 3728718 *7 (D.Mass. Sept. 22, 2005); In re Sullivan, 346 B.R. at 19.
. McEvoy Travel Bureau, Inc. v. Norton Co., 408 Mass. 704, 711 n. 5, 563 N.E.2d 188 (1990); Broomfield v. Kosow, 349 Mass, at 759, 212 N.E.2d 556; Shawmut-Canton LLC v. Great Spring Waters of America, Inc., 62 Mass.App.Ct. 330, 335, 816 N.E.2d 545 (2004); Commerce Bank & Trust Co. v. Hayeck, 46 Mass.App.Ct. at 693, 709 N.E.2d 1122.
. Plaintiff’s Memorandum, Docket No. 148 at p. 6.
. Plaintiff’s Undisputed Facts, Docket No. 148 at ¶ 9; Defendant’s Response to Facts, Docket No. 157 at ¶ 9 (“Option One is without information sufficient to admit or deny the allegations contained in Paragraph 9.”).
. Defendant’s Undisputed Facts, Docket No. 159 at ¶¶ 29-32; Plaintiffs Response to Facts, Docket No. 169 at ¶¶ 29-32 ("31. Denied as worded. DiMare stated that she read the documents presented to her to the best of her ability.” (underline in original)).
. Plaintiff's Undisputed Facts, Docket No. 148 at ¶ 11; Defendant’s Response to Facts, Docket No. 157 at ¶ 11 (“Admitted that Di-Mare executed a Note, Mortgage, and other loan documents on August 8, 2005. Option One otherwise denies the allegations contained in Paragraph 11.”).
. Plaintiff's Memorandum, Docket No. 148 at p. 9.
. Id. 9.
. See 209 C.M.R. § 32.02 (2005); see also Vincent v. Ameriquest Mortg. Co. (In re Vincent), 381 B.R. 564, 570 n. 4 (Bankr.D.Mass.2008).
. Mass. Gen. Laws ch. 183, § 28C(a). See also 209 C.M.R. § 53.03.
. Id.
. Id.
. 209 C.M.R. § 53.04(3)(g).
. Mass. Gen. Laws ch. 183, § 28C(b).
. See H.B. 4880, St. 2004, ch. 268, § 1 (2004).
. Mass. Gen. Laws ch. 183C, § 1 et seq.
. See Mass. Gen. Laws ch. 183C, § 18(a).
. The Debtor asserts, however, that foreclosure was not avoided, but merely delayed as she immediately defaulted on the first payment due under the Option One loan. This suggests a fact that remains unproven; namely, that at the time of the closing, the Debtor’s eventual default on the Option One loan was a certainty.
.Plaintiff’s Memorandum, Docket No. 148 at 14 (quoting Frappier v. Countrywide Home Loans, Inc., No. 09-cv11006-MAP, 2010 WL 3944687 *2 (D.Mass. Oct. 7, 2010), aff'd in part, rev'd in part, 645 F.3d 51 (1st Cir.2011)). The Debtor’s citation of Commonwealth v. Fremont Inv. & Loan, 452 Mass. 733, 897 N.E.2d 548 (2008), is equally inapposite because that case involved alleged violations of Mass. Gen. Laws ch. 93A and Mass. Gen. Laws ch. 183 C, not Mass. Gen. Laws ch. 183, § 28C.
. Waters v. Min Ltd., 412 Mass. 64, 587 N.E.2d 231 (1992).
. Id. at 66, 69, 587 N.E.2d 231 (citations omitted).
. United Cos. Lending Corp. v. Sargeant, 20 F.Supp.2d 192, 206-207 (D.Mass.1998). See Laudani v. Tribeca Lending Corp. (In re Laudani), 401 B.R. 9, 34 (Bankr.D.Mass.2009); In re Sullivan, 346 B.R. at 25; Maxwell v. Fairbanks Capital Corp. (In re Maxwell), 281 B.R. 101, 127 (Bankr.D.Mass.2002).
. In re Sullivan, 346 B.R. at 26 (quoting Storie v. Household Intern., Inc., No. 03-40268-FDS, 2005 WL 3728718 *9 (D.Mass. Sept. 22, 2005)); see In re Laudani, 401 B.R. at 34.
. Plaintiff’s Memorandum, Docket No. 148 atp. 18.
. Opposition, Docket No. 169 at p. 12.
. See In re Laudani, 401 B.R. at 35 ("Even if the Debtor were surprised that he was unable to obtain more cash from his refinancing with Tribeca than he ultimately received, that surprise is not the equivalent of the unfair surprise component needed to establish procedural unconscionability.”). I further note that the Debtor has failed to demonstrate that the pre-closing representations regarding the mortgage terms rose to the level of fraud or misrepresentation.
. See Waters v. Min Ltd., 412 Mass, at 68, 587 N.E.2d 231.
. Keller v. O'Brien, 425 Mass. 774, 778-779, 683 N.E.2d 1026 (1997); Santagate v. Tower, 64 Mass.App.Ct. 324, 336, 833 N.E.2d 171 (2005).
. Taylor Woodrow Blitman Constr. Corp. v. Southfield Gardens Co., 534 F.Supp. 340, 347 (D.Mass.1982) (quoting 66 Am. Jur. 2d Restitution and Implied Contracts § 3 (1962)). See Agin v. Mortg. Elec. Registration Sys., Inc. (In re Bower), No. 10-1092, 2010 WL 4023396 *7 (Bankr.D.Mass. Oct. 13, 2010); Braunstein v. McCabe (In re the McCabe Group, PC), 424 B.R. 1, 15 (Bankr.D.Mass. 2010); Santagate v. Tower, 64 Mass.App.Ct. at 329, 833 N.E.2d 171.
.Smith v. Jenkins, 626 F.Supp.2d 155, 171 (D.Mass.2009) (quoting LaSalle Nat’l Bank v. Perelman, 82 F.Supp.2d 279, 294-295 (D.Del. 2000)). See Keller v. O'Brien, 425 Mass, at 778, 683 N.E.2d 1026; Salamon v. Terra, 394 Mass. 857, 859, 477 N.E.2d 1029 (1985); Nat'l Shawmut Bank v. Fidelity Mut. Life Ins. Co., 318 Mass. 142, 146, 61 N.E.2d 18 (1945); Sutton v. Valois, 66 Mass.App.Ct. 258, 267, 846 N.E.2d 1171 (2006); Santagate v. Tower, 64 Mass.App.Ct. at 329, 833 N.E.2d 171; Stevens v. Nagel, 64 Mass.App.Ct. 136, 141, 831 N.E.2d 935 (2005); Cox v. Cox, 56 Mass.App.Ct. 864, 780 N.E.2d 951 (2002).
. Complaint, Docket No. 1 ¶ 75.
. Id. at ¶ 76.
. Id. at ¶ 79.
. The Massachusetts Supreme Judicial Court has held that a plaintiff must prove the following in order to recover for negligent infliction emotional distress: “(1) negligence; (2) emotional distress; (3) causation; (4) physical harm manifested by objective symp-tomatology; and (5) that a reasonable person would have suffered emotional distress under the circumstances of the case.” Payton v. Abbott Labs, 386 Mass. 540, 557, 437 N.E.2d 171 (1982). In contrast, to prove intentional infliction of emotion distress, the plaintiff must show "(1) that the actor intended to inflict emotional distress or that he knew or should have known that emotional distress was the likely result of his conduct, (2) that the conduct was 'extreme and outrageous,' was ‘beyond all possible bounds of decency’ and was 'utterly intolerable in a civilized community,’ (3) that the actions of the defendant were the cause of the plaintiff's distress, and (4) that the emotional distress sustained by the plaintiff was ‘severe’ and of a nature that ‘no reasonable man could be expected to endure it.’ ” Agis v. Howard Johnson Co., 371 Mass. 140, 145, 355 N.E.2d 315 (1976) (citations omitted).
. A claim for negligent infliction of emotional distress fails because, as explained above, the Debtor did not establish that Option One owed her a duty. With respect to intentional infliction of emotional distress, the Debtor has proffered no evidence to even raise a trial worthy issue regarding the first two elements.
. 28 U.S.C. § 157(b)(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.”); see In re Laudani, 401 B.R. at 42; Nosek v. Ameriquest Mortg. Co. (In re Nosek), No. 04-4517, 2006 WL 1867096 *17 (Bankr.D.Mass. June 30, 2006), rev'd on other grounds, Ameriquest Mortg. Co. v. Nosek (In re Nosek), 354 B.R. 331 (D.Mass.2006). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494461/ | MEMORANDUM OF DECISION
HENRY J. BOROFF, Bankruptcy Judge.
Before the Court is a “Motion For Leave to File Statement of Claim for Administrative Expense Pursuant to 11 U.S.C. Section 503(b)(9)” (the “Motion”) filed by A.L. Prime Energy Consultant, Inc. (“Prime”). This case presents an issue of first impression in this Circuit: whether a bankruptcy court has the discretion to allow the late filing of a request for payment of a claim asserting priority un*336der § 503(b)(9) of the Bankruptcy Code (a “§ 503(b)(9) claim”).1
I. FACTS AND POSITIONS OF THE PARTIES
J.J. Donovan and Sons, Inc. (the “Debt- or”) owns and operates a fuel terminal. The Debtor delivers fuel and services heating equipment. Between April 11 and April 20, 2011, the Debtor ordered deliveries of fuel oil from Prime. A little over a week later, on April 29, the Debtor filed its voluntary Chapter 11 petition. The § 341(a) meeting of creditors was originally scheduled for June 6, but was not held on that date. Prime filed the instant motion 65 days after that first date set for the § 341 meeting and 5 days after the deadline set by Local Rule 3002-1 for filing § 503(b)(9) claims. By its Motion, Prime requests the allowance of its late filed claim.
In response to Prime’s Motion, Gulf Oil Limited Partnership (“Gulf’) and the Chapter 11 Trustee timely filed an Opposition and Objection, respectively. At the hearing on the Motion, Gulf and the Chapter 11 Trustee contested both the characterization of Prime’s claim as entitled to priority under § 503(b)(9) as well as the Court’s ability to permit the late filing of any § 503(b)(9) claim. At the conclusion of the hearing, the Court articulated generally the two issues presented — the second conditioned upon the first: (1) whether the § 503(b)(9) claim filing deadline set forth in Local Rule 3002-1 is subject to extension for excusable neglect; and (2) whether Prime has shown excusable neglect. The first question was taken under advisement and an evidentiary hearing on the second was set tentatively for January 6, 2012 pending the Court’s finding that the deadline can be extended for excusable neglect. The parties submitted further memoranda in support of their positions.
Prime relies on the introductory language of Local Rule 3002-1 to support its position that the Court has the discretion to extend the 60-day deadline for excusable neglect. Prime reads the introductory phrase, “[u]nless the Court orders otherwise ...” as granting the Court the discretion to allow late filed § 503(b)(9) claims. In addition, Prime notes that where, as with § 503(b)(9), there is no articulated filing deadline within a provision of the Bankruptcy Code or the Bankruptcy Rules, Bankruptcy Rule 9006(b)(1) provides courts who have set deadlines the corresponding discretion to enlarge them for good reason. Finally, Prime analogizes to the case of Pioneer Investment Services Co. v. Brunswick Associates Limited Partnership, 507 U.S. 380, 113 S.Ct. 1489, 123 L.Ed.2d 74 (1993), where the Supreme Court read Rule 9006(b)(1) to permit a bankruptcy court the discretion to allow a late filed proof of claim in a Chapter 11 case upon a showing of the claimholder’s excusable neglect.
Gulf, on the other hand, reads the same introductory language of Local Rule 3002-1 differently. In its interpretation, the words “[ujnless the Court orders otherwise ...” refers not to the Court’s ability to allow a late filed claim, but to the Court’s ability to set a different initial deadline. Gulf argues that the Court is limited to extending deadlines only before the expiration of the deadline and cites to In re Erving Industries, Inc., 432 B.R. 354 *337(Bankr.D.Mass.2010) — where this Court granted a motion to extend the filing deadline for administrative claims prior to the expiration of the 60-day deadline. See Case No. 09-30623-HJB, Docket No. 118. Here, the Court was not asked to change the default deadline in Local Rule 3002-1 before its expiration; accordingly, Gulf argues, the Local Rule’s introductory phrase is inapplicable. And in further support of its proposition that the introductory phrase of the Local Rule is limited in scope, Gulf points to the Supreme Court’s directive in Howard Delivery Service, Inc. v. Zurich American Insurance Co., 547 U.S. 651, 667, 126 S.Ct. 2105, 165 L.Ed.2d 110 (2006) that priority statutes should be narrowly construed.
Relying solely on what he claims to be the “clear, unambiguous” language of the Local Rule, the Chapter 11 Trustee contends that the 60-day deadline is mandatory and therefore any late filed request for an allowance of a § 503(b)(9) claim must be denied, with no exceptions available.
II. DISCUSSION
A. The Relevant Provisions
Section 503(b) lists those claims eligible for administrative expense status. One such claim is:
the value of any goods received by the debtor within 20 days before the date of commencement of a case under this title in which the goods have been sold to the debtor in the ordinary course of such debtor’s business.
§ 503(b)(9). While the Bankruptcy Code and the Bankruptcy Rules are silent as to when such a claim must be filed, Local Rule 3002-1 fills the void:
RULE 3002-1. DEADLINE FOR ASSERTING ADMINISTRATIVE CLAIMS PURSUANT TO 11 U.S.C. § 503(b)(9); RECLAMATION OF GOODS
Unless the Court orders otherwise, any request for allowance of an administrative expense for the value of goods delivered to a debtor in the ordinary course of the debtor’s business within twenty (20) days prior to the commencement of a case pursuant to 11 U.S.C. § 503(b)(9) shall be filed with the Court, in writing, within sixty (60) days after the first date set for the meeting of creditors pursuant to 11 U.S.C. § 341(a). Failure to file such a request for allowance within the time period specified in this Rule will result in denial of administrative expense treatment for such claim.
Mass. Local Bankr.R. 3002-1.
Bankruptcy Rule 9006 governs the computation, enlargement and reduction of time periods specified in other bankruptcy rules as well as “in the Federal Rules of Civil Procedure, in any local rule or court order, or in any statute that does not specify a method of computing time.” Fed. R. Bankr.P. 9006(a) (emphasis supplied). Subdivision (b) of the Rule instructs as to when and how those time periods may be enlarged:
Except as provided in paragraphs (2) and (3) of this subdivision, when an act is required or allowed to be done at or within a specified period by these rules or by a notice given thereunder or by order of court, the court for cause shown may at any time in its discretion (1) with or without motion or notice order the period enlarged if the request therefor is made before the expiration of the period originally prescribed or as extended by a previous order or (2) on motion made after the expiration of the specified period permit the act to be *338done where the failure to act was the result of excusable neglect.
Id. at 9006(b)(1).
B. The Interplay of the Relevant Rules
The disposition of the issue presented requires no more than a careful examination of Local Rule 3002-1 and Bankruptcy Rule 9006. Admittedly, Local Rule 3002-1 could have been better phrased to avoid any confusion. But a close reading of the Local Rule provides sufficient data to mine its meaning. The essence of the Local Rule is that a party must file a request for allowance of a § 503(b)(9) claim within 60 days of the first date set for the § 341 meeting. See Local Rule 3002-1. And if the claimholder fails to meet the deadline, the priority is lost. Id.
However, the deadline set forth in Local Rule 3002-1 contains an exception within its terms. By the words “[u]nless the Court orders otherwise,” it was intended that the Court have sufficient flexibility to alter the default 60-day deadline set forth in the Local Rule for good reason. Gulf and the Chapter 11 Trustee argue that the reservation of discretion set forth in the Local Rule refers to the setting of the initial deadline and not to a post-deadline extension. The Court has to agree. Local Rule 3002-1 was intended to provide the estate representative with as much certainty as possible with respect to those claims which would be entitled to priority from estate assets. Accordingly, Local Rule 3002-1 offers a default deadline which the Court can, by its order, alter as case circumstances dictate. But the certainty to which the Local Rule aspires would vanish were the Court to feel free under the same Local Rule to extend an expired deadline, irrespective of the reason for the late filing or without weighing any prejudice to the estate.
Gulf and the Trustee are wrong, however, in their contention that the language of Local Rule 3002-1 is impervious to the impact of Rule 9006(b). Bankruptcy Rule 9006(a) and (b) supplement Local Rule 3002-1, explicitly granting courts discretion to allow all manner of late filings, except where specifically prohibited. Bankruptcy Rule 9006(a) provides, in relevant part, that Rule 9006(b) applies “in computing any time period specified ... in any local rule ... or in any statute that does not specify a method of computing time.” (emphasis supplied). And Bankruptcy Rule 9006(b) provides, inter alia, that except for those specified Bankruptcy Rules set forth in Bankruptcy Rule 9006(b)(2) and (3) (none of which are here applicable), the Court may, in its discretion, enlarge the time by which an act is done—even after expiration of the deadline, “if the failure to act was the result of excusable neglect.” Id.
By way of illustration, in Pioneer, the Supreme Court read Bankruptcy Rule 9006(b)(1) to give bankruptcy courts broad discretion to allow late filed proofs of claim in Chapter 11 cases, where the failure to timely file the claim was the result of excusable neglect:
[B]y empowering the courts to accept late filings ‘where the failure to act was result of excusable neglect,’ Congress plainly contemplated that the courts would be permitted, where appropriate, to accept late filings caused by inadvertence, mistake, or carelessness, as well as by intervening circumstances beyond the party’s control.
Pioneer, at 390, 113 S.Ct. 1489 (quoting, Rule 9006(b)(1)). While the Pioneer case involved a late filed proof of claim and not a late filed request for payment under § 503(b)(9), nothing in Bankruptcy Rule 9006(b) would appear to limit its applica*339tion to certain kinds of claims. The time-computation and time-extension provisions of Rule 9006 ... are generally applicable to any time requirement found elsewhere in the rules unless expressly excepted.” Id. at n. 4. See also, West Delta Oil Co. v. Hof, 2002 WL 506814, *4 (E.D.La. March 28, 2002) (“[A] bankruptcy court may permit late administrative claims either for cause, under section 503(a), or upon motion where there was ‘excusable neglect’ for missing the deadline, pursuant to Rule 9006(b)”) (citing, inter alia, In re Gurley, 235 B.R. 626, 631-32 (Bankr.W.D.Tenn. 1999) (“The Bankruptcy Code specifies no time for the filing of requests for reimbursement of administrative expenses, thus it is left to the discretion of the bankruptcy judge to set a deadline for filing such requests”)); In re PT-1 Communications, Inc., 403 B.R. 250, 259 (Bankr.E.D.N.Y.2009) (“[A] Court may allow a late filed request for administrative expense payment if the creditor establishes that the failure to timely file the request was due to excusable neglect”) (citing, Rule 9006(b)(1)).
III. CONCLUSION
For the foregoing reasons, this Court concludes that, while Local Rule 3002-1 affords the Court with the flexibility to set the deadline for the filing of § 503(b)(9) claims, Bankruptcy Rule 9006(b) permits the Court to allow such a claim after the deadline, upon a showing of the claimant’s excusable neglect.
Of course, Prime’s work is not over. It now has the burden of showing that the failure to timely file its claim was the result of excusable neglect.
The Court will issue an Order in conformance with this Memorandum of Decision.
. All references to the "Bankruptcy Code” or to Code sections are to the Bankruptcy Code, 11 U.S.C. § 101 et seq.; all references to "Bankruptcy Rule” are to the Federal Rules of Bankruptcy Procedure; and all references to "Local Rule” are to the Massachusetts Local Bankruptcy Rules, which were promulgated effective December 1, 2009 and remain current. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494462/ | MEMORANDUM OF DECISION
WILLIAM C. HILLMAN, Bankruptcy Judge.
I. INTRODUCTION
The matters before the Court are the Trustee’s Motion for Partial Summary Judgment (the “Motion”) filed by Warren Agin (the “Trustee”), the Chapter 7 trustee of the estate of James D. Bower (the “Debtor”), the Defendants’ Opposition to Trustee’s Motion for Partial Summary Judgment and Cross-Motion for Summary Judgment (the “Cross-Motion”) filed by the defendants Mortgage Electronic Registration Systems, Inc. (“MERS”) and The Bank of New York Mellon1 (“BNYMellon,” collectively with MERS, the “Defendants”), and the Reply to Opposition to Trustee’s Motion for Partial Summary Judgment on Counts III and IV (the “Reply”) filed by the Trustee. On October 13, 2010, I granted the Trustee’s prior motion for partial summary judgment, finding that the omission of the Debtor’s name from the mortgage acknowledgment (the “Acknowledgment”) rendered the mortgage currently held by BNYMellon (the “Mortgage”) avoidable under 11 U.S.C. § 544(a)(3).2 Through his present motion, the Trustee seeks recovery from the Defendants under 11 U.S.C. §§ 550(a)(1) and (2) on account of the avoided transfer. In response, the Defendants assert that MERS is not an initial transferee and that BNYMellon is a good faith transferee who gave value and accepted the Mortgage in good faith without knowledge of the Trustee’s claim. For the reasons set forth below, I will grant both motions in part.
II. BACKGROUND
The facts relevant to the present dispute are few and undisputed. On or about October 26, 2005, the Debtor, in connection with a refinancing, granted the Mortgage with respect to real property located at 240 Bradford Street, Unit 2, Provincetown, Massachusetts (the “Property”) to MERS as nominee for Pride Mortgage LLP.3 Although the Acknowledgment contained a place for the notary or justice of the peace to insert the grantor’s name, the Debtor’s name is absent.4 Nevertheless, the Mortgage was recorded in Barnstable Country Registry of Deeds (the “Registry”).5 On February 24, 2010, MERS executed an assignment of the Mortgage in favor of BNYMellon.6
*350The Debtor filed his voluntary Chapter 7 petition on February 1, 2010, and the Trustee was subsequently appointed.7 On March 26, 2010, the Trustee filed the present adversary proceeding seeking avoidance of the Mortgage under 11 U.S.C. § 544(a)(8) and recovery under 11 U.S.C. § 550(a).8 After the Trustee moved for summary judgment with respect to the avoidance of the Mortgage, I took the matter under advisement.9 On October 13, 2010, I issued a Memorandum of Decision and granted the Trustee’s motion.10 Relying on Judge Feeney’s decision in In re Giroux11 and its subsequent affirmance by the United States District Court for the District of Massachusetts (the “District Court”),12 I concluded that the omission of the Debtor’s name from the Acknowledgment was a material defect that rendered it avoidable by the Trustee.13
BNYMellon filed an interlocutory appeal and an election to have the appeal heard by the District Court, but the leave was ultimately denied.14 In the interim, the Trustee sought and obtained approval to sell the Property pursuant to 11 U.S.C. § 363.15 As a result, he is currently holding the net proceeds of approximately $250,000 in escrow pending further order of this Court.16
On August 22, 2011, the Trustee filed the Motion seeking judgment as a matter of law under 11 U.S.C. §§ 550(a)(1) and (2) from MERS and BNYMellon. The Defendants filed the Cross-Motion on September 26, 2011, and the Reply followed on September 29, 2011. On September 30, 2011, I held a hearing on the cross-motions and at its conclusion, took both under advisement.
III. POSITIONS OF THE PARTIES
The Trustee
Since I previously held that the Trustee may avoid the Mortgage, he contends that he may now recover a single satisfaction under 11 U.S.C. § 550 from either MERS or BNYMellon on account of the avoided Mortgage. First, relying on Bonded Fin. Servs. v. European Am. Bank,17 the Trustee argues that, as the mortgagee and assignor to BNYMellon, MERS is an initial transferee under 11 U.S.C. § 550(a)(1) because it held legal title and exercised dominion and control over the Mortgage. He further asserts that it is irrelevant that MERS is identified as a “nominee” because a duly authorized signature from MERS was required to effectuate an as*351signment of the Mortgage. Similarly, the Trustee contends that MERS need not have held the promissory note that the Mortgage secured because Massachusetts law recognizes that one party may hold the mortgage while another holds the promissory note.
Next, The Trustee argues that he can recover from BNYMellon as an immediate transferee under 11 U.S.C. § 550(a)(2) because it had actual knowledge of the defect and did not act in good faith. He contends that the Acknowledgment contained a material defect on its face and a reasonable person would have been induced to investigate it further. Therefore, the Trustee asserts that I should impute knowledge of the material defect to BNYMellon because it had the facts necessary to discover it. At very least, he argues that BNYMellon lacked good faith by failing to investigate the matter.
The Defendants
MERS argues that it was not an initial transferee because it is an entity acting merely as a conduit in the ordinary course of business. While MERS concedes that it had a legally sufficient interest to foreclose under Massachusetts law, it asserts that its interest is limited by its fiduciary duty to act on behalf of the note holder. Under the MERS rules, it states that its nominal authority may only be exercised at the direction of the note holders or their servi-cers.
BNYMellon contends that the Trastee cannot recover from it because it is a good faith transferee that took the Mortgage for value without knowledge of the Trustee’s claim. Relying on In re Bressman18 and In re Sherman,19 BNYMellon argues that actual knowledge is a higher standard than mere notice of a possible defect and does not give rise to a duty to investigate. To the extent that actual notice may encompass facts which the transferee knew or should have known, BNYMellon asserts this speaks only to its good faith in the context of its routine business practices. In this light, BNYMellon states that the sole defect in the Acknowledgment is a small one, and cannot be tantamount to knowledge that the Mortgage was avoidable because no reasonable person would presume such a result. To the contrary, BNYMellon asserts that it had no knowledge of the Trustee’s claim at any time prior to the commencement of this adversary proceeding.
IV. DISCUSSION
1. The Summary Judgment Standard
Pursuant to Fed.R.Civ.P. 56, “the court shall grant summary judgment if the mov-ant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.”20 “A ‘genuine’ issue is one supported by such evidence that ‘a reasonable jury, drawing favorable inferences,’ could resolve it in favor of the nonmoving party.”21 Material facts are those having the potential to affect the outcome of the suit under the applicable law.22 The absence of a material factual dispute is a “condition neces-
*352sary,” but not a “condition sufficient” to summary judgment.23
The party seeking summary judgment “always bears the initial responsibility ... of identifying those portions of ‘the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any,’ which demonstrate the absence of a genuine issue of material fact.”24 The nonmoving party must then “produce ‘specific facts, in suitable eviden-tiary form, to ... establish the presence of a trialworthy issue.’ ”25 A trialworthy issue cannot be established by “conclusory allegations, improbable inferences, and unsupported speculation.”26 The court must view the record in the light most favorable to the nonmoving party and draw all reasonable inferences in its favor.27 Therefore, when deciding cross-motions for summary judgment, the court must consider each motion separately.28
2. Count III — Liability for Avoided Transfer Against MERS
Section 550(a)(1) of the Bankruptcy Code provides, in relevant part, that “to the extent that a transfer is avoided under section 544 ... the trustee may recover, for the benefit of the estate ... the value of such property, from ... the initial transferee of such transfer....”29 “The term ‘transferee’ is not defined in the Bankruptcy Code, and there is no legislative history to elucidate its meaning,” but “courts ... have uniformly followed the test set forth by the [United States Court of Appeals for the] Seventh Circuit in the Bonded case.”30 In Bonded, the Seventh Circuit held that “the minimum requirement of status as a ‘transferee’ is dominion over the money or other asset, the right to put the money to one’s own purposes.”31 As explained by the United States Bankruptcy Appellate Panel for the First Circuit:
The Bonded court reasoned that a “mere conduit” could not be deemed a transferee and that merely having the ability to control funds (as principals of companies often do) does not automatically render the possessor a transferee. [Bonded, 838 F.2d] at 893-94. “When A *353gives a check to B as agent for C, then C is the ‘initial transferee’; the agent may be disregarded.” Id. at 893. “In order to be a transferee of the debtor’s funds, one must (1) actually receive the funds, and (2) have full dominion and control over them for one’s own account, as opposed to receiving them in trust or as agent for someone else.” Rupp v. Markgraf, 95 F.3d at 942.
Since the Seventh Circuit’s decision in Bonded, it has become well settled that transferee status under § 550(a)(1) necessitates the transferee’s “dominion and control,” and that “dominion and control” refers to legal, as opposed to mere physical possession of the property transferred. Bowers, 99 F.3d at 156 (“[T]he dominion and control test set forth in Bonded requires legal dominion and control.”); Security First Nat. Bank v. Brunson (In re Coutee), 984 F.2d 138, 141 n. 4 (5th Cir.1993) (“Dominion and control means legal dominion and control.”). Thus, to be held to the standard of the initial transferee, a transferee must have the legal right to use the funds to whatever purpose he or she wishes, be it to invest in “lottery tickets or uranium stocks.” Bonded, 838 F.2d at 894.32
The Trustee argues that MERS had “dominion and control” over the Mortgage because it held legal title. While it is true that MERS was the mortgagee of record, it held that mortgage as a “nominee” of the note holder. Despite the Trustee’s assertions to the contrary, this distinction is both significant and dispositive.
Judge Young of the United States District Court for the District of Massachusetts recently conducted a thorough examination of MERS in Culhane v. Aurora Loan Servs. of Nebraska.33 Regarding MERS’s status as a “nominee,” he observed that:
By the very terms of the mortgage instrument, MERS holds only bare legal title to each mortgage registered on its system. Consistent with its status as holder of bare legal title to the mortgage, MERS further agrees to act at the direction of the note holder, who retains a beneficial interest in the mortgage. Thus, MERS is hardly a principal; at most, it is an agent.
The term “nominee” in fact connotes a narrow form of agency: a “person designated to act in place of another, usu[ally] in a very limited way.” The MERS Rules likewise define “nominee” as a “limited agent,” although this appears to be a recent addition. Perhaps even more fitting to describe MERS’s role in the mortgage transaction is the second definition of “nominee” given in Black’s Law Dictionary: a “party who holds bare legal title for the benefit of others.” By holding bare legal title to mortgages for the purpose of recording them in its name, MERS allows for the underlying notes, which carry with them the beneficial interests in the mortgages, to be transferred freely and without clouding title.
As discussed above, the common law of Massachusetts permits the practice of splitting the mortgage from the debt that it secures (at least prior to foreclosure). Such a split results in the mortgagee holding legal title to the mortgage in trust for the note holder, who has an equitable right to obtain an assignment of the mortgage. The mortgagee is thus a mortgagee in a nominal sense only; its *354rights are limited by its obligation as trustee. This is precisely the same scenario created by the standard MERS mortgage contract, irrespective of its use of the term “nominee” over “trustee.” Thus, the law is held to imply a trustee-beneficiary relationship between MERS and the note holder.34
With respect to MERS’s authority to assign mortgages, Judge Young explained that:
[W]here a mortgagee holds legal title to the mortgage in trust for the note holder, and where the note holder desires to foreclose, “law or custom” in fact necessitates that, prior to initiating foreclosure proceedings, the mortgagee must assign its interest to the note holder or the note holder’s servicing agent. The power to assign the mortgage’s legal title to its beneficial owner is arguably the one power that must be bestowed on a mortgagee who holds only legal title. Because the mortgagee holds the title in trust for the note holder, it may transfer that title only at the note holder’s request or by decree of court. In this sense, the mortgagee’s power of assignment is more akin to a duty that it owes as trustee. But, regardless whether it is best termed a power or a duty, equity requires that the holder of bare legal title to a mortgage have the capacity to assign it to the note holder or the note holder’s loan servicer, so that a valid foreclosure may be effectuated.35
With Judge Young’s observations in mind, I find that MERS was not an initial transferee because it did not have “dominion and control” over the Mortgage. As previously stated, the Seventh Circuit defined “dominion and control” as “the right to put the money [or asset] to one’s own purposes.”36 While MERS admittedly holds more than a mere possessory interest in the Mortgage, it lacks the authority to act without direction from the note holder or servicer in light of its nominee status. In this way, MERS is simply a conduit. Therefore, the Defendants are entitled to judgment as a matter of law with respect to Count III.
3. Count IV — Liability for Avoided Transfer Against BNYMellon
Pursuant to 11 U.S.C. § 550(a)(2), the Trustee also “may recover, for the benefit of the estate, ... the value of such property, from ... any immediate or mediate transferee....”37 A Trustee may not, however, recover from such “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.” 38 In the present case, it is undisputed that BNYMellon took for value.
“Knowledge,” as that term is used in 11 U.S.C. § 550(b)(1), does not mean “constructive notice.”39 Nevertheless, if an immediate transferee possesses knowledge of facts that suggest a transfer may be avoidable, and “further inquiry by the transferee would reveal facts sufficient to alert him that the property is recoverable, he cannot sit on his heels.”40 As further explained by the Seventh Circuit:
*355Venerable authority has it that the recipient of a voidable transfer may lack good faith if he possessed enough knowledge of the events to induce a reasonable person to investigate. No one supposes that “knowledge of voidability” means complete understanding of the facts and receipt of a lawyer’s opinion that such a transfer is voidable; some lesser knowledge will do. Some facts strongly suggest the presence of others; a recipient that closes its eyes to the remaining facts may not deny knowledge. But this is not the same as a duty to investigate, to be a monitor for creditors’ benefit when nothing known so far suggests that there is a fraudulent conveyance in the chain. “Knowledge” is a stronger term than “notice.” A transferee that lacks the information necessary to support an inference of knowledge need not start investigating on his own.41
Therefore, the issue before me is whether BNYMellon was aware of facts that would have alerted a reasonable person to the avoidability of the Mortgage.
At the September 30, 2011, hearing, BNYMellon argued that it had no such knowledge:
[U]nder the law as it was back when this transfer was first made back in 2006 with respect to this assignment, the law as it was, Bank of New York had no reason to know that at some later time a Chapter 7 Trustee could actually avoid the mortgage because of something I believe is a latent effect [sic] in that mortgage, that would not necessarily, under the law as it was, give rise and cause the Bank of New York to make further inquiry.
I believe that they — at the time, they were reasonable to rely on the fact that this was something presented before an officer, a Notary at the time, and could rely on, at the time, that this was not a defective document, and otherwise, why wouldn’t the mortgage be completely void at that time?42
This argument is premised on two assertions: (1) that Judge Feeney’s decision in In re Giroux is an unanticipated change in the underlying law; and (2) that the defect in the Acknowledgment was latent. Both of these assertions are false.
In In re Mbazira,43 Judge Saylor of the United States District Court for the District of Massachusetts rejected the first assertion when brought by a debtor who sought to challenge the validity of her mortgage after confirmation of her Chapter 13 plan. Finding that I did not abuse my discretion by concluding she was judicially estopped from such a challenge, Judge Saylor reasoned:
The debtor offers no persuasive argument as to how Giroux may be considered an unanticipated change in the substantive law governing the case. True, the bankruptcy court was called upon to predict whether the Supreme Judicial Court would consider the omission of a mortgagor’s name from the acknowledgment a material defect under Massachusetts law. But in doing so, it was guided by extensive precedent from Massachusetts and other jurisdictions. Had the debtor conducted research and identified the alleged defect in her mortgage prior to confirmation, she too could have raised the arguments made by the Gir-oux debtor under the existing governing *356statutes and body of controlling case law. Under the circumstances, it was not an abuse of discretion to conclude that Giroux did not effect [sic] an unanticipated change in the law sufficient to overcome the clear basis for judicial es-toppel.44
Accordingly, while In re Giroux may have been the first case in this district to hold that the absence of a mortgagor’s name from an acknowledgment is a material defect, it was based entirely on existing law.
Turning to the second assertion, the defect in the Acknowledgment clearly was not hidden. To the contrary, it is apparent on its face that the Debtor’s name is missing from the Acknowledgment and BNYMellon cannot credibly argue otherwise. Therefore, by raising this argument, BNYMellon implicitly suggests that the defect was undiscoverable prior to In re Giroux. This fails for the same reason as the last — In re Giroux is not an unanticipated change in the law. In sum, given the patent defect in the Acknowledgement and that “Massachusetts is a strict formality state,”45 I find that BNYMellon had knowledge of facts that should have compelled it to investigate the matter further. As such, the Trustee is entitled to summary judgment as to Count IV.
V. CONCLUSION
In light of the foregoing, I will enter an order granting the Motion with respect to Count IV and denying it with respect to Count III, and granting the Cross-Motion with respect to Count III and denying it with respect to Count IV.
. f/k/a The Bank of New York as Successor Trustee to JPMorgan Chase Bank, N.A., as Trustee for the Certificate holders of Structured Asset Mortgage Investments II Trust 2006-AR4 Mortgage Pass-Through Certificates, Series 2006-AR4.
. See Agin v. Mortg. Elec. Registration Sys., Inc. (In re Bower), No. 10-1092, 2010 WL 4023396 (Bankr.D.Mass. Oct. 13, 2010).
. LR 56-1 Statement of Material Facts, Docket No. 97 at ¶ 5.
. In re Bower, 2010 WL 4023396 at *1.
. LR 56-1 Statement of Material Facts, Docket No. 97 at ¶ 5.
.Id. at ¶¶ 12-15. The Defendants dispute this fact "to the extent that it is an incomplete representation of the chain of transfer of the subject mortgage loan.” Defendants’ LR 56.1 Statement of Material Facts, Docket No. 107 at ¶ 1. According to the Declaration of Shari Middlebrooks, the HL Senior Research Specialist with JPMorgan Chase Bank, N.A., ”[o]n or about June 30, 2006, the Bank entered into a Pooling and Servicing Agreement ('PSA') whereby it became the trustee for the certificateholders of Structured Asset Mortgage Investments II Trust 2006-AR4 Mortgage Pass-Through Certificate Series 2006-AR4 ('Trust'). The mortgage and note of the Bower Loan was conveyed and assigned to *350the Bank as trustee under the terms of the PSA as of the closing date of the Trust.” Docket No. 111 at ¶ 4. For reasons set forth more fully below, I do not find the date of the transfer to be dispositive of the issue now before me.
. LR 56-1 Statement of Material Facts, Docket No. 97 at ¶ 11.
. Id. at ¶ 16.
. Id. at ¶ 17.
. Id. at ¶¶ 18-21.
. Agin v. Mortg. Elec. Registration Sys., Inc. (In re Giroux), No. 08-14708, 2009 WL 1458173 (Bankr.D.Mass. May 21, 2009).
. Mortg. Elec. Registration Sys., Inc. v. Agin, No. 09-CV-10988, 2009 WL 3834002 (D.Mass. Nov. 17, 2009).
. In re Bower, 2010 WL 4023396 at *1.
. LR 56-1 Statement of Material Facts, Docket No. 97 at ¶¶ 22, 26.
. Id. at ¶¶ 23-24.
. Id. at ¶ 25.
. Bonded Fin. Servs. v. European Am. Bank, 838 F.2d 890 (7th Cir.1988).
. Wasserman v. Bressman (In re Bressman), 327 F.3d 229 (3d Cir.2003).
. Brown v. Third Nat’l Bank (In re Sherman), 67 F.3d 1348 (8th Cir.1995).
. Fed.R.Civ.P. 56(a) made applicable in adversary proceedings by Fed. R. Bankr.P. 7056.
. Triangle Trading Co. v. Robroy Indus., Inc., 200 F.3d 1, 2 (1st Cir.1999) (quoting Smith v. F.W. Morse & Co., Inc., 76 F.3d 413, 427 (1st Cir.1996)).
. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986); McCarthy v. Northwest Airlines, Inc., 56 F.3d 313, 314-315 (1st Cir.1995); Nereida-*352Gonzalez v. Tirado-Delgado, 990 F.2d 701, 703 (1st Cir. 1993).
. Desmond v. Varrasso (In re Varrasso), 37 F.3d 760, 764 (1st Cir.1994).
. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Anderson v. Liberty Lobby, Inc., 477 U.S. at 248, 106 S.Ct. 2505.
. Triangle Trading Co., 200 F.3d at 2 (quoting Morris v. Gov’t Dev. Bank of Puerto Rico, 27 F.3d 746, 748 (1st Cir.1994)).
. Griggs-Ryan v. Smith, 904 F.2d 112, 115 (1st Cir.1990) (quoting Medina-Munoz v. R.I. Reynolds Tobacco Co., 896 F.2d 5, 8 (1st Cir. 1990)).
. Nicolo v. Philip Morris, Inc., 201 F.3d 29, 33 (1st Cir.2000).
. Reich v. John Alden Life Ins. Co., 126 F.3d 1,6 (1st Cir. 1997).
. 11 U.S.C. § 550(a)(1).
. Richardson v. United States (In re Anton Noll, Inc.), 277 B.R. 875, 878 (1st Cir. BAP 2002) (citing Bonded Fin. Servs. v. European Am. Bank, 838 F.2d at 893). See also Christy v. Alexander & Alexander of New York, Inc. (In re Finley, Kumble, Wagner, Heine, Underberg, Manley, Myerson & Casey), 130 F.3d 52 (2d Cir. 1997); Bowers v. Atlanta Motor Speedway (In re Southeast Hotel Prop. Ltd. P'ship.), 99 F.3d 151 (4th Cir.1996); Schafer v. Las Vegas Hilton Corp. (In re Video Depot, Ltd.), 127 F.3d 1195 (9th Cir. 1997); Rupp v. Markgraf 95 F.3d 936 (10th Cir.1996); Nordberg v. Arab Banking Corp. (In re Chase & Sanborn Corp.), 904 F.2d 588 (11th Cir.1990).
. Bonded Fin. Servs. v. European Am. Bank, 838 F.2d at 893.
. In re Anton Noll, Inc., 277 B.R. at 879.
. Culhane v. Aurora Loan Servs. of Nebraska, - F.Supp.2d -, 2011 WL 5925525 (D.Mass. Nov. 28, 2011).
. Id. at *14-15 (citations and footnote omitted).
. Id. at *16 (citation omitted) (emphasis added).
. Bonded Fin. Servs. v. European Am. Bank, 838 F.2d at 893.
.11 U.S.C. § 550(a)(2).
. 11 U.S.C. § 550(b)(1).
. Smith v. Mixon, 788 F.2d 229, 232 (4th Cir.1986).
. In re Sherman, 67 F.3d at 1357; see also In re Bressman, 327 F.3d at 236.
. Bonded Fin. Servs. v. European Am. Bank, 838 F.2d at 897-898 (citations omitted).
. Trans. Sept. 30, 2011 at 6:7-22.
.Mbazira v. Litton Loan Serv'g, LLP (In re Mbazira), No. 10-11831-FDS, 2011 WL 3208033 (D.Mass. July 27, 2011).
. Id. at *4.
. Mortg. Elec. Registration Sys., Inc. v. Agin, 2009 WL 3834002 at *2. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494466/ | DECISION
CARLA E. CRAIG, Chief Judge.
This matter comes before the Court on the objection of Churchill Downs Incorporated (“Churchill Downs”) to the entry of an order for relief in this case, which was filed by Suffolk Regional Off-Track Betting Corporation (“Suffolk OTB” or the “Debtor”). Churchill Downs maintains that Suffolk OTB did not obtain the requisite authorization to commence this chapter 9 bankruptcy case under § 109(c)(2). Suffolk OTB challenges Churchill Downs’s standing to object to entry of an order for relief, and argues that, in any event, the *401requirements of § 109 were satisfied. Suffolk OTB’s petition is dismissed pursuant to § 921(c) because the bankruptcy filing was not authorized as required by § 109(c)(2), and therefore, Suffolk OTB is ineligible to be a debtor under chapter 9 of title 11, U.S.C.1
Jurisdiction
This Court has jurisdiction of this core proceeding pursuant to 28 U.S.C. §§ 157 and 1334, and the Eastern District of New York standing order of reference dated August 28, 1986. This decision constitutes the Court’s findings of fact and conclusions of law to the extent required by Federal Rule of Bankruptcy Procedure 7052.
Background
The following facts are undisputed.
Suffolk OTB, a public benefit corporation created by Article V of the New York State Racing, Pari-Mutuel Wagering and Breeding Law (the “Racing and Wagering Law”), is one of five separately governed regional off-track betting corporations in the State of New York. Suffolk OTB offers pari-mutuel wagering on thoroughbred and harness horse races held at racetracks located within and without the State of New York. Casale Decl. ¶¶ 4, 5, 6, Mar. 29, 2011, ECF No. 19.
On March 16, 2011, the Suffolk County Legislature issued, and the County Executive approved, Resolution No. 38-2011, authorizing Suffolk OTB to file a petition under chapter 9 of the Bankruptcy Code (the “County Resolution”), and on March 18, 2011, Suffolk OTB filed a petition under chapter 9 of the Bankruptcy Code. Suffolk OTB has cited a number of factors as contributing to the financial difficulties that led to its bankruptcy filing, including the legislative scheme under which it operates. Casale Decl. ¶¶ 9-10, ECF No. 19. Under the Racing and Wagering Law, Suffolk OTB is required to distribute certain percentages of its revenue to state and local governments, and to New York’s horse racing industry. The revenue remaining after payment of mandatory distributions was insufficient to fund Suffolk OTB’s operating expenses for its 2010 fiscal year, and years of making these required payments has left Suffolk OTB unable to reinvest in its business and with debts greater than its ability to pay. Ca-sale Decl. ¶¶ 11-12, ECF No. 19. Suffolk OTB hopes to develop a plan that would enable it to emerge from chapter 9 by reducing costs, improving operational efficiencies, expanding its business, and obtaining new debt financing to pay its existing creditors and to fund its operations and plans for growth. Casale Decl. ¶22, ECF No. 19.
Churchill Downs, a Kentucky corporation, owns various racetracks, including Churchill Downs Racetrack, Calder Race Course, Fair Grounds Race Course, and Arlington Park (the “Churchill Tracks”), directly or through wholly-owned subsidiaries. Joint Stipulation of Facts ¶ 6, ECF No. 137. Suffolk OTB accepts wagers on races held at the Churchill Tracks and displays simulcast broadcasts of these races at various of its locations. Joint Stipulation of Facts ¶4, ECF No. 137.
Suffolk OTB listed “Churchill Downs Inc./Churchill Downs Simulcast Network” in its List of Creditors Holding 30 Largest Unsecured Claims (the “Creditor List”) on account of a $36,440.18 pre-petition claim arising from “[hjost track settlements, including commissions payable on racing wa*402gers.”2 Joint Stipulation of Facts ¶ 16, ECF No. 137; Creditor List, ECF No. 3. Churchill Downs and TrackNet Media Group, LLC (“TrackNet”), an affiliate of Churchill Downs, were separately listed on Schedule G as parties to executory contracts with Suffolk OTB. Schedule G, ECF Nos. 74, 74-5; Joint Stipulation of Facts ¶ 17, ECF No. 137.
During the post-petition period, the Churchill Tracks have continued to provide their simulcast signal and related wagering activity to Suffolk OTB, and Suffolk OTB has continued to pay the Churchill Tracks through the Churchill Downs Simulcast Network, a wholly-owned subsidiary of Churchill Downs, in accordance with the monetary terms of the contract governing these obligations. Joint Stipulation of Facts ¶ 18, ECF No. 137.
On April 12, 2011, an order was issued scheduling a hearing for May 18, 2011, to consider any objections to the petition, and to consider entry of an order for relief pursuant to § 921. On May 11, 2011, Churchill Downs filed its objection to the petition, arguing that the Suffolk County Legislature did not have authority to authorize Suffolk OTB’s bankruptcy filing. No other objections were filed. On June 14, 2011, the day before the adjourned hearing on Suffolk OTB’s eligibility to be a chapter 9 debtor, Suffolk OTB satisfied the pre-petition obligation owed to “Churchill Downs/Churchill Downs Simulcast Network.” 3 Joint Stipulation of Facts ¶ 16, ECF No. 137.
In a post hearing brief filed on June 27, 2011, Suffolk OTB challenged Churchill Downs’s standing to object to the petition. Suffolk OTB argues that Churchill Downs lacks standing as a creditor because its pre-petition claim had been paid in full, Suffolk OTB’s Post-Hearing Brief at ¶ 28, ECF No. 101, and also lacks standing as a party to an executory contract. While acknowledging that it “has stated in the past that it has an executory contract with Churchill Downs,” Suffolk OTB asserted that “a further review of Suffolk OTB’s records indicates that this is not in fact the case,” in that the contract in question is between Suffolk OTB and TrackNet, an affiliate of Churchill Downs. Suffolk OTB’s Post-Hearing Brief at ¶ 29, ECF No. 101. A hearing was held on July 13, 2011, and an evidentiary hearing was held on October 25, 2011, on this issue.
Discussion
I. Churchill Downs, as a party to an executory contract with Suffolk OTB, has standing to object to the entry of an order for relief in this case.
A. The Parties’ Contentions
Suffolk OTB contends that Churchill Downs is neither a creditor of the Debtor nor a party to an executory contract with the Debtor, and therefore lacks standing to object to the entry of an order for relief pursuant to § 921. Churchill Downs contends that it has standing as a party to an executory contract with the Debtor, because, although it is not named a party in the contract in question, TrackNet entered into that contract as its agent.
“Standing is a threshold issue in every federal litigation.” Savage & Assocs., P.C. v. Mandl (In re Teligent, Inc.), 417 B.R. 197, 209 (Bankr.S.D.N.Y.2009), *403aff'd, No. 09 CIV 09674(PKC), 2010 WL 2034509 (S.D.N.Y. May 13, 2010), aff'd, 640 F.3d 53 (2d Cir.2011). “[T]he question of standing is whether the litigant is entitled to have the court decide the merits of the dispute or of particular issues. This inquiry involves both constitutional limitations on federal-court jurisdiction and prudential limitations on its exercise.” Warth v. Seldin, 422 U.S. 490, 498, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975). “To establish Article III standing, a party must show (1) an injury in fact that is actual or imminent rather than conjectural or hypothetical, (2) the injury is fairly traceable to the conduct complained of, and (3) it is likely, as opposed to speculative, that the injury will be redressed by a favorable decision.” Teligent, 417 B.R. at 210 (citing Lujan v. Defenders of Wildlife, 504 U.S. 555, 560, 112 S.Ct. 2130, 119 L.Ed.2d 351 (1992)). “Prudential standing refers to the requirement that even ‘[w]hen the plaintiff has alleged injury sufficient to meet the case or controversy requirement, ... the plaintiff generally must assert his own legal rights and interests, and cannot rest his claim to relief on the legal rights or interests of third parties.’ ” Id. (quoting Warth, 422 U.S. at 499, 95 S.Ct. 2197).
Additionally, § 1109, made applicable to chapter 9 cases pursuant to § 901, confers standing to “raise and ... appear and be heard on any issue in a case under [chapter 9]” on a “party in interest.” 11 U.S.C. §§ 901, 1109; In re Valley Health Sys., 429 B.R. 692, 710 n. 45 (Bankr. C.D.Cal.2010) (“Section 1109(b) is applicable to chapter 9 cases.”). To qualify as a “party in interest,” a party must establish that it has a “direct financial stake in the outcome” of the issue on which it seeks to be heard. Teligent, 417 B.R. at 210 (quoting Doral Ctr., Inc. v. Ionosphere Clubs, Inc. (In re Ionosphere Clubs, Inc.), 208 B.R. 812, 814 (S.D.N.Y.1997)). See also In re Innkeepers USA Trust, 448 B.R. 131, 141 (Bankr.S.D.N.Y.2011) (“Courts in this District, while generally interpreting section 1109(b) broadly, have limited ‘party in interest’ standing where a party’s interest in the proceeding is not a direct one.”). The Second Circuit has “rejected as incompatible with the purposes of the Code the notion that any particular creditor’s interest may be asserted by anyone other than that creditor.” Krys v. Official Comm. of Unsecured Creditors (In re Refco Inc.), 505 F.3d 109, 117 (2d Cir.2007) (citing Roslyn Sav. Bank v. Comcoach Corp. (In re Comcoach Corp), 698 F.2d 571, 573 (2d Cir.1983)). The determination whether a party is a “party in interest” is made on a case-by-case basis. Church Mut. Ins. Co. v. Am. Home Assurance Co. (In re Heating Oil Partners, LP), 422 Fed.Appx. 15, 17 (2d Cir.2011).
Suffolk OTB argues that Churchill Downs is not a creditor in this case because, on June 14, 2011, Suffolk OTB satisfied the pre-petition debt owed to Churchill Downs on account of “[h]ost track settlements, including commissions payable on racing wagers.” Joint Stipulation of Facts ¶ 16, ECF No. 137. Suffolk OTB argues that Churchill Downs is not a party to the executory contract under which that debt arose, which was signed by TrackNet, not Churchill Downs, and that any rights Churchill Downs asserts pursuant to that contract are derivative in nature, and therefore insufficient to confer standing. Alternatively, Suffolk OTB argues that, if Churchill Downs is a party to the contract, Churchill Downs does not have a pecuniary interest in this matter because Suffolk OTB “issued a check in the amount of $100,000 made payable to [counsel for Churchill Downs] as an advance against any amounts that might be payable to Churchill [Downs] for future simulcast content and related wagering activity” through the term of the contract. *404Gazes Decl. ¶9, Oct. 20, 2011, ECF No. 141. “This amount is twice the estimated maximum exposure of Suffolk OTB to Churchill based on historical trends.” Id. For these reasons, Suffolk OTB argues that Churchill Downs lacks standing to object to the entry of an order for relief.
Churchill Downs contends that it is a party to the executory contract between TrackNet and Suffolk OTB because Track-Net entered into the contract as Churchill Downs’s agent. Churchill Downs further asserts that the funds advanced by the Debtor might not fully satisfy the Debtor’s remaining financial obligations under the contract, and that, in any event, the Debt- or has ongoing non-monetary obligations under the contract. For these reasons, Churchill Downs argues, it has standing to object to entry of the order for relief.
B. The Relevant Agreements
On March 4, 2007, Churchill Downs, CD Contentco HC, LLC (“CD Contentco”), Magna Entertainment Corp. (“Magna”), and MEC Content Holdco LLC (“MEC Content Holdco”) entered into the operating agreement of TrackNet (the “Operating Agreement”). Ex. 8; Joint Stipulation of Facts ¶ 1, ECF No. 137. CD Content-co, a wholly owned subsidiary of Churchill Downs, held 50% of the membership interest in TrackNet, and MEC Content Hold-co, a wholly owned subsidiary of Magna, held the other 50% membership interest; Churchill Downs and Magna, though parties to the Operating Agreement, were not members of the limited liability company. Ex. 8 at 1, ¶ 1.6[a], Schedule A; Joint Stipulation of Facts ¶¶ 1, 3, ECF No. 137.
The Operating Agreement authorized TrackNet “as the sole and exclusive agent for” Churchill Downs, CD Contentco, Magna, and MEC Content Holdco, and their affiliates, to engage in certain business activities. Ex. 8 ¶ 1.3[b]. “TrackNet served as the exclusive agent for various tracks owned by Churchill [Downs] and Magna in the negotiation and distribution of their respective simulcast signals to racetracks and off-track betting entities like Suffolk OTB.” Joint Stipulation of Facts ¶ 2, ECF No. 137.
TrackNet and Suffolk OTB, along with five other New York State off-track betting corporations, entered into a term sheet dated February 16, 2008 (the “Term Sheet”), Ex. 9, “whereby the [off-track betting corporations, including Suffolk OTB], were granted the right to accept commingled pari-mutuel wagers on, and display signals of, races conducted at racetracks” owned by Churchill Downs and Magna, Joint Stipulation of Facts ¶ 4, ECF No. 137. The Term Sheet expired on December 31, 2009. Ex. 9 at 1; Joint Stipulation of Facts ¶ 4, ECF No. 137.
On December 31, 2009, TrackNet and Suffolk OTB, along with the five other offtrack betting corporations that were parties to the Term Sheet, entered into an Amended Term Sheet, extending the term of the Term Sheet to December 31, 2011 (the “Amended Term Sheet”). Ex. 10; Joint Stipulation of Facts ¶ 5, ECF No. 137. Four of the racetracks subject to the Amended Term Sheet are Churchill Tracks. Joint Stipulation of Facts ¶ 6, ECF No. 137. “Upon receiving simulcast content from, and taking wagers on races taking place at, the Churchill Tracks, pursuant to the Amended Term Sheet,” Suffolk OTB remitted payment to Churchill Downs Simulcast Network, “the product content provider for Churchill [Downs].” Joint Stipulation of Fact ¶ 7, ECF No. 137. Thus, although Churchill Downs was not named as a party to the Amended Term Sheet, Suffolk OTB made its contractually required payments to Churchill Downs’s designee, not to TrackNet.
*405On May 14, 2010, Churchill Downs, CD Contentco, MI Developments Investments Inc. (successor to Magna), and MEC Content Holdco entered into a dissolution agreement for TrackNet (the “Dissolution Agreement”).4 Ex. 12; Joint Stipulations of Facts ¶ 8, ECF No. 137. Thereafter, on September 12, 2011, a Certificate of Cancellation of TrackNet was executed and filed with the Delaware Secretary of State pursuant to Delaware state law. Ex. 15; Joint Stipulation of Facts ¶ 8, ECF No. 137.
After the Dissolution Agreement was executed, the parties continued to perform in accordance with the Amended Term Sheet: Suffolk OTB accepted wagers on races taking place at the Churchill Tracks, received the simulcast signals from the Churchill Tracks, and remitted payment to Churchill Downs Simulcast Network, as it had before TrackNet dissolved. Joint Stipulation of Facts ¶¶ 7, 10, ECF No. 137. The Churchill Tracks performed in accordance with the Amended Term Sheet after TrackNet’s dissolution by providing their simulcast signals to Suffolk OTB. Joint Stipulation of Facts ¶ 10, ECF No. 137.
Suffolk OTB argues that the simulcast signals transmitted pursuant to the Amended Term Sheet for the Churchill Tracks were licensed from Churchill Downs to TrackNet pursuant to the Operating Agreement, and therefore, TrackNet was not acting as Churchill Downs’s agent, but rather as a licensee and sublicensor. This characterization ignores crucial provisions of the Operating Agreement, which both authorized TrackNet to act as its agent, and at the same time, granted TrackNet licenses with respect to certain rights and authorized TrackNet to subli-cense those rights.
For example, section 1.3 of the Operating Agreement, entitled “Purpose and Scope,” TrackNet is authorized, “as the sole and exclusive agent ” for Churchill Downs and Magna, to “sublicense ” Churchill Downs and Magna’s ADW Content Rights, Point to Point Content Rights, and Rebate Content Rights to third parties.5 Ex. 8 ¶ 1.3[b][i]4-6 (emphasis added). At the same time, Schedule B to the Operating Agreement, entitled “Licensed Rights,” provides that, as of the date of the Operating Agreement until the end of the term of the Operating Agreement, Churchill Downs and Magna “shall, for all *406race meets of each of its race tracks ... (i) exclusively license to [TrackNet] under the terms of the [Operating] Agreement such track’s ADW Content Rights, Point to Point Content Rights and Rebate Content Rights, and (ii) grant to [TrackNet] the exclusive right to sublicense such track’s respective ADW Content Rights, Point to Point Content Rights and Rebate Content Rights.... ” Ex. 8, Schedule B ¶ A (emphasis added). Schedule B also states that Churchill Downs and Magna “grant and license to [TrackNet] the right ...., as the sole and exclusive agent for [Churchill Downs] and [Magna],” to “sublicense ” those same rights listed above. Ex. 8, Schedule B ¶ B. 4, 5, 6, 7, 9 (emphasis added).
C. Interpretation of the Operating Agreement
The Operating Agreement provides that Delaware state law governs its interpretation and enforceability, as well as the rights of the parties thereto. Ex. 8 ¶ 10.5. Under Delaware law, “[w]hen interpreting a contract, the role of the Court is to effectuate the parties’ intent.” Lorillard Tobacco Co. v. Am. Legacy Found,., 903 A.2d 728, 739 (Del.2006). The Court must determine “what a reasonable person in the position of the parties would have thought the language of the contract means.” Id. If a contract is clear and unambiguous, the plain meaning of the terms will control. Id. (citing Rhone-Pou-lenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616 A.2d 1192, 1195-1196 (Del.1992)). However, when a contract’s terms are ambiguous, a court may consider extrinsic evidence, including the conduct of the parties, to determine the parties’ intent. Georgetown Crossing LLC v. Ruhl, No. 589-S, 2006 WL 4782273, at *6 (Del. Ch. Dec. 5, 2006). Furthermore, “[a] court must interpret contractual provisions in a way that gives effect to every term of the instrument, and that, if possible, reconciles all of the provisions of the instrument when read as a whole.” Council of Dorset Condo. Apartments v. Gordon, 801 A.2d 1, 7 (Del.2002).
It may appear that the Operating Agreement is internally inconsistent in defining the relationship between TrackNet, on the one hand, and Churchill Downs and Magna, on the other. The Operating Agreement clearly provides that TrackNet is agent for Churchill Downs and Magna: at paragraph 1.3[b], the Operating Agreement provides that TrackNet, “as the sole and exclusive agent” for Churchill Downs, the other parties to the Operating Agreement, and their affiliates, “will, on behalf of’ those parties and their affiliates, “subli-cense” ADW Content Rights, Point-to-Point Content Rights and Rebate Content Rights; and Schedule B (“Licensed Rights”) contains similar language at paragraph B(5), (6), and (7). At the same time, at paragraph A of Schedule B, TrackNet is granted rights as a licensor to sublicense the “ADW Content Rights, Point to Point Content Rights and Rebate Content Rights” for the tracks owned by Churchill Downs and Magna.
However, these provisions of the Operating Agreement can be understood to give effect to each. TrackNet’s authority to act as agent for Churchill Downs and Magna, and its right to act as a licensee and sublicensor with respect to the rights owned by Churchill Downs and Magna, need not be viewed as mutually exclusive. That is, while Churchill Downs, under the Operating Agreement, granted a license to TrackNet, Churchill Downs also authorized TrackNet, as agent, to “sublicense” those rights on its behalf. The Term “sub-license” is used in paragraph 1(b), and in paragraph B of Schedule B, where it appears that “license” is meant; those provi*407sions are obviously intended to grant TrackNet the authority as agent to license the rights in question on Churchill Downs’s behalf. This interpretation is consistent with Churchill Downs’s reservation of rights to “sublicense” directly to third parties. Ex. 8, Schedule B ¶ B, 9. Here, too, the Operating Agreement uses the term “sublicense” where “license” would be appropriate; as owner of the rights in question, Churchill Downs would be acting as licensor, not sublicensor. In any event, whether or not “sublicense” is understood as “license” in the clauses quoted above, it is clear that the parties to the Operating Agreement intended to authorize TrackNet to act as their agent in the distribution of wagering and simulcast rights.
This conclusion is reinforced by paragraph 5.3[i] of the Operating Agreement, which provides as follows:
All simulcast import agreements for ADW Import Content, Point to Point Import Content and Rebate Import Content, and simulcast export agreements for ADW Export Content, Point to Point Export Content and Rebate Export Content entered into pursuant to this [Operating] Agreement shall not be executed by [TrackNet] on its own behalf, but rather shall be executed by [TrackNet] as agent for the applicable [race tracks and off track betting facilities controlled by Churchill Downs and Magna] ... and/or [any advance deposit wagering service controlled by Churchill Downs]. All rights and obligations under the simulcast import agreements and simulcast export agreements entered into pursuant to this [Operating] Agreement shall be rights and obligations of the applicable [race tracks and off track betting facilities controlled by Churchill Downs and Magna] ... and/or [any advance deposit wagering service controlled by Churchill Downs], and shall not be rights or obligations of [TrackNet].
Ex. 8 ¶ 5.3[i]. The Term Sheet and Amended Term Sheet clearly fall within the category of “simulcast export agreements for ADW Export Content, Point to Point Export Content and Rebate Export Content.”6 The Term Sheet and Amended Term Sheet provide for Suffolk OTB and the other regional off-track betting corporations to receive and display simulcast signals of races conducted at the Churchill Tracks, for which Churchill Downs holds the rights. Indeed, this is conceded by Suffolk OTB in the Joint Stipulation of Facts, which states that TrackNet and the regional off-track betting corporations “executed a term sheet whereby the OTBs were granted the right to accept commingled pari-mutuel wagers on, and display the signals of, races conducted at racetracks for which TrackNet served as agent.” Joint Stipulation of Facts ¶4, ECF No. 137. Although the Amended Term Sheet contemplated that the parties would enter into a separate simulcast agreement, this never occurred; accordingly, the simulcast content received by Suffolk OTB is provided pursuant to the Amended Term Sheet. Ex. 10 ¶ 7; Suffolk OTB’s Brief Regarding Churchill Downs Incorporation’s Lack of Standing to Prosecute Its Objection to Debtor’s Petition (“Suffolk OTB Standing Brief’) ¶ 13, ECF No. 126. Therefore, the Amended Term Sheet must be viewed as a “simul*408cast export agreement,”7 which, according to paragraph 5.3[i] of the Operating Agreement, TrackNet was authorized to execute only as agent.
The conclusion that TrackNet was authorized under the Operating Agreement to act as agent for Churchill Downs in licensing wagering and simulcast rights, and to sublicense those rights, is also consistent with the terms of the Dissolution Agreement, which provides for the termination of all agency relationships and licenses created by the Operating Agreement:
Immediately and automatically upon the expiration of the Transition Period, (i) all agency relationships between [the parties to the Dissolution Agreement, including Churchill Downs] and [Track-Net] created in the Operating Agreement shall be terminated and [Track-Net] shall not be authorized to act on behalf of any of the [p]arties and (ii) all licenses granted by the [p]arties to [TrackNet] in the Operating Agreement shall be terminated and shall vest in the [p]arty contributing such licenses....
Ex. 12 ¶ 1.
D. Churchill Downs’s Status as a Party to the Amended Term Sheet
Given the conclusion that the Operating Agreement authorized TrackNet to act as agent for Churchill Downs and as licensee of Churchill Downs’s rights, the capacity in which TrackNet entered into the Amended Term Sheet must be determined. The evidence presented at trial establishes that TrackNet executed the Amended Term Sheet as Churchill Downs’s agent.
Patrick Troutman, a current vice president of Churchill Downs and the former executive vice president of TrackNet, testified that he signed the Term Sheet and the Amended Term Sheet on TrackNet’s behalf solely as agent for the racetracks owned or controlled by Churchill Downs and Magna. Troutman Aff. ¶¶ 2, 6-9, Oct. 20, 2011, ECF No. 136-1; Tr.8 10/25/11 at 90, 92-93, 94-95, ECF No. 148. He further testified that TrackNet did not hold an ownership interest in the simulcast signals owned by Churchill Downs or Magna, and that he was unaware of any licenses granted to TrackNet by Churchill Downs or Magna. Troutman Aff. ¶ 5, ECF No. 136-1; Tr. 10/25/11 at 97, ECF No. 148.
Furthermore, Suffolk OTB stipulated that TrackNet served as agent for Churchill Downs and Magna “in the negotiation and distribution of their respective simulcast signals to racetracks and off-track betting entities,” and that TrackNet entered into the Term Sheet and Amended Term Sheet “as agent” for the racetracks listed in those agreements. Joint Stipulation of Facts ¶¶ 2, 4, 6, ECF No. 137. Additionally, throughout the term of the Amended Term Sheet, Suffolk OTB remitted payments to Churchill Downs Simulcast Network, Churchill Downs’s product content provider, and not to TrackNet. *409Joint Stipulation of Facts ¶¶ 7, 10, EOF No. 137; Tr. 10/25/11 at 113, ECF No. 148.
In light of the conclusion that TrackNet entered into the Amended Term Sheet as the agent of Churchill Downs, it is necessary to determine whether Churchill Downs is a party to the Amended Term Sheet.
Delaware courts apply the Restatement of Agency in analyzing the legal effect of an agency relationship. Dassen v. Boland, C.A. No. S09C-06-042, 2011 WL 1225579, at *5 (Del.Super.Ct. Mar. 23, 2011); Pisano v. Del. Solid Waste Auth., C.A. No. 05C-03-132-FSS, 2006 WL 3457686, at *9 (Del.Super.Ct. Nov. 30, 2006). If Churchill Downs was an undisclosed principal of TrackNet, as Suffolk OTB alleges, § 6.03 of the Restatement (Third) of Agency applies, which provides, in relevant part:
When an agent acting with actual authority makes a contract on behalf of an undisclosed principal,
(1) unless excluded by the contract, the principal is a party to the contract;
(2) the agent and the third party are parties to the contract; and
(3) the principal, if a party to the contract, and the third party have the same rights, liabilities, and defenses against each other as if the principal made the contract personally....
Restatement (Third) of Agency § 6.03. In connection with subdivision (1), “[a]n explicit exclusion limits the third party’s manifestation of assent to be bound. Such an explicit exclusion provides a simple device through which a third party may exclude the interests of persons other than those identified as parties to the contract.” Restatement (Third) of Agency § 6.03 cmt. d. For example:
A enters into a stock-purchase agreement with T Corporation. The agreement contains a representation made by A that A acts solely for A’s account and that no other person will have any interest in the securities that A will acquire from T Corporation. The agreement excludes P, A’s undisclosed principal, from rights or obligations under the agreement.
Id.
The Amended Term Sheet contained no such exclusion of undisclosed principals from the contract, and therefore, Churchill Downs, as the undisclosed principal of TrackNet, is a party to the Amended Term Sheet as a matter of law.9
Suffolk OTB argues that it has no contractual relationship with Churchill Downs, because Churchill Downs was not a member of TrackNet and therefore did not “step into the shoes” of TrackNet, or receive any of its assets, upon TrackNet’s dissolution, and because the Dissolution Agreement did not assign the Amended Term Sheet to Churchill Downs. Suffolk OTB also notes that TrackNet was in good standing with the state of Delaware as of the dates of the bankruptcy filing and Churchill Downs’s objection.
Given that Churchill Downs, as principal, was a party to the Amended Term Sheet from its inception, Suffolk OTB’s arguments concerning the rights acquired, or not acquired, by Churchill Downs upon TrackNet’s dissolution are irrelevant. Churchill Downs is a party to the Amended Term Sheet not as successor to Track-Net, but as a principal. Churchill Downs’s *410status as a party to the Amended Term Sheet with Suffolk OTB is unaffected by the termination of its agency relationship with TrackNet. No assignment of the Amended Term Sheet from TrackNet to Churchill Downs was required because Churchill Downs was already a party to that contract. Even if TrackNet’s rights, as agent, under the Amended Term Sheet devolved to its members upon its dissolution, Churchill Downs, as principal, is still a party to the contract with Suffolk OTB.
Similarly, it is irrelevant that Track-Net’s Certificate of Cancellation was not filed with the Delaware Secretary of State until September 12, 2011. Churchill Downs, a principal, is a party to the Amended Term Sheet, and would be even if TrackNet had not dissolved.
Suffolk OTB, relying on the Restatement (Second) of Contracts § 326, contends that the Dissolution Agreement resulted in Churchill Downs becoming, at best, a partial assignee because it cannot alone perform all of the obligations under the Amended Term Sheet, and therefore would have standing only if all of the parties to the Amended Term Sheet joined in the objection. The Restatement (Second) of Contracts § 326 provides, in pertinent part:
If the obligor has not contracted to perform separately the assigned part of a right, no legal proceeding can be maintained by the assignor or assignee against the obligor over his objection, unless all the persons entitled to the promised performance are joined in the proceeding, or unless joinder is not feasible and it is equitable to proceed without joinder.
Restatement (Second) of Contracts § 326(2).
Suffolk OTB’s reliance on the Restatement (Second) of Contracts is misplaced, and its argument that Churchill Downs is a partial assignee, lacking standing to enforce the Amended Term Sheet absent joinder of all the other parties, must be rejected. Churchill Downs was not partially assigned rights under the Amended Term Sheet upon TrackNet’s dissolution; rather, it was a party to the Amended Term Sheet from its inception.
Suffolk OTB also argues that, even if TrackNet executed the Amended Term Sheet as an agent for Churchill Downs and other principals, Churchill Downs would not have standing to enforce the contract unless all of the principals joined in the action. In support of this position, Suffolk OTB cites Restatement (Second) of Agency § 305 and Brunswick Leasing Corp. v. Wis. Cent., Ltd., 136 F.3d 521 (7th Cir. 1998), for the proposition that no single principal may sue under the contract that was entered into by an agent on behalf of multiple principals. Restatement (Second) of Agency § 305 provides: “Unless otherwise agreed between the principal and the agent, the other party to a contract made by an agent for several undisclosed principals who have not jointly authorized him is not liable in an action at law upon the contract brought by one of them alone.” Restatement (Second) of Agency § 305. Brunswick Leasing, relying on this section, held that the plaintiff in that case, “one of multiple undisclosed principals” to a contract, “may not sue to enforce a part of a contract entered into by its agent.” Brunswick Leasing, 136 F.3d at 531.
This argument reflects a misunderstanding of applicable agency law. An agent may enter into a single contract on behalf of multiple principals, and each of those principals is a party to the contract with standing to enforce its rights thereunder. Restatement (Third) of Agency §§ 3.16 (“Two or more persons may as coprincipals appoint an agent to act for *411them in the same transaction or matter”), 6.03 (“unless excluded by the contracts, the [undisclosed] principal is a party to the contract”), 6.05 cmt. a (“Multiple principals who appoint the same agent to act for them in the same matter or transaction are covered by § 3.16.”).
The provision of the Restatement (Second) of Agency on which Suffolk OTB relies in support of this argument has no application in this case. The Restatement (Second) of Agency was superseded by the Restatement (Third) of Agency, which was adopted in 2005 and published in 2006. The Restatement (Third) of Agency did not adopt § 305 as it existed under the Restatement (Second) of Agency, rather, it incorporated that provision, along with §§ 148, 187, and 294, into new § 6.05(2), which provides, in pertinent part:
Two or more principals may authorize the same agent to make separate contracts for them. If the agent makes a single contract with a third party on the principals’ behalves that combines the principals’ separate orders or interests and calls for a single performance by the third party,
(a) if the agent purports to make the combined contract on behalf of disclosed principals, the agent is subject to liability to the third party for breach of the agent’s warranty of authority as stated in § 6.10, unless the separate principals are bound by the combined contract;
(b) if the principals are unidentified or undisclosed, the third party and the agent are the only parties to the combined contract; and
(c)unless the agent acted with actual or apparent authority to bind each of the principals to the combined contract, (i) subject to (1), none of the separate principals is subject to liability on the combined contract; and (ii) the third party is not subject to liability on the combined contract to any of the separate principals.
Restatement (Third) of Agency § 6.05(2). This section applies only when “[t]wo or more principals ... authorize the same agent to make separate contracts for them,” and the agent nevertheless “makes a single contract ... on the principals’ behalves.” Id. (emphasis added).10 “Multiple principals who appoint the same agent to act for them in the same matter or transaction are covered by § 3.16,” Restatement (Third) of Agency § 6.05 cmt. a, which permits an agent to enter into a single contract on behalf of multiple principals, Restatement (Third) of Agency § 3.16. Nothing in the record indicates that TrackNet was directed to enter into separate contracts for Churchill Downs and Magna. To the contrary, the fact that Churchill Downs and Magna designated TrackNet as their mutual agent in a single contract, the Operating Agreement, supports the conclusion that TrackNet was authorized to enter into a single contract on their behalf. Therefore, in the absence of evidence to establish that TrackNet was not authorized to enter into a single contract on behalf of Churchill Downs and Magna, Restatement (Third) of Agency § 6.05(2) is inapplicable, and §§ 3.16 and 6.03 apply, which provide that an agent may enter into a contract on behalf of multiple principals, and undisclosed princi*412pals are parties to a contract unless the contract specifically excludes them.
E. Suffolk OTB’s Other Arguments
In a further effort to deny Churchill Downs standing to be heard on its objection to this chapter 9 case, Suffolk OTB questions the validity and enforceability of the Amended Term Sheet. Suffolk OTB argues that, according to the Dissolution Agreement, the agency relationship between Churchill Downs and TraekNet terminated on June 14, 2010, and that the Amended Term Sheet did not become effective until it was approved by the Racing and Wagering Board on June 18, 2010. Therefore, Suffolk OTB argues that TraekNet was not authorized to act as Churchill Downs’s agent at the time the Amended Term Sheet became an effective contract.
Assuming, without concluding, that Suffolk OTB has standing to challenge the enforceability of the Amended Term Sheet on this basis, this argument must be rejected. The Dissolution Agreement provides that the agency relationship with TraekNet will terminate “immediately and automatically upon the expiration of the Transition Period,” which is “thirty (30) calendar days (or such shorter or longer period as the Parties may agree in writing) commencing upon the execution of [the] Dissolution Agreement.” Ex. 12 ¶ 1. It is unclear whether the Transition Period was extended; however, even if the agency relationship terminated prior to the effective date of the Amended Term Sheet, Churchill Downs ratified TrackNet’s execution of the contract on its behalf.
Restatement (Third) of Agency § 4.01 provides, in pertinent part:
(1) Ratification is the affirmance of a prior act done by another, whereby the act is given effect as if done by an agent acting with actual authority.
(2) A person ratifies an act by
(a) manifesting assent that the act shall affect the person’s legal relations, or
(b) conduct that justifies a reasonable assumption that the person so consents.
Restatement (Third) of Agency § 4.01(1), (2).
Churchill Downs ratified TrackNet’s execution of the Amended Term Sheet by performing under the contract and providing the simulcast signals for its tracks. Churchill Downs’s ratification “retroactively creates the effects of actual authority,” Restatement (Third) of Agency § 4.02(1), and as such, Churchill Downs is a party to the Amended Term Sheet.
Suffolk OTB also argues that the failure to disclose that TraekNet dissolved “violated the general contractual obligation to deal in good faith and may constitute fraud in the inducement,” rendering the Amended Term Sheet void or voidable. Suffolk OTB’s Standing Brief ¶ 17, ECF No. 126.
Under Delaware law, a party alleging breach of the obligation to deal in good faith must “allege a specific implied contractual obligation and allege how the violation of that obligation denied the [party] the fruits of the contract.” Kuroda v. SPJS Holdings, L.L.C., 971 A.2d 872, 888 (Del.Ch.2009). A party alleging fraud in the inducement must allege with particularity “(1) a false representation of material fact; (2) the defendant’s knowledge of or belief as to the falsity of the representation or the defendant’s reckless indifference to the truth of the representation; (3) the defendant’s intent to induce the plaintiff to act or refrain from acting; (4) the plaintiffs action or inaction taken in justifiable reliance upon the representation; and (5) damage to the plaintiff as a result of *413such reliance.” Kuhn Constr. Co. v. Diamond State Port Corp., Civ. No. 10-637-SLR, 2011 WL 1576691, at *9 (D.Del. Apr. 26, 2011); Duffield Assocs., Inc. v. Meridian Architects & Eng’rs, LLC, C.A. No. S10C-03-004 FRS, 2010 WL 2802409, at *4 (Del.Super.Ct. July 12, 2010). Suffolk OTB received the simulcast signals and the other benefits to which it was entitled under the Amended Term Sheet; accordingly, there is no basis to conclude that Suffolk OTB did not receive the fruits of the contract or that it incurred damages as a result of the failure to disclose Track-Net’s dissolution. As such, these arguments must be rejected.
For these reasons, Churchill Downs is a party to the Amended Term Sheet. Suffolk OTB concedes that the Amended Term Sheet is an executory contract, notwithstanding the payment of $100,000 “as an advance against any amounts that might be payable to Churchill [Downs] for future simulcast content and related wagering activity.” Gazes Decl. ¶ 9, ECF No. 141. The Amended Term Sheet does not simply provide for payment of a sum certain each month. Payments required to be made depend on wagers placed and on the amount of winning bets; therefore, even if, as Suffolk OTB asserts, the advance is twice the amount which has historically been required to be paid for the period, it is not possible to conclude that no additional amounts may be owned to Churchill Downs under the Amended Term Sheet. Additionally, as Churchill Downs notes, the Amended Term Sheet, which incorporates, modifies, and extends the Term Sheet, imposes ongoing non-monetary obligations on Suffolk OTB, and the failure to perform those obligations could give rise to a claim for breach of contract, e.g., Ex. 9 at 1 (“[The New York State regional off-track betting corporations] commit[] to display and accept wagers on. each TrackNet simulcast signal covered by this Agreement, and in doing so to make good faith efforts to market such simulcast content to an extent no less favorable than any non-TrackNet track of comparable quality.”). See Vern Countryman, Executory Contracts in Bankruptcy: Part I, 57 Minn. L.Rev. 439, 460 (1973) (An executory contract is “a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that the failure of either to complete performance would constitute a material breach excusing the performance of the other.”). See also ReGen Capital I, Inc. v. Halperin (In re U.S. Wireless Data, Inc.), 547 F.3d 484, 488 n. 1 (2d Cir.2008) (“Although § 365 does not define the term ‘executory contracts,’ courts have long employed the definition articulated by Professor Countryman.... ”).
If an order for relief is entered, the Amended Term Sheet, as an executory contract, is subject to Suffolk OTB’s assumption or rejection pursuant to §§ 365 and 901, and Churchill Downs, as a party to the Amended Term Sheet, would have standing to be heard in connection with any motion to assume or reject that contract. If Churchill Downs has standing to be heard on the issue of assumption or rejection of the Amended Term Sheet in this bankruptcy case, it has standing to be heard on the threshold issue of Suffolk OTB’s entitlement to commence this bankruptcy case.
The fact that the Amended Term Sheet will expire on December 31, 2011 has no effect on Churchill Downs’s standing to object to the petition. As of the date of filing, and as of the date of this decision, Churchill Downs is a party to an executory contract with the Debtor, and has standing to object to and the entry of an order for relief. Moreover, Suffolk *414OTB clearly contemplates an ongoing contractual relationship with Churchill Downs throughout the duration of this case. Tr. 6/15/11 at 9, ECF No. 98.11
II. Suffolk OTB is not eligible for chapter 9 relief.
Section 109(c) governs eligibility under chapter 9, and provides:
An entity may be a debtor under chapter 9 of this title if and only if such entity—
(1) is a municipality;
(2) is specifically authorized, in its capacity as a municipality or by name, to be a debtor under such chapter by State law, or by a governmental officer or organization empowered by State law to authorize such entity to be a debtor under such chapter;
(3) is insolvent;
(4) desires to effect a plan to adjust such debts; and
(5)(A) has obtained the agreement of creditors holding at least a majority in amount of the claims of each class that such entity intends to impair under a plan in a case under such chapter;
(B) has negotiated in good faith with creditors and has failed to obtain the agreement of creditors holding at least a majority in amount of the claims of each class that such entity intends to impair under a plan in a case under such chapter;
(C) is unable to negotiate with creditors because such negotiation is impracticable; or
(D) reasonably believes that a creditor may attempt to obtain a transfer that is avoidable under section 547 of this title.
11 U.S.C. § 109(c).
The debtor bears the burden to establish that the requirements of § 109(c) are satisfied. Int’l Ass’n of Firefighters, Local 1186 v. City of Vallejo (In re City of Vallejo), 408 B.R. 280, 289 (9th Cir. BAP 2009); In re Boise County, No. 11-00481-TLM, 2011 WL 3875639, at *6 (Bankr.D.Idaho Sept. 2, 2011); In re N.Y.C. Off-Track Betting Corp., 427 B.R. 256, 264 (Bankr.S.D.N.Y.2010); In re Valley Health Sys., 383 B.R. 156, 161 (Bankr. C.D.Cal.2008); In re Slocum Lake Drainage Dist. of Lake County, 336 B.R. 387, 390 (Bankr.N.D.Ill.2006); SunTrust Bank v. Alleghany-Highlands Econ. Dev. Auth. (In re Alleghany-Highlands Econ. Dev. Auth.), 270 B.R. 647, 649 (Bankr.W.D.Va. 2001); In re County of Orange, 183 B.R. 594, 599 (Bankr.C.D.Cal.1995). A court should “construe broadly § 109(c)’s eligibility requirements ‘to provide access to relief in furtherance of the [Bankruptcy] Code’s underlying policies.’ ” Vallejo, 408 B.R. at 289 (quoting Valley Health Sys., 383 B.R. at 163). At the same time, however, chapter 9 petitions should be viewed “with a jaded eye.” N.Y.C. Off-Track Betting, 427 B.R. at 264. “Principles of dual sovereignty, deeply embedded in the fabric of this nation and commemorated in the Tenth Amendment of the United States Constitution, severely curtail the power of bankruptcy courts to compel municipalities to act once a petition is approved.” Id.
By the same token, “[t]he bankruptcy court’s jurisdiction should not be exercised lightly in Chapter 9 cases, in light of the interplay between Congress’ [s] bankruptcy power and the limitations on federal power under the Tenth Amend*415ment.” In re Sullivan County Reg’l Refuse Disposal Dist., 165 B.R. 60, 82 (Bankr.D.N.H.1994). Courts evaluating chapter 9 filings must balance these constitutional concerns with congressional intent to provide access to chapter 9 relief in accordance with the Bankruptcy Code’s policies. N.Y.C. Off-Track Betting, 427 B.R. at 265 (citing cases).
Suffolk OTB’s compliance with § 109(c)(1), (3), (4), and (5) is not challenged. With respect to § 109(c)(2), Suffolk OTB concedes that it was not specifically authorized by state law to file its bankruptcy petition. Rather, Suffolk OTB argues that the requirement of § 109(c)(2) was satisfied by compliance with the second clause of that provision, because the instant bankruptcy filing was specifically authorized by the Suffolk County Legislature, which, according to Suffolk OTB, is “a governmental officer or organization empowered by State law to authorize [Suffolk OTB] to be a debtor under [chapter 9].” See 11 U.S.C. § 109(c)(2).
Churchill Downs argues that the County Resolution exceeds the scope of the Suffolk County Legislature’s authority, and therefore, Suffolk OTB’s bankruptcy filing has not been authorized as required by § 109(c)(2). Resolution of this issue hinges upon whether New York State law empowers the Suffolk County Legislature to authorize Suffolk OTB’s bankruptcy filing.
A. Local Finance Law § 85.80
Suffolk OTB argues that New York’s Local Finance Law § 85.80 grants Suffolk County Legislature the power to authorize Suffolk OTB’s bankruptcy filing. That statute provides:
A municipality or its emergency financial control board in addition to, or in lieu of, filing a petition under this title, or the city of New York or the New York state financial control board, may file any petition with any United States district court or court of bankruptcy under any provision of the laws of the United States, now or hereafter in effect, for the composition or adjustment of municipal indebtedness.
N.Y. Local Fin. Law § 85.80.
The Local Finance Law defines “municipality” as “a county, city, town or village.” N.Y. Local Fin. Law § 2.00(1). Because Suffolk County is a municipality under the Local Finance Law and is authorized to file a petition on its own behalf, Suffolk OTB argues that Suffolk County is also empowered to authorize Suffolk OTB’s bankruptcy petition. Suffolk OTB also argues that the legislature intended Local Finance Law § 85.80 to apply to public benefit corporations, and that “municipality” as used in Local Finance Law § 2.00(1) should be understood to include a public benefit corporation. Tr. 6/15/11 at 30, ECF No. 98.
Suffolk OTB has provided no authority to support its expansive reading of Local Finance Law § 85.80. The New York Court of Appeals recently explained:
“As the clearest indicator of legislative intent is the statutory text, the starting point in any case of interpretation must always be the language itself, giving effect to the plain meaning thereof.” Additionally, “[w]here a statute describes the particular situations in which it is to apply and no qualifying exception is added, an irrefutable inference must be drawn that what is omitted or not included was intended to be omitted or excluded.”
Raynor v. Landmark Chrysler, 18 N.Y.3d 48, 936 N.Y.S.2d 63, 959 N.E.2d 1011 (N.Y. 2011) (alteration in original) (citations omitted).
*416Local Finance Law § 85.80 is clear that Suffolk County is authorized to file a chapter 9 petition on its own behalf, but nothing in the language of that statute permits Suffolk County to authorize the bankruptcy filing of a separate entity, such Suffolk OTB. See Lemma v. Off Track Betting Corp., 272 A.D.2d 669, 707 N.Y.S.2d 276, 278 (N.Y.App.Div.2000) (A regional offtrack betting corporation “is a separate and distinct legal entity created pursuant to the Racing, Pari-Mutual Wagering and Breeding Law.”). See also N.Y. Rac. Pari-Mut. Wag. & Breed. Law § 503 (listing powers of the off-track betting corporations, including the power to sue and be sued, to own property, and to enter into contracts). Furthermore, while Suffolk OTB may be a municipality as defined by the Bankruptcy Code, see N.Y.C. OffTrack Betting, 427 B.R. at 265-266, it is not a municipality under the Local Finance Law. Local Finance Law § 2.00(1) defines “municipality,” for the purposes of that statute, as “a county, city, town or village.” N.Y. Local Fin. Law § 2.00(1). Had the State Legislature intended the Local Finance Law to permit a municipality, as defined thereunder, to authorize a bankruptcy petition for a separate legal entity, it would have drafted the statute accordingly. By the same token, had the State Legislature intended Local Finance Law § 85.80 to extend to public benefit corporations, the definition of “municipality” would have included them. In sum, Local Finance Law § 85.80 provides no basis upon which to conclude that Suffolk OTB’s bankruptcy filing was authorized under § 109(c)(2).
B. Racing and Wagering Law, Municipal Home Rule Law and Suffolk County Charter
Suffolk OTB argues that Article V of the Racing and Wagering Law grants control of Suffolk OTB to Suffolk County, and that therefore the Suffolk County Legislature was empowered to authorize Suffolk OTB to file a petition under chapter 9 of the Bankruptcy Code.
Suffolk OTB is a public benefit corporation created by Racing and Wagering Law § 502. N.Y. Rac. Pari-Mut. Wag. & Breed. Law § 502(1). “A ‘public benefit corporation’ is a corporation organized to construct or operate a public improvement wholly or partly within the state, the profits from which inure to the benefit of this or other states, or to the people thereof.” N.Y. Gen. Constr. Law § 66(4). The New York regional off-track betting corporations created by the Racing and Wagering Law operate pari-mutuel betting systems, which are gambling systems “in which bets placed on a race are pooled and then paid (less a management fee and taxes) to those holding winning tickets.” N.Y.C. OffTrack Betting, 427 B.R. at 261 (quoting Black’s Law Dictionary (8th ed. 2004)).
Counties are required to pass enabling legislation in order to participate in the off-track betting system. N.Y. Rac. Pari-Mut. Wag. & Breed. Law § 502(3). Upon passing enabling legislation and filing a certificate with the Secretary of State and with the State Racing and Wagering Board, participating counties are empowered to appoint the board of directors for their respective off-track betting corporations. N.Y. Rac. Pari-Mut. Wag. & Breed. Law § 502(1), (3). “The powers of the corporation [are] vested in and exercised by the board of directors.... ” N.Y. Rac. Pari-Mut. Wag. & Breed. Law § 502(8). Upon termination of an off-track betting corporation, “all of its rights, property, assets, and funds shall ... vest in and be possessed by the participating counties.” N.Y. Rac. Pari-Mut. Wag. & Breed. Law § 502(5)(a).
*417Suffolk County enacted enabling legislation to participate in the regional off-track betting system. Suffolk County Code §§ 123-1, 123-2. Pursuant to Racing and Wagering Law § 502(1), the Suffolk County Legislature appointed the three members of Suffolk OTB’s board of directors. N.Y. Rac. Pari-Mut. Wag. & Breed. Law § 502(1). However, Suffolk County does not maintain unfettered control over Suffolk OTB. Rather, the New York State Racing and Wagering Board (the “Racing and Wagering Board”) has “general jurisdiction over all horse racing activities and all pari-mutuel betting activities, both on-track and off-track, in the state and over the corporations, associations, and persons engaged therein.” N.Y. Rac. Pari-Mut. Wag. & Breed. Law § 101. As such, the Racing and Wagering Board must approve each corporation’s plan of operation (including contracts for audio-visual broadcasts of races) and betting programs, among other things. N.Y. Rac. Pari-Mut. Wag. & Breed. Law § 521; N.Y. Comp. Codes R. & Regs. tit. 9, §§ 5203.2-5203.14.
Suffolk OTB concedes that the Racing and Wagering Law does not contain a provision empowering Suffolk County to authorize Suffolk OTB’s chapter 9 filing. This omission, in the context of the comprehensive regulatory scheme created by the Racing and Wagering Law, cannot be viewed as an oversight. As explained by the New York Court of Appeals, when interpreting a statute, it must be recognized that “what is omitted ... was intended to be omitted.” Raynor, 18 N.Y.3d 48, 936 N.Y.S.2d 63, 959 N.E.2d 1011 (quoting Alonzo M. v. N.Y.C. Dep’t of Prob., 72 N.Y.2d 662, 665, 536 N.Y.S.2d 26, 532 N.E.2d 1254 (1988)) For these reasons, it is improper to read into the statute a grant of authority to the Suffolk County Legislature to authorize Suffolk OTB’s bankruptcy filing. See Town of Hoosick v. E. Rensselaer County Solid Waste Mgmt. Auth., 182 A.D.2d 37, 39-40, 592 N.Y.S.2d 472 (N.Y.App.Div.1992) (the absence of withdrawal language from a statute governing a public benefit corporation dealing with solid waste management was an intentional omission by the State Legislature, and therefore, town was not permitted to enact legislation revoking enabling legislation).
Notwithstanding the lack of express statutory authorization, Suffolk OTB argues that the Suffolk County Legislature’s power to authorize Suffolk OTB’s bankruptcy filing is implied from the provisions of the New York State Constitution, Municipal Home Rule Law, Local Finance Law, and the Racing and Wagering Law. Suffolk OTB points out that the Racing and Wagering Law vests control of Suffolk OTB with Suffolk County insofar as (1) the Suffolk County Legislature was required to enact enabling legislation in order for Suffolk OTB to exist; (2) the Suffolk County Legislature appoints the members of Suffolk OTB’s board of directors; (3) Suffolk OTB’s net profits are remitted to Suffolk County; and (4) upon Suffolk OTB’s termination, all of its assets vest with Suffolk County. N.Y. Rac. Pari-Mut. Wag. & Breed. Law § 502(1), (3), (5)(a), (8). Suffolk OTB contends that, in essence, it is a “creature of Suffolk County,” Suffolk OTB’s Post-Hearing Reply Brief ¶ 2, ECF No. 113, and that, because Suffolk County created Suffolk OTB, it can also dissolve it or put it in bankruptcy, Tr. 6/15/11 at 14, ECF No. 98. Additionally, Suffolk OTB also argues that county legislatures may legislate regarding matters of local concern, and that Suffolk OTB’s existence, operation and bankruptcy filing is a matter of local concern to Suffolk County.
It is well settled that local governments “have only the lawmaking powers the Legislature confers on them,” DJL *418Rest. Corp. v. City of N.Y., 96 N.Y.2d 91, 725 N.Y.S.2d 622, 749 N.E.2d 186, 189 (2001) (citing Kamhi v. Town of Yorktown, 74 N.Y.2d 428, 548 N.Y.S.2d 144, 547 N.E.2d 346, 347 (1989)), or “expressly granted to them by the State Constitution,” Coconato v. Town of Esopus, 152 A.D.2d 39, 547 N.Y.S.2d 953, 955 (N.Y.App.Div.1989). Pursuant to the New York State Constitution and state laws, “[l]ocal governments have been delegated broad powers to enact local legislation consistent with state laws.” Willow Woods Manufactured Homeowner’s Assn., Inc. v. R & R Mobile Home Park, Inc., 81 A.D.3d 930, 917 N.Y.S.2d 656, 659 (N.Y.App.Div. 2011) (citing N.Y. Const. art. IX, § 2; N.Y. Mun. Home Rule Law § 10).
Article IX § 2 of the New York State Constitution provides, in pertinent part:
In addition to powers granted in the statute of local governments or any other law, (i) every local government shall have power to adopt and amend local laws not inconsistent with the provisions of this constitution or any general law relating to its property, affairs or government. ...
N.Y. Const. art. IX, § 2(c).
Municipal Home Rule Law § 10 provides, in pertinent part:
In addition to powers granted in the constitution, the statute of local governments or in any other law, (i) every local government shall have power to adopt and amend local laws not inconsistent with the provisions of the constitution or not inconsistent with any general law relating to its property, affairs or government. ...
N.Y. Mun. Home Rule Law § 10(1)(i).12
These sections prohibit local governments from enacting laws that are preempted by state laws. As explained by the New York Court of Appeals,
Broadly speaking, State preemption occurs in one of two ways — first, when a local government adopts a law that directly conflicts with a State statute and second, when a local government legislates in a field for which the State Legislature has assumed full regulatory responsibility. The State Legislature may expressly articulate its intent to occupy a field, but it need not. It may also do so by implication.
An implied intent to preempt may be found in a “declaration of State policy by the State Legislature ... or from the fact that the Legislature has enacted a comprehensive and detailed regulatory scheme in a particular area.” In that event, a local government is “precluded from legislating on the same subject matter unless it has received ‘clear and explicit’ authority to the contrary.”
DJL Rest., 725 N.Y.S.2d 622, 749 N.E.2d at 190 (omission in original) (citations and footnote omitted). See also Nassau County Town of N. Hempstead v. County of Nassau, 32 Misc.3d 809, 929 N.Y.S.2d 833, 837-838 (N.Y.Sup.Ct.2011).
The State Legislature enacted the Racing and Wagering Law and Title 9, Subtitle T of the Official Compilation of Codes, Rules & Regulations for the State of New York, which constitute a “comprehensive and detailed regulatory scheme” in the area of off-track betting, and as such, any local law on that subject is preempted. See DJL Rest., 12b N.Y.S.2d 622, 749 N.E.2d at 190. Accordingly, the Suffolk County Legislature exceeded its authority *419by adopting the County Resolution authorizing Suffolk OTB’s bankruptcy filing.13 This conclusion is not affected by the fact that Suffolk County enacted the enabling legislation that constituted its election to participate in the off-track betting system, appoints Suffolk OTB’s board of directors, receives Suffolk OTB’s net profits, and would receive Suffolk OTB’s assets upon termination. As conceded by Suffolk OTB, the Racing and Wagering board is the governing “regulatory body” for all regional off-track betting corporations, including Suffolk OTB. Tr. 6/15/11 at 14, ECF No. 98. Suffolk County’s authority to control Suffolk OTB is ultimately subject to the Racing and Wagering Board, which has “general jurisdiction over all horse racing activities and all pari-mutuel betting activities, both on-track and offtrack, in the state and over the corporations, associations, and persons engaged therein.” N.Y. Rac. Pari-Mut. Wag. & Breed. Law § 101. See Capital Dist. Reg’l Off-Track Betting Corp. v. N.Y. State Racing and Wagering Bd., 54 N.Y.2d 154, 445 N.Y.S.2d 55, 429 N.E.2d 733, 734 (1981) (“The legislative scheme demonstrates an intent to place ultimate supervisory and regulatory power in the [Racing and Wagering Board].”).
Moreover, although Suffolk OTB asserts that “the nature of gambling ... is a very, very local concern,” it also conceded that the horse racing industry is “an important industry to New York State,” and is “an important state concern.” Tr. 6/15/11 at 13, 20, ECF No. 98. Indeed, Racing and Wagering Law § 518 specifically states that an objective of that statute is “to derive from such betting, as authorized by [that] article, a reasonable revenue for the support of government, and to prevent and curb unlawful bookmaking and illegal wagering on horse races.” N.Y. Rae. Pari-Mut. Wag. & Breed. Law § 518. That section further explains:
It is also the intention of [Article V-a] to ensure that off-track betting is conducted in a manner compatible with the well-being of the horse racing and breeding industries in this state, which industries are and should continue to be major sources of revenue to state and local government and sources of employment for thousands of state residents.
Id. In light of those objectives, Racing and Wagering Law § 518 also specifically provides “that off-track pari-mutuel betting on horse races, conducted under the administration of the state racing and wagering board in the manner and subject to the conditions provided for in this article, shall be lawful, notwithstanding the provisions of any law, general, special or local.” Id. (emphasis added).
This section, together with the comprehensive regulatory scheme enacted by the State Legislature, expresses the legislature’s intent to assume full regulatory responsibility for the off-track betting system. To conclude otherwise would ignore the unambiguous provisions of Racing and Wagering Law § 518. Accordingly, the County Resolution constitutes an imper*420missible attempt to legislate in an area preempted by State law.
Consistent with the conclusion that the operations of regional off-track betting corporations are not purely local in nature, but implicate state concerns, is the fact that the Racing and Wagering Law prescribes distributions that must be made to state and local government, and to New York breeders and racetracks. These mandatory payments must be made before any operating expenses are paid by Suffolk OTB. Casale Decl. ¶¶ 11-12, ECF No. 19. Although Suffolk OTB cites these obligations as a factor contributing to its financial difficulties, these statutory payment requirements make it clear that the State has a direct financial interest in Suffolk OTB’s operations.
Additionally, and perhaps most importantly, the County Resolution subjects a public benefit corporation created by the State to the provisions of title 11, U.S.C., thereby usurping the State’s power in this regard, which is clearly beyond the scope of the Suffolk County Legislature’s authority. “The bankruptcy court’s jurisdiction should not be exercised lightly in Chapter 9 cases, in light of the interplay between Congress’ [s] bankruptcy power and the limitations on federal power under the Tenth Amendment.” Sullivan County Reg’l Refuse Disposal Dist., 165 B.R. at 82. Although § 109(c) should be construed broadly to give effect to Congress’s intent “to expand ‘the applicability of chapter IX as much as possible,’” N.Y.C. Off Track Betting, 427 B.R. at 265 (quoting H.R.Rep. No. 94-686, at 18 (1975), reprinted in 1976 U.S.C.C.A.N. 539, 557), the Court may not accomplish this by turning a blind eye to New York law governing the scope of a county’s authority.
This case is distinguishable from N.Y.C. Off-Track Betting, in which an off-track betting corporation’s authority to seek chapter 9 relief was unsuccessfully challenged. In that case, prior to the bankruptcy filing, the State legislature enacted legislation transferring control of the debt- or from New York City to the state, and the governor issued an executive order authorizing the debtor to file a chapter 9 petition. Id. at 263, 267. After analyzing New York law, the court held that the executive order satisfied § 109(c)(2) because “[t]he Governor’s executive power is broad ... [and] enables [him] to act in certain circumstances, without a ‘specific and detailed legislative expression authorizing a particular executive act.’ ” Id. at 269 (quoting Bourquin v. Cuomo, 85 N.Y.2d 781, 628 N.Y.S.2d 618, 652 N.E.2d 171, 173 (1995)). The court noted that “the Governor only lacks the power to act when he oversteps his constitutional role.” Id.
The Suffolk County Legislature does not possess the same broad scope of authority as the governor. To the contrary, a county’s powers are limited to those expressly granted to it by the State Constitution or the State Legislature. DJL Rest., 725 N.Y.S.2d 622, 749 N.E.2d at 189; Coconato, 547 N.Y.S.2d at 955. The County Resolution exceeded Suffolk County’s authority and is therefore unconstitutional and void.14 See Kamhi, 548 N.Y.S.2d 144, 547 N.E.2d at 347 (“Without legislative grant, *421an attempt to exercise such authority is ultra vires and void.”); Coconato, 547 N.Y.S.2d at 955 (“If a local government acts beyond the scope of authority granted to it, its act will be considered unconstitutional.”). Accordingly, Suffolk OTB has not complied with § 109(c)(2), and is therefore ineligible to be a debtor under chapter 9.
III. Equity.
Suffolk OTB argues that, even if it the requirements of § 109(c)(2) were not met, it is within the Court’s discretion to nonetheless enter the order for relief. Suffolk OTB points to the language of § 921(c), which states that “[ajfter any objection to the petition, the court, after notice and a hearing, may dismiss the petition if the ... petition does not meet the requirements of this title.” 11 U.S.C. § 921(c) (emphasis added). Suffolk OTB urges that equity weighs against dismissing this case, because it has proposed a chapter 9 plan pursuant to which all creditors will be paid in full, and because, if the case is dismissed, Suffolk OTB may be required to cease operations. Tr. 6/15/11 at 11, ECF No. 98.
“Despite the permissive statutory language, courts have construed § 921(c) to require the mandatory dismissal of a petition filed by a debtor who fails to meet the eligibility requirements under § 109(c).” Vallejo, 408 B.R. at 289. See also Boise County, 2011 WL 3875639, at *6; N.Y.C. Off-Track, Betting, 427 B.R. at 264; Valley Health Sys., 383 B.R. at 160; County of Orange, 183 B.R. at 599.
Whether or not, under some circumstances, a court may have discretion to enter an order for relief in a chapter 9 case notwithstanding failure to meet all of the requirements of § 109(c), it would be inappropriate to do so in this case. The fundamental importance, in our federal system, of proper deference to state sovereignty, outweighs Suffolk OTB’s arguments concerning the benefits which may flow to creditors and others, from this chapter 9 case. The dismissal of this case does not preclude Suffolk OTB from addressing its problems in other ways, either by restructuring its debt outside chapter 9 or by filing another chapter 9 bankruptcy petition after receiving proper authorization.
Conclusion
For the foregoing reasons, Suffolk OTB’s petition is dismissed pursuant to § 921(c). A separate order will issue.
. Unless otherwise indicated, all statutory references are to the Bankruptcy Code, Title 11, U.S.C.
. On May 17, 2011, Suffolk OTB filed an amended Creditor List, listing debts owed to "Churchill Downs Inc./Churchill Downs Simulcast Network” in the amounts of "39,961.20 (Multiple Tracks) $2,129.70 (Hoosier).” Amended Creditor List, ECF No. 76.
. Chapter 9 does not prohibit a debtor from paying a pre-petition debt post-petition. 11 U.S.C. §§ 901, 904.
. In connection with Magna’s chapter 11 bankruptcy case in Delaware, Magna "transferred its ownership interests in the assets of certain licensed horse racing and pari-mutuel wagering facilities" to MI Developments Investments Inc. Ex. 12 at 1. See also Joint Stipulation of Facts ¶ 8, ECF No. 137.
. The Operating Agreement provides that “ADW Content Rights shall mean solely for purposes of [advance deposit wagering] all wagering, audio, video, date and replay rights related to horse racing or dog racing whether distributed through internet, wireless, telephone, satellite, television, broadband, mobile or video streaming.” Ex. 8 at 30. The Operating Agreement defines "Point to Point Content Rights" as "all wagering, audio, video, data and replay rights related to horse racing or dog racing for purposes of pari-mutuel wagering at a race track or other location which constitutes a simulcasting facility (i.e., a race track, off track betting facility or other fixed ‘brick and mortar' facility open to the general public) for use at such receiving location.” Ex. 8 at 36. The Operating Agreement defines “Rebate Content Rights” as "all wagering, audio, video, data, and replay rights related to horse racing or dog racing for purposes of Rebating.” Ex. 8 at 37. "Rebating” is defined in the Operating Agreement as “the practice by an entity that conducts [advance deposit wagering] of providing volume based incentives (i) exceeding two percent (2%) of the total handle wagered through such entity, or (ii) to any [advance deposit wagering] customer in excess of four percent (4%) of the total handle wagered by such [advance deposit wagering] customer.” Id.
. ADW Export Content, Point to Point Export Content and Rebate Export Content are defined in the Operating Agreement as Churchill Downs, Magna, and their affiliates' ADW Content Rights, Point to Point Content Rights, and Rebate Content Rights "sold or distributed or sublicensed to” third parties. Ex. 8 at 30, 36, 37.
. Suffolk OTB asserts (in connection with an argument concerning the effect of the Dissolution Agreement) that the Amended Term Sheet "is not simply a simulcast import or export agreement” because it "sets forth the terms and conditions upon which [the New York State regional off-track betting corporations] may accept commingled pari-mutuel wagers on, and display the audio-visual signals of, races conducted at the TrackNet-affili-ated racetracks.” Suffolk OTB Standing Brief ¶ 13, ECF No. 126. Even if this is correct, the Amended Term Sheet still constitutes a "simulcast export agreement” under paragraph 5.3[i] of the Operating Agreement because it provides for the distribution of simulcast rights, in combination with other rights.
. “Tr.” refers to the transcript of the hearing held on the date indicated.
. If Churchill Downs were a disclosed principal, the result would be the same. See Restatement (Third) of Agency § 6.01 ("When an agent acting with actual or apparent authority makes a contract on behalf of a disclosed principal, (1) the principal and the third party are parties to the contract....”)
. The superseded § 305 of Restatement (Second) of Agency, relied upon by Suffolk OTB, is also limited to a situation where an agent was not authorized to enter into a single contract for multiple principals: "[u]nless otherwise agreed between the principal and the agent, the other party to a contract made by an agent for several undisclosed principals who have not jointly authorized, him is not liable in an action at law upon the contract brought by one of them alone.” Restatement (Second) of Agency § 305 (emphasis added).
. Suffolk OTB’s counsel stated: "we consider [Churchill Downs] to be a critical vendor, it is our intention to honor that executory contract, assume the executory contract, pay them in full and continue a fruitful relationship going forward.”
. Consistent with the State Constitution, article IX, § 2, and Municipal Home Rule Law § 10, the Suffolk County Charter permits the Suffolk County Legislature to exercise the functions assigned to it by state law and the powers of local legislation and appropriation, and to adopt an administrative code. Suffolk County Charter §§ C2-1, C2-2.
. At one point, Suffolk OTB sought to distinguish between a county resolution and a county law, apparently suggesting that the County Resolution is a permissible exercise of power, even if a local law authorizing Suffolk OTB’s bankruptcy filing would exceed Suffolk County’s authority. Suffolk OTB's Post-Hearing Reply Brief ¶ 13, ECF No. 113. This argument must be rejected. A local resolution and a local law are "both are legislative acts.” Reese v. Lombard, 47 A.D.2d 327, 330, 366 N.Y.S.2d 493 (N.Y.App.Div.1975). Suffolk OTB has not provided any authority to support a conclusion that Suffolk County may accomplish by resolution something that it is unauthorized to accomplish by local law, and has conceded that a resolution "is basically the equivalent of [a] local law.” Tr. 7/13/11 at 28, ECF No. 115.
. Suffolk OTB argued at the June 15, 2011 hearing that the County Executive, who cosigned the County Resolution, was empowered to issue an executive order authorizing Suffolk OTB's bankruptcy filing. Tr. 6/15/11 at 29, ECF No. 98. Suffolk OTB’s attorney stated at the hearing that Suffolk OTB would brief that argument, but no briefing has been submitted. Therefore, this argument is deemed abandoned. Furthermore, a search has uncovered no authority to support an argument that a county executive possesses greater authority than the county legislature in this regard. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494613/ | ORDER-MEMORANDUM-OPINION
JOAN A. LLOYD, Bankruptcy Judge.
This matter is before the Court on the Motion for Clarification filed by Defendant Fidelity and Deposit Company of Maryland (“F & D”) in its Capacity as Performance Bond Surety for Plaintiff Rust of Kentucky, Inc. (“Rust”). Although the Court’s Judgment of February 7, 2012 disposes of the issues raised in F & D’s Motion, the Court will GRANT the Motion of F & D in order to clarify the matters raised by F & D in its Motion.
On February 7, 2012, following a trial on the Complaint of Rust against F & D and TMS Contracting, LLC (“TMS”), the Court entered a Memorandum-Opinion and Judgment in favor of Rust on its breach of contract claims against TMS and against F & D on its claim of breach of a payment bond. (See, F & D’s Motion for Clarification for recital of facts pertaining to the performance bond, F & D’s Proof of Claim, Rust’s Objection to F & D’s Proof of Claim, the Agreed Order between Rust and F & D on the Objection to the Proof of Claim and the Consolidation Motion and resulting Order in this adversary proceeding.)
F & D requests that the Court answer three questions related to its Proof of Claim and Rust’s Objection. The first is, “Whether the Judgment addresses Rust’s remaining Claim Objection to the contested portion of the F & D Claim pertaining to F & D’s Performance Bond payment.” The answer is that the Judgment did address the remaining claim objection of Rust to the contested portion of the F & D claim on the Performance Bond. The Court determined that TMS breached the subcontracts and wrongfully terminated Rust from the project. Any monies paid to TMS under the Performance Bond by F & D on Rust’s behalf were not the legal obligation of Rust. While not explicitly addressed in the Judgment, the issue is implicitly addressed by the Court’s findings.
The second question is, “Whether the Court intended the Judgment to either sustain or overrule Rust’s remaining Claim Objection to the contested portion of F & D’s Claim pertaining to F & D’s Performance Bond payment.” The Judgment does not explicitly state that the remaining Claim Objection of Rust was sustained. However, in fact that is the practical effect of the Court’s findings and the Judgment in favor of Rust on the breach of contract claim and wrongful termination claim. The Judgment implicitly sustained Rust’s remaining Objection to F & D’s Proof of Claim.
The third issue is, ‘Whether the Court intended to reserve its ruling on Rust’s remaining Claim Objection to the contested portion of F & D’s claim pertaining to F & D’s Performance Bond payment pending the outcome of any appeals of the Judgment pertaining to the construction dispute between Rust, TMS and TMS’s payment bond surety.” The Court did not intend to reserve its ruling on the remaining Claim Objection pending the outcome of any appeals of the Judgment. In accordance with the clarifications herein, the Court’s Judgment sustains Rust’s remaining Claim Objection.
The Court being duly advised in the premises,
*789IT IS HEREBY ORDERED, ADJUDGED AND DECREED that F & D’s Motion for clarification is GRANTED in accordance with the matters addressed herein.
IT IS FURTHER ORDERED, ADJUDGED AND DECREED that the remaining Claim Objection of Rust to the Proof of Claim of F & D, be and hereby is, SUSTAINED.
This a final and appealable Order there is no just reason for delay. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494614/ | ORDER DENYING APPLICATION FOR EMPLOYMENT AND COMPENSATION
DENNIS D. O’BRIEN, Bankruptcy Judge.
This matter was heard on December 13, 2011, on Vogel Law Firm’s application for approval of employment and allowance of compensation. The United States Trustee objects to the applications. Jon Brake appeared on behalf of Vogel, and Sarah Wencil appeared on behalf of the Trustee. The Court, having received and reviewed briefs filed by the parties, heard and considered arguments made at the hearing, and being fully advised in the matter, now makes this ORDER pursuant to the Fed*841eral and Local Rules of Bankruptcy Procedure.
I
This case was filed on December 29, 2010, by Vogel Law Firm. The firm did not file an employment application until January 18, 2011. The application was initially approved on January 20, 2011. In the meantime, the U.S. Trustee had timely objected on January 19, 2011. In the objection, the U.S. Trustee claimed that Vo-gel had failed to disclose a number of potential conflicts of interest and that the firm was in fact not disinterested and therefore not qualified to represent the debtor under 11 U.S.C. § 327(a). The order approving was vacated on January 25, 2011.
Vogel took no action to set the application for hearing, as required by Local Rule 2014 — 1(b). Another attorney, Erik Ahl-gren, not of the Vogel firm, filed an application to be employed on February 15, 2011. Mr. Ahlgren was approved as counsel. A plan was confirmed by the Court on August 25, 2011, and the Court has allowed Mr. Ahlgren’s fees.
After a plan was confirmed, Vogel filed an application for compensation on September 15, 2011, for services rendered from the filing date to the date of his initial application for employment, January 18, 2011. The U.S. Trustee objected, asserting that a professional could not receive compensation for services unless the professional was employed by the estate. The applicant continued that motion and filed this application to be employed on November 22, 2011. Both motions were heard on December 13, 2011.
The Court denies the application for employment because it was untimely filed, it failed to disclose potential disqualifying conflicts, and because Vogel had an actual disqualifying conflict of interest during the period for which approval is sought. The application for allowance of compensation is denied because the applicant’s employment was never approved under 11 U.S.C. § 327(a).1
II
The application for approval of employment under consideration was filed on November 22, 2011, after the Trustee objected to Vogel’s application for compensation, filed on September 15, 2011, because Vogel’s employment had never been approved. The application seeks approval for Vogel’s employment for the period from the date of the petition filing to the Trustee’s initial objection to an earlier application for employment that Vogel filed on January 18, 2011. Vogel should have addressed the Trustee’s objection to the firm’s employment in January 2011. Instead, the firm arranged for an unassociated attorney to represent the debtor in the case. Vogel’s request for a nunc pro tunc order now is without explanation or justification for the delay.
Even if the late application could be justified under the circumstances, it would not be approved because Vogel never disclosed on the re cord potential conflicts of interest in the employment. Full disclosure is required. Aside from seeking to represent the debtor-in-possession Kap-py, Vogel represented its 85% shareholder, Walter L. Tischer, who was also the officer in charge of the debtor-in-possession, and, who had a substantial individual unsecured claim in the case, as well as the controlling interest in several corporate claimants of Kappy. Additionally, Tischer had an indi*842vidual Chapter 11 pending that Vogel was representing. None of this was disclosed in either of the employment applications.
Vogel argued at the hearing that these matters were thoroughly discussed with the Trustee in telephone calls. Discussions with the Trustee do not satisfy the disclosure requirements. Proper disclosure belongs in the application filed of record for the Court and all interested parties in the case to see.
“When applying to serve as counsel to the debtor, it is the responsibility of the debtor and his counsel to fully disclose all relationships with the debtor, related entities, creditors and any other parties in interest.” In re Atlanta Sporting Club, 137 B.R. 550, 553 (Bankr.N.D.Ga.1991) (citing In re Waterfall Village of Atlanta, Ltd., 103 B.R. 340, 346 (Bankr.N.D.Ga.1989); In re Flying E. Ranch Co., 81 B.R. 633, 637 (Bankr.D.Colo.1988); In re Huddleston, 120 B.R. 399, 400-01 (Bankr.E.D.Tex.1990)); see also In re Diamond Mortg. Corp. Of Illinois, 135 B.R. 78, 97 (Bankr.N.D.Ill.1990) (holding that the attorney and the debtor must disclose “any fact which would be relevant to the court’s determination of whether the professional has a conflict of interest, is not disinterested or represents an adverse interest, must be disclosed” and noting that a reviewing court has no duty to search a file to find conflicts of interest). “The court must be presented the whole picture especially where there is a multi layering of relationships as in the present case.” Atlanta Sporting Club, 137 B.R. at 553 (quoting Waterfall Village, 103 B.R. at 346).
“When an attorney fails to disclose relationships and facts necessary for the Court to make a determination as to whether they meet the requirements of the Code, three explanations may be inferred: oversight or negligence, failure to under stand the importance of proper disclosure, or an intent to circumvent the Code.” Id., citing In re Automend, 85 B.R. 173, 179 (Bankr.N.D.Ga.1988).
Finally, Vogel claims that there was no actual conflict of interest and that the application should be allowed pursuant to 11 U.S.C. § 327(c). Vogel claims that the Trustee was informed that Kappy’s insider creditors would subordinate their claims to non insider unsecured claims, removing any conflict. The Trustee’s attorney, with whom Vogel’s attorney had the conversations, represented at the hearing that she had no recollection of an intent to subordinate in the discussions.
Assuming that Vogel’s version of the conversations is accurate, the expression of intent to subordinate does not cure an obvious conflict of interest for Vogel. Tischer’s claim in the Kappy estate belonged to his individual bankruptcy estate, which Vogel also represented. Tischer’s interests in the corporate insider claims filed in Kappy belonged to his individual estate, too. As such, the firm could hardly be in a position to advise Kappy to subordinate the claims without violating the duty owed to Tischer’s estate, or to even evaluate the Tischer and related insider claims at all. See In re Big Mac Marine, Inc., 326 B.R. 150 (8th Cir. BAP 2005).
Vogel argues that the scheduled non insider unsecured claims were insignificant in number and amount, and that essentially there was no harm, so no foul.2 But, at the beginning of bankruptcy cases, schedules filed with the petition are not the final word in the number and amount of ultimately allowed unsecured claims. Actual conflicts of interest arise from the representation of adverse interests in the case or proceeding. They are identified *843and determined before, not after, trouble arises from the conflict. As observed above, Vogel’s representation of the Kappy and Tischer estates disqualified the firm from dealing with the Tischer and related claims in the Kappy estate from the outset. An attorney is disqualified from representing a debtor by an actual conflict of interest as long as the conflict exists. Big Mac Marine, Inc., 326 B.R. at 155. Here, the conflict existed during the period for which Vogel now seeks approval of employment.
Vogel’s application for approval of employment will be denied for the reasons discussed above, and the application for compensation must also be denied as required by Lamie v. U.S. Trustee, 540 U.S. 526, 124 S.Ct. 1023, 1025, 1032, 157 L.Ed.2d 1024 (2004).
Ill
Accordingly, it is hereby ordered that the applications of the Vogel Law firm for approval of employment and for an award of compensation are DENIED.
. See: Lamie v. U.S. Trustee, 540 U.S. 526, 124 S.Ct. 1023, 1025, 1032, 157 L.Ed.2d 1024 (2004).
. According to the plan ultimately confirmed in the case, non insider claims were estimated at just over $9,000, while insider claims totaled $396,020. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494615/ | Order:
(1)Sanctioning Attorney;
(2) Overruling Claim Objections;
(3) Scheduling Status Conference.
JOHN K. OLSON, Bankruptcy Judge.
On November 2, 2011, this court entered an Order to Show Cause which directed attorney Alberto Hernandez to appear on December 7, 2011 and explain apparent violations of Fed. R. Bankr.P. 9011(b) and 11 U.S.C. § 526(a)(2). For the reasons below, Mr. Hernandez is hereby sanctioned for prosecuting five claim objections in violation of Rule 9011(b). The offending claim objections are hereby overruled and the court will conduct a status conference to address when Mr. Hernandez’ suspension should begin.
I. Procedural Background
Debtors Paul Velez and Merle Duplessis filed schedules on March 25, 2011. See [ECF No. 9]. Schedule F listed fifty-two unsecured nonpriority creditors. See id. at 12-19. Forty-one of those debts were marked as “disputed,” eight were marked “unliquidated” (despite being scheduled in precise amounts), one entry was a notification placeholder, and one debt owed to “Gemb/jcp” in the amount of $0.01 (one cent) was not marked as contingent, unliq-uidated, or disputed.
Creditors timely filed twelve claims before the July 25, 2011 claims bar date, and the Debtor objected to eight of them:
ECF No. 44 Objection to Claim # 2 of Chase Bank (for Kohl’s Dept. Stores)
Basis — “Debtor asserts that the claim is filed in violation of Local Rule 3000-l(A)(3), as the proof of claim is based on a writing that does not attach a list of invoices or other attachments and documentation to show that Debtor owes the actual amount claimed, such as the accounts application or contract or most recent statement provided to Debtor prior to the filing date. The document does not attach any documents and/or evidence of lawful assignment of note as provided on F.S. 727.104. The assignment of the negotiable instrument and/or note does not substantially confirm and/or comply with the strict language of 727.104. Florida Statutes (2010) failed to state the basis for the deficiency. The claim should be Stricken and Disallowed.”
Claim # 2 Amt: $ 506.02
Schedule F Amt: $ 492.00 (marked as
unliquidated & owed to Kohl’s)
Last four digits of acct. # listed on proof of claim — 5095
Corresponding four digits of acct. # listed on Schedule F — 5095
Debtor recommendation — strike & disallow
Status — objection heard 09/07/2011 ... Mr. Hernandez submits proposed eOrder # 275958 after hearing striking & disallowing the claim ... court refrains from entering proposed order and instead enters Order to Show Cause on 11/02/2011
ECF No. 44 Objection to Claim # 3 of FIA Card Svcs. (for Bank of America)
Basis — Debtor asserts that the claim is filed in violation of Local Rule 3000-l(A)(3), as the proof of claim *915is based on a writing that does not attach a list of invoices or other attachments and documentation to show that Debtor owes the actual amount claimed, such as the accounts application or contract or most recent statement provided to Debtor prior to the filing date. The document does not attach any documents and/or evidence of lawful assignment of note as provided on F.S. 727.104. The assignment of the negotiable instrument and/or note does not substantially confirm and/or comply with the strict language of 727.104. Florida Statutes (2010) failed to state the basis for the deficiency. The claim should be Stricken and Disallowed.
Claim # 3 Amt: $ 17,268.74
Schedule F Amt: $17,268.00 (marked as unliquidated & owed to BofA)
Last four digits of acct. # listed on proof of claim — 0084
Corresponding four digits of acct. # listed on Schedule F — 0084
Debtor recommendation — strike & disallow
Status — objection heard 09/07/2011 ... Mr. Hernandez submits proposed eOrder #275958 after hearing striking & disallowing the claim ... court refrains from entering proposed order and instead enters Order to Show Cause on 11/02/2011
ECF No. 44 Objection to Claim # 5 of Candica, LLC (for Barclay’s Bank)
Basis — “Debtor asserts that the claim is filed in violation of Local Rule 3000-l(A)(3), as the proof of claim is based on a writing that does not attach a list of invoices or other attachments and documentation to show that Debtor owes the actual amount claimed, such as the accounts application or contract or most recent statement provided to Debtor prior to the filing date. The document does not attach any documents and/or evidence of lawful assignment of note as provided on F.S. 727.104. The assignment of the negotiable instrument and/or note does not substantially confirm and/or comply with the strict language of 727.104. Florida Statutes (2010) failed to state the basis for the deficiency. The claim should be Stricken and Disallowed.”
Claim # 5 Amt: $8,380.69
Schedule F Amt: $ 8,295.00 (marked unliquidated & owed to Barclays)
Last four digits of acct. # listed on proof of claim — 4346
Corresponding four digits of acct. # listed on Schedule F — 4346
Debtor recommendation — strike & disallow
Status — objection heard 09/07/2011 ... Mr. Hernandez submits proposed eOrder #275958 after hearing striking & disallowing the claim ... court refrains from entering proposed order and instead enters Order to Show Cause on 11/02/2011
ECF No. 44 Objection to Claim # 6 of Portfolio Recover Assoc, (for Chase)
Basis — “Debtor asserts that the claim is filed in violation of Local Rule 3000-l(A)(3), as the proof of claim is based on a writing that does not attach a list of invoices or other attachments and documentation to show that Debtor owes the actual amount claimed, such as the accounts application or contract or most recent statement provided to Debtor prior to the filing date. The document does not attach any documents and/or evidence of lawful assignment of note as provided on *916F.S. 727.104. The assignment of the negotiable instrument and/or note does not substantially confirm and/or comply with the strict language of 727.104. Florida Statutes (2010) failed to state the basis for the deficiency. The claim should be Stricken and Disallowed.”
Claim # 6 Amt: $31,828.45
Schedule F Amt: $31,828.00 (marked unliquidated & owed to Chase)
Last four digits of acct. # listed on proof of claim — 4138
Corresponding four digits of acct. # listed on Schedule F — 4138
Debtor recommendation — strike & disallow
Status — objection withdrawn by Mr. Hernandez’s on record at 09/07/2011 claim objection hearing ... Mr. Hernandez fails to file formal notice of withdrawal ... court sua sponte enters order on 09/15/2011 at ECF No. 51 to clarify docket and deem objection withdrawn ... original POC # 6-1 allowed
ECF No. 44 Objection to Claim # 7 of CR Evergreen (for Chase)
Basis — “Debtor asserts that the claim is filed in violation of Local Rule 3000-l(A)(3), as the proof of claim is based on a writing that does not attach a list of invoices or other attachments and documentation to show that Debtor owes the actual amount claimed, such as the accounts application or contract or most recent statement provided to Debtor prior to the filing date. The document does not attach any documents and/or evidence of lawful assignment of note as provided on F.S. 727.104. The assignment of the negotiable instrument and/or note does not substantially confirm and/or comply with the strict language of 727.104. Florida Statutes (2010) failed to state the basis for the deficiency. The claim should be Stricken and Disallowed.”
Claim # 7 Amt: $6,240.33
Schedule F Amt: $6,240.00 (marked unliquidated & owed to Chase)
Last four digits of acct. # listed on proof of claim — 1273
Corresponding four digits of acct. # listed on Schedule F — 1273
Debtor recommendation — strike & disallow
Status — objection heard 09/07/2011 ... Mr. Hernandez submits proposed eOrder #275958 after hearing striking & disallowing the claim ... court refrains from entering proposed order and instead enters Order to Show Cause on 11/02/2011
ECF No. 44 Objection to Claim #8 of Portfolio Recovery Assoc, (for Chase)
Basis — “Debtor asserts that the claim is filed in violation of Local Rule 3000-l(A)(3), as the proof of claim is based on a writing that does not attach a list of invoices or other attachments and documentation to show that Debtor owes the actual amount claimed, such as the accounts application or contract or most recent statement provided to Debtor prior to the filing date. The document does not attach any documents and/or evidence of lavTul assignment of note as provided on F.S. 727.104. The assignment of the negotiable instrument and/or note does not substantially confirm and/or comply with the strict language of 727.104. Florida Statutes (2010) failed to state the basis for the deficiency. The claim should be Stricken and Disallowed.”
Claim # 8 Amt: $23,103.96
*917Schedule F Amt: $23,103.00 (marked unliquidated & owed to Chase)
Last four digits of acct. # listed on proof of claim — 0605
Corresponding four digits of acct. # listed on Schedule F — 0605
Debtor recommendation — strike & disallow
Status — objection heard 09/07/2011 ... Mr. Hernandez submits proposed eOrder #275958 after hearing striking & disallowing the claim ... court refrains from entering proposed order and instead enters Order to Show Cause on 11/02/2011
ECF No. 44 Objection to Claim # 11 of Quantum3 Group LLC
Basis — “Debtor asserts that the claim is filed in violation of Local Rule 3000-l(A)(3), as the proof of claim is based on a writing that does not attach a list of invoices or other attachments and documentation to show that Debtor owes the actual amount claimed, such as the accounts application or contract or most recent statement provided to Debtor prior to the filing date. The document does not attach any documents and/or evidence of lawful assignment of note as provided on F.S. 727.104. The assignment of the negotiable instrument and/or note does not substantially confirm and/or comply with the strict language of 727.104. Florida Statutes (2010) failed to state the basis for the deficiency. The claim should be Stricken and Disallowed.”
Claim #11 Amt: $21,920.78
Schedule F Amt: N/A (not scheduled)
Last four digits of acct. # listed on proof of claim — 9001
Corresponding four digits of acct. # listed on Schedule F — N/A (not scheduled)
Debtor recommendation — strike & disallow
Status — objection heard 09/07/2011 ... Mr. Hernandez submits proposed eOrder #275958 after hearing striking & disallowing the claim ... court modifies and enters proposed order sustaining objection to Claim # 11 on 11/04/2011
ECF No. 44 Objection to Claim # 12 of Quantum3 Group LLC
Basis — “Debtor asserts that the claim is filed in violation of Local Rule 3000-l(A)(3), as the proof of claim is based on a writing that does not attach a list of invoices or other attachments and documentation to show that Debtor owes the actual amount claimed, such as the accounts application or contract or most recent statement provided to Debtor prior to the filing date. The document does not attach any documents and/or evidence of lawful assignment of note as provided on F.S. 727.104. The assignment of the negotiable instrument and/or note does not substantially confirm and/or comply with the strict language of 727.104. Florida Statutes (2010) failed to state the basis for the deficiency. The claim should be Stricken and Disallowed.”
Claim #11 Amt: $64.00
Schedule F Amt: N/A (not scheduled)
Last four digits of acct. # listed on proof of claim — 1001
Corresponding four digits of acct. # listed on Schedule F — N/A (not scheduled)
Debtor recommendation — strike & disallow
*918Status — objection heard 09/07/2011 ... Mr. Hernandez submits proposed eOrder #275958 after hearing striking & disallowing the claim ... court modifies and enters proposed order sustaining objection to Claim # 12 on 11/04/2011
There is no such thing as “Local Rule 3000-l(A)(3),” and § 727.104 of the Florida Statutes has nothing to do with the validity of assignments for any of these claims. Section 727.103 defines “assignment” as “an assignment for the benefit of creditors made under this chapter” which, pursuant to § 727.102, is a proceeding in a Florida state circuit court. Pursuant to § 727.101, “[t]he intent of this chapter is to provide a uniform procedure for the administration of insolvent estates, and to ensure full reporting to creditors and equal distribution of assets according to priorities as established under this chapter.” Fla. Stat. § 727.101. There is nothing in the record to indicate that a state court ABC was commenced before this voluntary bankruptcy filing. Accordingly, there was no requirement of a written “irrevocable assignment and schedules” conforming to the form contained within § 727.104 and “providing for an equal distribution of the estate according to the priorities set forth in s. 727.114” Fla. Stat. § 727.104(l)(a). The notion that the above claims should be stricken and disallowed in their entirety for failure to conform to a state court ABC procedure is a position that — viewed objectively from the bench — constitutes a bad faith attempt to strike and disallow claims for debts which the Debtors admitted under penalty of perjury in their schedules to owing.1
A common law assignment or delegation of a contractual right or obligation which does not relate to a Florida state court “ABC” (“assignment for the benefit of creditors”) proceeding is not governed by § 727.104. “Florida law recognizes the general right to assign common law and statutory rights, unless there is an express prohibition in a statute, or a showing that an assignment would clearly offend an identifiable public policy.” VOSR Industries, Inc. v. Martin Properties, Inc., 919 So.2d 554, 556 (Fla. 4th DCA 2005) (citing Forgione v. Dennis Pirtle Agency Inc., 701 So.2d 557, 559 (Fla.1997)). Debtors’ counsel did not cite to any statute or case law giving rise to a good faith argument that the assignments were statutorily prohibited or against public policy.
Even if the court were to ignore the fact that Debtors’ counsel relied upon a nonexistent local rule and an irrelevant Florida statute, the core issue here is that he objected on technical grounds to claims corresponding to debts which his clients admitted under penalty of perjury in their schedules to owing.2 This is the thrust of the discussion section below. Six of the eight objections concerned debts which were scheduled as both noncontingent and undisputed. Each proof of claim contained *919sufficient information for Debtors’ counsel to match the claim with the scheduled debts, and three of the claims were within $1 of the scheduled amount. Mr. Hernandez submitted proposed orders striking five of the claims when his clients had already conceded under penalty of perjury that the debts were due and owing in substantially the same amounts. Further, the Debtors marked all but one of their Schedule F debts as either unliquidated or disputed, and the one debt marked as neither contingent, unliquidated, nor disputed was in the amount of $0.01 (one cent). The court accordingly entered its Order to Show Cause on November 2, 2011 to determine whether sanctions should be imposed upon Mr. Hernandez for violating 11 U.S.C. § 526(a)(2) in Schedule F and for prosecuting five claim objections in violation of Fed. R. Bankr.P. 9011(b).
II. Discussion
Section 502(a) of the Bankruptcy Code states that a timely filed claim “is deemed allowed, unless a party in interest ... objects.” Section 502 continues in subsections (b)(1) — (9) with an exhaustive list of reasons for claim disallowance, and failure to accompany a proof of claim with the appropriate writing is not one of the reasons listed. Because there is no independent basis for claim disallowance created by Fed. R. Bankr.P. 3001(c), failure to comply with that rule is an evidentiary defect which only deprives a claim of its prima, facie validity.
A proof of claim, when considered together with the relevant admissions in the schedules, establishes a prima facie case of the debtor’s liability on the claim and shifts the evidentiary burden to the debtor. See In re Jorczak, 314 B.R. 474, 481 (Bankr.D.Conn.2004). If a debt is undisputed, no other creditor has filed a proof of claim for the debt, and the debtor doesn’t present any evidence to dispute the debt or ownership of the debt, the objection to claim should be overruled based upon the preponderance of the evidence. See In re Kincaid, 388 B.R. 610, 617-18 (Bankr.E.D.Pa.2008). To hold otherwise is to invite mischief:
Debtors with no evidence that the claims are invalid may be inclined to launch “fishing expeditions” for documents that the claimants simply cannot produce timely or economically. Creditors who have executed their claims under penalty of fines and imprisonment will be forced to decide whether producing documentation is economically feasible for a $5,000 claim, while debtors who have signed bankruptcy schedules under penalty of perjury are relieved of their obligations to include those claims in a chapter 13 plan based on a technicality.
In re Habiballa, 337 B.R. 911, 916 (Bankr.E.D.Wis.2006). This district has at least three published opinions concerning claim disallowance under 11 U.S.C. § 502 and Fed. R. Bankr.P. 3001(c) which explain why a creditor’s failure to attach a signed application or statements supporting its claim is not a basis for claim disallowance when a debtor has conceded to owing the debt in her schedules. See In re Orozco, No. 09-34626-BKC-RAM (Bankr.S.D.Fla. July 30, 2011) (Mark, J.) (Westlaw & Lexis citations not yet available); In re Moreno, 341 B.R. 813 (Bankr.S.D.Fla.2006) (Mark, J.); Paul Mason & Assocs. v. Cordero (In re Felipe), 319 B.R. 730 (Bankr.S.D.Fla.2005) (Mark, J.).
“If a claim is scheduled by a debtor as undisputed and in an amount equal to or greater than the amount in the proof of claim, little, if any, documentation is necessary.” Moreno, 341 B.R. at 818. If “a claim correlates by account number to a claim scheduled by the debtor, but the amount of the claim exceeds the scheduled *920amount,” the debtor should only object to the extent that the unsubstantiated claim amount exceeds the scheduled amount. Id. at 819. Claim objections “should only address that portion of a claim actually in dispute.” Felipe, 319 B.R. at 735 n. 3. It is therefore inappropriate to seek an order striking a claim in its entirety if the debtor has scheduled the claim as undisputed in any amount. Id.
Further, in Moreno, Judge Mark warned that “The Court’s bar to raising objections to claims scheduled as undisputed should not be read as an invitation to schedule credit card debt as disputed in the hope of shifting the burden back to the creditor.” Moreno, 341 B.R. at 818. A debtor’s “scheduling a claim as contingent, unliquidated, or disputed, without thereafter affirmatively asserting in an objection that the debtor owes nothing or owes less than the amount claimed, does not change the result.” Id. A claim objection seeking to strike and disallow must contain both an affirmative assertion and a reasonable basis to conclude the debtor owes nothing or owes less than the amount claimed. See id. Simply marking a debt as contingent, unliquidated, or disputed will not change the result, and doing so disingenuously or without reasonable care will subject the debtor’s attorney to sanctions under 11 U.S.C. § 526(b)(5)(B) as well as Fed. R. Bankr.P. 9011(b).
At the December 7, 2011 show-cause hearing in this case, Mr. Hernandez attempted a series of explanations on the record that (roughly paraphrased) amounted to an admission that he negligently filed claim objections with inaccurate and/or incomplete factual bases. See Hr’g Tr., 3-9, Dec. 7, 2011. In an effort to focus Mr. Hernandez’s soliloquy, this court asked, “What evidence did you have before you, Mr. Hernandez, at the time that you filed the objections to these claims which would support striking them or disallowing them, when the claims that were filed were the only claims that related to these specific accounts, and that they were in substantially the same amount as the claims which had been scheduled by the debtor?” Hr’g Tr., 9, Dec. 7, 2011. Mr. Hernandez was unable to provide any evidence or even supply a meaningful explanation to justify filing of any of the offending claim objections. See Hr’g Tr., 9-10, Dec. 7, 2011. Mr. Hernandez sought to strike and disallow five claims which his clients had already admitted (under penalty of perjury) to owing in substantially similar amounts. “The gig is up ... on debtors taking advantage of the cost of responding to claims objections and obtaining orders striking claims which the debtor has acknowledged owing in whole or substantial part.” Moreno, 341 B.R. at 819-820.
Sanctions Imposed by this Order are Warranted and Appropriate.
If there is no substantive objection to a claim, the creditor should not be required to provide further documentation because it serves no purpose other than to decrease the likelihood that a valid claim against the estate will be disallowed on specious grounds. See In re Shank, 315 B.R. 799, 813 (Bankr.N.D.Ga.2004). The Federal Rules of Bankruptcy Procedure provide that the “rules shall be construed to secure the just, speedy, and inexpensive determination of every case and proceeding.” Fed. R. Bankr.P. 1001. The purpose of the rules governing claims is to require creditors to provide sufficient information so that a debtor may identify creditors and match their claims with scheduled debts. See generally In re Habiballa, 337 B.R. at 915 (explaining “the purpose of Rule 3001 is to provide certain minimum evidentiary standards for proofs of claim”). To require creditors to produce voluminous account information for *921every claim imposes an unnecessary burden on creditors without conferring a commensurate benefit to debtors. See Shank, 315 B.R. at 813. Instead, it increases abuse and litigation. See id. So long as the proof of claim contains sufficient information to match it with a scheduled debt, the debt is undisputed, no other creditor has filed a proof of claim for the debt, and the debtor doesn’t present any evidence to dispute the debt or ownership of the debt, the objection to claim is specious. See Kincaid, 388 B.R. at 617-18.
The court has entered orders to show-cause in this case and others with a singular aim — to address what has become a pervasive problem within this district stemming from wholesale unjustified claim objections, and to stop that practice. Fed. R. Bankr.P. 9011 places an affirmative duty upon attorneys to make a reasonable investigation of the facts and the law before signing and submitting any petition, pleading, motion, or other paper. B-Line, LLC v. Wingerter (In re Wingerter), 594 F.3d 931, 939 (6th Cir.2010); Briggs v. Labarge (In re Phillips), 433 F.3d 1068 (8th Cir.2006). Attorneys are required to “think first and file later.” Stewart v. RCA Corp., 790 F.2d 624, 633 (7th Cir.1986); see also Lieb v. Topstone Indus., Inc., 788 F.2d 151, 157 (3d Cir.1986) (telling attorneys to “look before leaping”). The filing of claim objections with little investigation into the facts or law has become commonplace in this district. In an attempt to stop this practice, the court is entering this and other similar sanctions orders. Attorneys who have filed claim objections in violation of Fed. R. Bankr.P. 9011(b) are being sanctioned in accordance with Rule 9011:
A sanction imposed for violation of this rule shall be limited to what is sufficient to deter repetition of such conduct or comparable conduct by others similarly situated.
Fed. R. Bankr.P. 9011(c)(2). While a certain sanction may be sufficient to deter repetition by an attorney who got caught, that very same sanction may not be sufficient to deter comparable conduct by others similarly situated. The sanctions imposed by this order must be tailored to deter those who may choose to take a calculated risk when deciding whether to object to a creditor’s claim.
III. Conclusion
Albert H. Hernandez filed and prosecuted five claim objections in this case without reasonable investigation into the facts or the law. He sought to strike and disallow the claims in their entirety when his clients had already admitted under penalty of perjury to owing the money. “The gig is up ... on debtors taking advantage of the cost of responding to claims objections and obtaining orders striking claims which the debtor has acknowledged owing in whole or substantial part.” Moreno, 341 B.R. at 819-820. Mr. Hernandez violated Fed. R. Bankr.P. 9011(b), and sanctions under Rule 9011(b)(2) must be tailored to deter repeat behavior and to deter similar conduct by others similarly situated.
It is accordingly ORDERED that:
(1) Alberto H. Hernandez, Esq. is hereby suspended from practice in the United States Bankruptcy Court, Southern District of Florida for 31 days. The suspension period shall begin on a date to be set by separate order of court after the time for reconsideration and appeal of this order has run;
(2) the Debtors’ objections to claims 2, 3, 5, 7, & 8, which Mr. Hernandez filed at ECF No. 44 in violation of *922Fed. R. Bankr.P. 9011(b), are hereby OVERRULED and claims 2, 3, 5, 7, & 8 are hereby ALLOWED as filed;
(3) a status conference is hereby scheduled for March 5, 2012 at 1:00 p.m. in Courtroom 301, 299 East Broward Blvd., Fort Lauderdale, FL 33301 to address the issue of when Mr. Hernandez’ suspension should begin.
. The Debtors admitted in their schedules to owing debts corresponding to claims 2, 3, 5, 6, 7, & 8. They did not schedule undisputed debt corresponding to claims 11 & 12 (such that those claims could be disputed if the Debtors, in good faith, denied owing the money).
. Claims 11 & 12 could not be matched to debt conceded as owed on Schedule F and, in light of the absence of any Debtor concession, the creditor did not attach enough supporting documentation to substantiate the claims. In other words, claims 11 & 12 seemed to “come out of the blue,” the court construed the Debtors' technical objections to those claims as a denial that they owed the money, and accordingly sustained the Debtors’ objections on November 4, 2011. See [ECF No. 61]. Debtors’ counsel withdrew his objection to claim 6 before the court entered it order to show cause, and the objections to claims 2, 3, 5, 7, & 8 are the subject of this sanctions order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494616/ | MEMORANDUM DECISION RE OBJECTION TO EXEMPTIONS
S. MARTIN TEEL, JR., Bankruptcy Judge.
The chapter 7 trustee has objected to the exemptions claimed by the debtors, Abdeel H. Wade and Lucinda A. Wade.1 *22The objection will be sustained in large part.2
I
First, the trustee objects that the exemptions claimed under D.C.Code § 15-501(a)(3) are improper to the extent that they exceed $850 per debtor.3 Under § 15-501(a)(3), a debtor may exempt “the debtor’s aggregate interest in any property, not to exceed $850 in value, plus up to $8,075 of any unused amount of the exemption provided under paragraph (14) of this subsection.” In turn, § 15-501(a)(14) allows a debtor to exempt “the debtor’s aggregate interest in real property used as the residence of the debtor.... ” The Wades scheduled their residence as worth $822,300, and as being subject to secured claims in the amount of $735,000. In other words, the Wades have at most $87,300 of equity in their residence, and there is no remaining value to exempt from the estate.
That $87,300 is precisely the amount that they claimed as exempt under § 15-501(a)(14). Accordingly, there is no unused portion of their § 15-501(a)(14) exemption. It follows that their exemption under § 15-501(a)(3) is limited to $850. See In re McDonald, 279 B.R. 382, 388 (Bankr.D.D.C.2002) (“[A] debtor who exempts the full amount of equity in her residence in an amount exceeding $8,075 pursuant to § 15-105(a)(14) may only exempt $850 of other property under § 15-501(a)(3).”).
The Wades, however, argue that because they exempted only $87,300 of the $833,200 total value of their residence, they have left unused $745,900 of their available exemption under § 15-501(a)(14). I reject that argument for the following reasons.
A
Like an exemption under 11 U.S.C. § 522(d)(1),4 an exemption under D.C.Code § 15-501(a)(14) is, in relevant part, limited to the debtor’s “aggregate interest” in the real property used as the debtor’s residence. Accordingly, the Wades are in error in assuming that § 15-501 (a)(14) can be invoked as to the entire value of their encumbered residence. See Drummond v. Urban (In re Urban), 375 B.R. 882, 886 n. 7 (9th Cir. BAP 2007) (“Section 522(d) exempts the debtor’s interest in property-not the property itself. The value that can be exempted is the unencumbered portion.”). See also In re Bethea, 275 B.R. 127, 129 (Bankr.D.D.C.2002) (“§ 522 treats a debtor’s interest in real property as distinct from a mortgagee’s lien on that property.”).
As explained in Owen v. Owen, 500 U.S. 305, 308-309, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991):
if a debtor holds only bare legal title to his house — if, for example, the house is subject to a purchase-money mortgage for its full value — then only that legal interest passes to the estate; the equitable interest remains with the mortgage *23holder, § 541(d). And since the equitable interest does not pass to the estate, neither can it pass to the debtor as an exempt interest in property. Legal title will pass, and can be the subject of an exemption; but the property will remain subject to the lien interest of the mortgage holder. This was the rule of Long v. Bullard, 117 U.S. 617, 6 S.Ct. 917, 29 L.Ed. 1004 (1886), codified in § 522. Only where the Code empowers the court to avoid liens or transfers can an interest originally not within the estate be passed to the estate, and subsequently (through the claim of an exemption) to the debtor.
In other words (with exceptions of no relevance here), liens are superior to any right of exemption, and the only realizable value that is property of the estate and that may be exempted is the debtor’s equity in the property (the debtor’s “aggregate interest” in the property).
The D.C. statute recognizes this by limiting the residence exemption to “the debtor’s aggregate interest in real property used as the residence of the debt- or, ... except nothing relative to these exemptions shall impair the following debt instruments on real property: deed of trust, mortgage, mechanic’s lien, or tax lien.” D.C.Code § 15-501(a)(14). Even if the D.C. Code did not so provide, 11 U.S.C. § 522(c)(2) — effective as to both exemptions under 11 U.S.C. § 522(d) and exemptions under other law — makes an una-voided hen effective against any claim of exemption. If the trustee avoids a lien, the lien is preserved for the benefit of the estate under 11 U.S.C. § 551. Such an avoided lien remains effective against the exemption claim even if the debtor had claimed the entire property exempt. See In re Bethea, 275 B.R. at 129-134.
B
Owen v. Owen suggests that an exemption statute may allow bare legal title to be exempted. Assume that D.C.Code § 15-501(a)(14) allows a debtor to exempt not just her equitable interest in her residence but also the non-equity rights in the residence that correspond to the part of the property value as to which she has no equity (because it secures the amount of the lienor’s claim). For purposes of § 15-501(a)(3), what dollar amount should be assigned to that unutilized § 15-501(a)(14) exemption?
That is an academic question here. The Wades have lumped all of their interests in the property together, exempting all but the amount subject to a lien that leaves nothing of value to be exempted from the estate. They have no “unused amount” of their § 15-501(a)(14) exemption.5
An exemption is the withdrawal from the estate of a property right and vesting that property right in the debtor. For purposes of placing a value on the exemption, it is the value by which the estate has been depleted by the exemption that should count in determining the amount of any unused § 15-501(a)(14) exemption. Here, the non-exempted part of the real property’s value (which the Wades have allocated without distinction to both *24their equity and non-equity interests in the property) is of no value to the estate because the lien on the property fully encumbers that value. Accordingly, on this record, the Wades have exempted all of the value they could exempt under § 15-501(a)(14), and there is no unused exemption under § 15-501(a)(14) to use under § 15-501(a)(3).
It is thus unnecessary to delve into exactly what interests the Wades have aside from their equity in the property,6 but even if they had not exempted their non-equity interest in the property, the outcome would be the same. Their non-equity interest in the property might entitle them to a right of redemption and the right to remain in the property until it is foreclosed, but presumably they do not wish to transfer those rights to the trustee. Even if they did, such rights would have practically nil value to the estate. What counts from the standpoint of what the estate could realize is the Wades’ equity in the property. Correspondingly, exempting the right of redemption and the right to remain in the property would be an exemption having no meaningful economic value to the estate. Accordingly, if the Wades had not exempted those rights, the “unused amount” of the § 15-501(a)(14) exemption would be fixed at zero for purposes of § 15-501(a)(3).7
Of course, a debtor’s right of redemption and her right to remain in the property until it is foreclosed may have considerable value to her, but that is of no concern to unsecured creditors as the beneficiaries of the bankruptcy estate. The bankruptcy estate would realize no meaningful value from those rights whether they are exempted or not (as either way, the lienor is entitled to the proceeds of any sale to satisfy the amount of its lien claim).
In conclusion, the Wades had no “unused amount” of the exemption provided under § 15-501(a)(14), and their § 15-501(a)(3) exemption is limited to $850 for each debtor.
II
The trustee next objects that the Wades cannot exempt under D.C.Code § 15-501(a)(2) any item valued at more than the per item limit imposed by that provision, which is $425. Section 15-501(a)(2) provides that a debtor may exempt:
the debtor’s interest, not to exceed $425 in value, in any particular item or $8,625 in aggregate value in household furnishings, household goods, wearing apparel, appliances, books, animals, crops, or musical instruments, that are held primari*25ly for the personal, family or household use of the debtor or a dependent of the debtor.
The Wades argue that:
The plain reading of D.C.Code Ann. § 15-501(a)(2) allows a debtor to exempt $425 for any particular item or up to $8,625 in the aggregate of all items exempted under that section. Since the Debtors have separately exempted less . than $8,625 in total value under D.C.Code Ann. § 15 — 501(a)(2), their exemptions under this section have been properly claimed.
The only sensible reading of § 15-501(a)(2) is that the exemptions claimed thereunder must not exceed $425 in value in any particular item and must not exceed $8,625 in aggregate value. That is how the analogous provision of 11 U.S.C. § 522(d)(3) has been consistently interpreted. See, e.g., In re Williams, 181 B.R. 298, 302 (Bankr. W.D.Mich.1995) (“Section 522(d)(3) clearly provides that a debtor may exempt his interest in household furnishings, up to an aggregate of $8,000 but ‘not to exceed $400 in value in any particular item.’ ”). Accordingly, the court sustains the trustee’s objection that no more than $425 of the value of any particular item either of the Wades owns may be claimed exempt.
The Wades claimed the following property exempt under § 15-501(a)(2):
Amount Claimed Wearing Apparel Exempt
Clothing $1,000.00
Clothing $1,000.00
Wedding band $1,000.00
Furs and Jewelry Engagement ring and wedding band $2,000.00
The court will require the Wades to turn over to the trustee the $1,000.00 wedding band, with only $425 of that item being exemptible.
As to the other items recited above, it is impossible to tell which individual items may exceed $425 in value. For example, the “Engagement ring and wedding band” might consist of one item worth only $425 (and thus fully exemptible) with the other item being worth $1,525 and exemptible only to the tune of $425. By failing to itemize each item being exempted, the Wades have created this problem, and, accordingly, I will direct them to turn over the property to the trustee (except to the extent that the trustee determines that he does not desire turnover), with the Wades’ exemption amount being limited to $425 for each item.
In two instances, the Wades have claimed an exemption under § 15-501(a)(2) of household goods, lumping together multiple items as to which the group of property is valued at an amount exceeding $425 (without exemption amounts having been claimed as to individual items). For example, the Wades have claimed “4 Televisions, Video camera, 3 DVD Players” with a value of $1,200 as exempt in the amount of $200 pursuant to § 15-501(a)(2). Because that exemption was limited to $200, but the property is worth $1,200, the trustee is entitled to turnover of the property with the Wades to be entitled to recover $200 out of the proceeds.8 The court will similarly require turnover as to the other group of items claimed to be exempt under § 15-501 (a)(2) and for which the value of the group of items is listed as exceeding $425 (without exemption amounts having been claimed as to individual items). As to both groups, the Wades need not make turnover of an item if the trustee advises *26that he does not desire turnover of the item.
III
The Wades have exempted numerous items under § 15-501(a)(2) that do not qualify for exemption under that provision, including checking, savings, and money market accounts, a Scottrade account, a TD Ameritrade investment account, and a 2010 D.C. income tax refund. Those items should be promptly turned over to the trustee.
IV
The trustee also requests that the Wades be required to turn over their automobiles because the amount they could exempt under D.C.Code § 15-501(a)(l) is less than the value of the two vehicles (valued at $4,455.00 and $6,175.00, and unencumbered by any lien), and no exemption remains available under § 15-501(a)(3) as to those vehicles (the $850 per debtor having been utilized with respect to other property claimed to be exempt). The court will order turnover of the two vehicles (unless the parties agree on a value to be paid the trustee in lieu of turnover), and the exempt amount for each vehicle is limited to $2,575 the maximum exemption allowed by § 15-501(a)(l).
V
An order follows.
. Pursuant to 11 U.S.C. § 522(b)(1), the Wades elected not to claim exemptions under 11 U.S.C. § 522(d), and elected instead to claim the exemptions available to them under 11 U.S.C. § 522(b)(3), which includes, as to them, exemptions available under District of Columbia law.
. To the extent that the trustee’s awkwardly worded objection could be construed as objecting to the Wades' exemption of the equity in their residence (which I do not believe was the trustee's intention) that objection will be overruled. The objection sets forth no basis for disallowing that exemption.
. The exemptions, in fact, total $1,700 or $850 for each of the Wades. But the trustee and the Wades have addressed the issue as though the Wades might attempt to exempt greater amounts under § 15-501(a)(3) with respect to exemptions disallowed under § 15-501(a)(2). Accordingly, I will address the issue.
.Section 522(d)(1) is the exemption of a residence available when a debtor elects 11 U.S.C. § 522(d) exemptions. See n.l, supra.
. The Wades scheduled their residence on their Schedule A (their schedule of real property) and their Schedule C (their schedule of claimed exemptions) without distinguishing between the part as to which they may have an equity interest, and the part as to which they have no such equity interest. On Schedule A, the Wades valued the real property on Schedule A as worth $822,300, and as being subject to secured claims in the amount of $735,000. On Schedule C, they exempted $87,300. In other words, all that they have not exempted is the part of the property that is fully encumbered and that would realize nothing for the estate.
. For all we know, legal title is held by a trustee under a deed of trust. The parties have not briefed whether the District of Columbia is a so-called title state or a lien state when it comes to the status of a trustee under a deed of trust. But instead of attempting to decide whether the Wades have a bare legal title, I will simply refer to the Wades’ non-equity interest. That interest, whether it is treated as a legal title interest or not, confers upon them certain rights, including a right of redemption, and a right to remain in the property until it is foreclosed. I will assume (without deciding) that those are part of their rights that could be exempted under § 15— 501(a)(14).
. Assume, without it actually being decided, that if a debtor rents part of a real property residence, the rents from that property arguably are part of that real property (and not a proceed of the lease as a separate personal property right) and exemptible under § 15— 501(a)(14) if they are unencumbered. A failure to exempt the rents might result in part of a debtor’s § 15-501(a)(14) exemption going unused. But here, the Wades have scheduled no leases, and, as already noted, have lumped all of their interests in the property together, exempting all but the amount subject to a lien that leaves nothing of value to be exempted from the estate. They have no "unused amount” of their § 15-501(a)(14) exemption.
. The Wades could amend the exemption as to each item to assert no more than $425 exempt as to each item. The exemption of an aggregate amount of only $200 for the group of items does not make sense. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494617/ | MEMORANDUM OF DECISION ON MOTIONS OF APURV GUPTA AND VICTOR MUNGER FOR ALLOWANCE OF ADMINISTRATIVE EXPENSE CLAIMS
MELVIN S. HOFFMAN, Bankruptcy Judge.
Apurv Gupta and Victor Munger, senior executives of the debtor, Quincy Medical *28Center, Inc. (“QMC”), have filed substantively similar motions seeking allowance of administrative expense claims under § 503(b)(1) of the Bankruptcy Code, 11 U.S.C. § 101 et seq.,1 for severance pay due them under QMC’s Executive Severance Policy dated January 1, 2011. QMC opposes both motions.
The salient facts are not in dispute. Both Dr. Gupta and Mr. Munger were employees in good standing of QMC on July 1, 2011, the date QMC and certain affiliates filed voluntary petitions under chapter 11 of the Bankruptcy Code in this court. QMC’s primary asset was Quincy Hospital, a 196 bed acute care facility which has served the community in and around Quincy, Massachusetts since 1890. Dr. Gupta served as Senior Vice President for Clinical Affairs/Chief Medical Officer of QMC pursuant to an employment agreement effective October 1, 2009. Mr. Mun-ger served as Senior Vice President of Human Resources pursuant to a letter agreement effective March 1, 2010. Both executives were included in QMC’s executive severance policy as set forth in a memorandum dated January 1, 2011 which entitled them to, among other things, a minimum of six and a maximum of twelve months’ base salary continuation upon termination of employment other than for cause. QMC’s severance policy does not articulate specific guidelines or procedures for determining the circumstances under which an employee may receive in excess of the minimum six months’ salary.
By letters dated October 7, 2011, QMC terminated Dr. Gupta’s and Mr. Munger’s employment without cause effective October 1, 2011 which was the date when substantially all the assets of QMC and its affiliates were acquired by a third party purchaser known as Quincy Medical Center a Steward Family Hospital, Inc. (“Steward”). Since that time Steward has been operating Quincy Hospital and its ancillary facilities. The cited reason for the terminations was Steward’s failure to offer Dr. Gupta and Mr. Munger continued employment.
In the Asset Purchase Agreement (“APA”) entered into by Steward and QMC and its affiliates, Steward agreed to offer employment for a period of no less than three months to each employee of QMC as of the date of the sale closing at the salary and position enjoyed by such employee prior thereto. Further, in the event Steward terminated any former QMC employee, Steward agreed to honor any severance obligation based on QMC’s severance policy. While Dr. Gupta and Mr. Munger were QMC employees on the sale closing date, they were not offered employment by Steward.
Mr. Munger asserts a claim for administrative expenses against QMC in the amount of $135,000, consisting of a severance pay claim of $90,000, representing six months’ salary, and a claim of $45,000, representing the minimum three months’ salary he would have received had Steward hired him.
Dr. Gupta asserts an administrative expense claim against QMC of $468,000, consisting of a severance claim of $312,000, equal to twelve months’ salary, and a claim of $156,000, representing 180 days’ salary, because QMC failed to give Dr. Gupta the requisite 180 days’ prior notice of termination pursuant to his employment agreement.2
*29QMC is unwilling to concede that any component of either claim is entitled to administrative priority treatment. Furthermore, while QMC agrees with the amount of Mr. Munger’s claim it suggests the claim is properly a claim against Steward. QMC submits that had Steward employed Mr. Munger as it was obligated to under the APA, Steward would have been obliged to retain and pay him for three months and then upon termination pay him six additional months’ salary under QMC’s severance policy. As for Dr. Gupta’s claim, without accepting any of Dr. Gupta’s alternative claim amounts, QMC invites him as well to pursue Steward for recovery.
As noted previously, the claims of both executives consist of severance and non-severance components. In the case of Mr. Munger’s claim, the non-severance component is $45,000 for three months’ post sale compensation. There is no basis, however, for Mr. Munger’s assertion that QMC should be liable for this amount. It was Steward, not QMC, who made the commitment to employ QMC’s staff for a minimum of three months after the sale closing. Mr. Munger has failed to articulate any basis, nor am I aware of any, by which QMC should be held liable for Steward’s failure to employ him.
Dr. Gupta’s non-severance claim consists of 180 days’ salary totaling $156,000 resulting from QMC’s failure to give Dr. Gupta the required 180 day notice of termination under his employment agreement. But as Dr. Gupta’s employment agreement was never assumed by QMC, his claim for termination damages is not a claim against QMC as debtor in possession, rather it is a textbook Bankruptcy Code § 502(b)(7) general unsecured claim. “Although during the Chapter 11 proceeding a prepetition executory contract remains in effect and enforceable against the nondebtor party to the contract, the contract is unenforceable against the debtor in possession unless and until the contract is assumed.” Mason v. Official Committee of Unsecured Creditors (In re FBI Distribution Corp.), 330 F.3d 36, 43 (1st Cir.2003).
Classifying the severance components of the two executives’ claims is less clear cut than the non-severance components just discussed. Mr. Munger seeks six months’ severance while Dr. Gupta seeks twelve. As observed previously, QMC’s Executive Severance Policy is not clear as to the basis for a terminated employee’s entitlement to severance pay in excess of six months. The only reasonable interpretation of the policy is that a terminated employee receives severance equal to six months unless otherwise mutually agreed. QMC’s opposition to Dr. Gupta’s motion indicates it did not agree to the doctor’s receiving twelve months’ severance and thus I conclude that the maximum severance to which Dr. Gupta is entitled is $156,000, representing six months of his salary at termination.
Having attended to the preliminaries, it is time to consider the pivotal issue presented by these motions — whether the severance claims are entitled to § 503(b)(1) priority status as expenses of administration of the chapter 11 case.
In the First Circuit, clear guidance has been provided by the court of appeals in decisions arising out of the bankruptcies of two well-known discount retail chains from different eras, Mammoth Mart and Filene’s Basement. In Cramer v. Mammoth Mart, Inc. (In re Mammoth Mart, Inc.), 536 F.2d 950 (1st Cir.1976), a Bankruptcy Act case, the court succinctly articulated *30the principles for determining administrative expense qualification generally. These principles remain as relevant today under Bankruptcy Code § 503(b)(1) as they were a generation ago under § 64(a)(1) of the Bankruptcy Act. The court distinguished between transactions with a debtor in possession and those with the pre-bankruptcy debtor:
For a claim in its entirety to be entitled to first priority under s 64(a)(1), the debt must arise from a transaction with the debtor-in-possession. When the claim is based upon a contract between the debtor and the claimant, the case law teaches that a creditor’s right to payment will be afforded first priority only to the extent that the consideration supporting the claimant’s right to payment was both supplied to and beneficial to the debtor-in-possession in the operation of the business.
Mammoth Mart, 536 F.2d at 954. Against this backdrop, the court laid out the test for determining whether a severance pay claim is entitled to administrative priority treatment:
It follows that whether a claim for severance pay based upon an unrejected contract with the debtor and arising from a chapter XI discharge will be entitled to s 64(a)(1) priority will depend upon the extent to which the consideration supporting the claim was supplied during the reorganization. If an employment contract provides that all discharged employees will receive severance pay equal to their salaries for a specified period, the consideration supporting the claim being an employee in good standing at the time of the discharge will have been supplied during the arrangement, and the former employee will be entitled to priority.
Id. at 955.
In an adversary proceeding brought by a former executive of Filene’s Basement, the court of appeals provided useful insight into its Mammoth Mart decision, refining it to achieve consistency with the Bankruptcy Code. Again the court began by presenting a primer on how to analyze administrative expense claims by parties to unassumed executory contracts such as the employment agreements of Dr. Gupta and Mr. Munger.
Where the debtor in possession, however, induces a nondebtor to render performance pursuant to an unassumed prepetition executory contract, pending its decision to reject or assume, the non-debtor party will be entitled to administrative priority only to the extent that the consideration supporting the claim was supplied to the debtor in possession during the reorganization and was beneficial to the estate.
FBI Distributing, 330 F.3d at 42-43. The court next turned to its Mammoth Mart decision explaining that:
The rationale underlying the holding was that because severance pay was a component of compensation for services rendered-that is, the employees’ wages included severance pay-it could be entitled to administrative priority, but only to the extent that it was earned postpetition. Furthermore, it made no difference that the right to payment for the severance earned prepetition arose during the reorganization. What did matter was when the consideration supporting the claim was supplied. Id. at 954; see also 11 U.S.C. § 503(b)(1) (“for services rendered after the commencement of the case”) (emphasis added).
Id. at 43.
Based on these two decisions, the law in the First Circuit is clear. Severance pay is entitled to administrative expense priority only to the extent it is tied *31to the employee’s length of service so that it is part of the employee’s compensation. If it passes that test then the administrative expense priority is limited exclusively to that portion of severance pay attributable to post petition services. As an example consider an employee whose compensation consists of an annual salary of $100,000 plus severance equal to $100 per month for every month of employment. If the employer were to become a chapter 11 debtor and later terminate the employee, the employee would be entitled to an administrative expense claim for severance equal to $100 for each month of service after the chapter 11 petition date.
Here, the severance pay arrangement for both Dr. Gupta and Mr. Munger had nothing to do with length of service. Just like Ms. Mason’s severance deal with Filene’s Basement, whether the QMC executives worked two minutes or two years after executing their employment agreements they were entitled to six months’ salary upon termination without cause. The fact that Dr. Gupta and Mr. Munger stayed on with QMC and rendered valuable services post-petition does not change the result. They were fully compensated for their post-petition services.
The executives argue that QMC induced them to continue their employment post-petition by publicizing, generally and in pleadings filed in this court, the agreement of Steward to retain all QMC employees post-closing. Even if such conduct by QMC could be called inducement, the court of appeals in FBI dismissed inducement as a basis for creating an administrative expense claim because it amounted to the argument that the debtor in possession had assumed the employment agreement by implication. “It is well settled, however, that an executory contract cannot be assumed by the unilateral acts of the debtor in possession during the reorganization of its business.” Id. 44. “If the debtor-in-possession elects to continue to receive benefits from the other party to an executory contract pending a decision to reject or assume the contract, the debtor-in-possession is obligated to pay for the reasonable value of those services, which, depending on the circumstances of a particular contract, may be what is specified in the contract.” Id. at 43-44, citing N.L.R.B. v. Bildisco and Bildisco, 465 U.S. 513, 531, 104 S.Ct. 1188, 79 L.Ed.2d 482 (1984), and adding emphasis.
The severance pay claims of Dr. Gupta and Mr. Munger being unrelated to their salaries and length of service, the claims are not entitled to treatment as expenses of administration under Bankruptcy Code § 503(b)(1).
The matter, however, does not end here. The order of the court dated Sept. 26, 2011 [Docket # 339] approving the sale to Steward specifically approved the APA. Paragraph 30 of the sale order provides:
The terms and provisions of the APA, together with the terms and conditions of this Order, shall be binding in all respects upon all entities, including, without limitation, the Company (including its employees, officers and directors), its estates, all creditors and equity interest holders of the Company, Steward, and their respective affiliates, successors and assigns, agents and any affected third parties, including, but not limited to, all persons asserting a claim against or interest in any of the Assets to be sold, conveyed or assigned to Steward pursuant to the APA.
Under paragraph 37 of that order this court retains jurisdiction to “interpret [and] implement ...” the APA and to “resolve any disputes arising under or related to the APA” Finally, paragraph 21 of the order dated November 22, 2011 confirming QMC and affiliates’ joint plan of liquidation [#435] provides “the Sale Order shall survive Confirmation of the Plan, en*32try of this Order and the occurrence of the Effective Date.”
A bankruptcy court has jurisdiction to interpret and enforce its own prior orders. Travelers Indem. Co. v. Bailey, 557 U.S. 137, 129 S.Ct. 2195, 2205, 174 L.Ed.2d 99 (2009); First Marblehead Corp. v. Education Resources Institute, Inc. 2011 WL 6141004, at *6-7 (D.Mass. Dec. 8, 2011). By virtue of the sale order, which was not appealed, Dr. Gupta and Mr. Munger, employees of QMC on the date of that order, and Steward are bound by the order and the provisions of the APA. Both motions filed by the executives assert that Steward violated the terms of the APA by not offering them employment post-closing. I will, therefore, treat both motions as seeking relief in the alternative — either for an order granting administrative expense status to their claims or for an order directing Steward to pay them. Having denied their request for administrative expense status, I will set the motions down for further hearing on their request for an order directing Steward to pay the claims.
Separate Orders shall issue.
. While the introductory paragraph of Mr. Munger's motion cites Bankruptcy Code § 503(b)(3), it is clear from the body of his motion and his prayer for relief that Mr. Mun-ger seeks allowance of his claim under § 503(b)(1).
. In his motion Dr. Gupta offers a menu of possible lower administrative expense claims *29using a series of alternative calculation formulas but $468,000 is his high-side number and the only one in his prayer for relief. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494618/ | Memorandum
MAGDELINE D. COLEMAN, Bankruptcy Judge.
Introduction
Before this Court for consideration is the Chapter 7 Trustee, Michael A. Kaliner’s (the “Trustee”) objection (the “Objection”) to Proof of Claim No. 16 of Law Street Capital, LLC (“LSC”). LSC has asserted a secured claim against the debt- or, Thomas A. Kuranda (the “Debtor”) in the amount of $38,870.811 that arises from money advanced to the Debtor pursuant to an agreement titled “Law Street Capital LLC Funding Agreement.” The Trustee contends that LSC’s holds only an unsecured claim because the proceeds in which LSC asserts a secured claim are post-petition assets and at the time of the alleged pre-petition assignment represented a future interest.
Following an evidentiary hearing on April 26, 2011, and having considered the issues raised by the parties at the hearing and in their post-hearing filings, this Court finds that LSC has met its burden with regard to the Debtor’s liability for its secured claim. On this basis, the Objection will be overruled.
Factual and Procedural Background
On April 23, 2003, the Debtor and his former wife filed a complaint in the Montgomery County Court of Common Pleas for damages arising from defects in the construction of their home. The case was captioned Thomas Kuranda v. Nick Conti, et al., Case No. 03-06224 (the “State Court Action”). Subsequent to the commencement of the State Court Action, the proceeding was referred to common law arbitration before the American Arbitration Association. An arbitration hearing was held on three dates: October 18, 2005; October 25, 2005; and November 15, 2005. On January 18, 2006, the arbitrator entered an award in favor of the Debtor in the amount of $336,590.50 plus expenses for a total award of $340,782.50 (the “Arbitration Award”).
In February 2006, the defendants to the Arbitration Proceedings challenged the award by filing a Motion to Vacate and/or Modify the Arbitration Award (the “Modification Motion”) in a matter captioned “Thomas Kuranda v. Nick Conti Les Stewart, Nick & Les, Inc., Stewart-Conti Development Company, Inc., and Prudential Diliberto & Murphy Realtor,” Court of Common Pleas, Montgomery County, Pennsylvania, Case No. 03-06224 (“State Court Proceeding”). After holding eviden-tiary hearings, the Montgomery County Court of Common Pleas issued an Order dated June 10, 2007, denying the Modification Motion and confirming the Arbitration Award (the “Confirmation Order”). On July 13, 2007, the Debtor filed a praecipe to enter the Arbitration Award as a judgment on the docket in the State Court Proceeding. In addition to the amount of the Arbitration Award, the Debtor requested that he be awarded $103,638.97 in post-award interest for a total judgment amount of $444,421.47 (the “Judgment Amount”). On July 23, 2007, the judgment defendants filed a Notice of Appeal of the *42Order of July 10, 2007, which was later quashed by the Pennsylvania Superior Court.
On September 4, 2007, and after the entry of the Confirmation Order, the Debt- or entered into an agreement with LSC titled “Law Street Capital LLC Funding Agreement” executed September 4, 2007 (the “Funding Agreement”), whereby LSC advanced money to the Debtor in the total amount of $34,850 (the “Funded Amount”) consisting of (1) a $30,000 payment to the Debtor; (2) a broker fee of $4,600 to Chestnut Hill Funding, Inc.; and (3) a $250 application fee. As consideration for the Funded Amount, the Debtor assigned a portion of his interest in “the proceeds of my lawsuit” to LSC. Amended Proof of Claim, Exh. T-2, ¶ 5. The Funding Agreement defines the term “proceeds” as “any money paid as a consequence of the lawsuit whether by settlement, judgment or otherwise.” Amended Proof of Claim, Exh. T-2, ¶ 6. The Debtor’s obligation to pay LSC the amount due pursuant to the Funding Agreement was not triggered unless and until the Debtor received payment of the proceeds of his lawsuit. Amended Proof of Claim, Exh. T-2, ¶¶ 2 and 4. The terms of the Funding Agreement also provide that it shall be construed in accordance with the laws of the State of New York.
To secure repayment, the Debtor granted to LSC a security interest in and an assignment of proceeds of his lawsuit. The terms of the security interest are set forth in the Funding Agreement which states:
“I hereby grant you a Lien and Security Interest in the -proceeds of the lawsuit. The amount due you shall be withheld from any money collected as a result of this lawsuit and paid immediately upon collection to LSC.... ”
Amended Proof of Claim, Exh. T-2, ¶ 19 (emphasis added).
With regard to the assignment of proceeds of the Debtor’s lawsuit, the Funding Agreement states:
“In signing this agreement, I am assigning my interest in the proceeds of my lawsuit to LSC in the amount described in the Full Disclosure Box. In the event that this assignment is not permitted by law, then I agree to pay LSC all of the funds due under this Agreement immediately upon the payment of the Lawsuit proceeds as a separate and independent obligation. I am granting a Security Interest and Lien to LSC in the same amount.”
Amended Proof of Claim, Exh. T-2, ¶ 5 (emphasis added).
The Debtor subsequently confirmed the assignment of the proceeds of his lawsuit in an Irrevocable Letter of Instruction executed on September 6, 2007 (the “Assignment Letter”). In the Assignment Letter, the Debtor stated:
This letter, along with copies of the Law Street Capital LLC Funding Agreement, will confirm that I am irrevocably assigning an interest in the proceeds from any settlement of my pending case (as described above) to Law Street Capital LLC.
Amended Proof of Claim, Exh. T-2. The Assignment Letter described the lawsuit as “Thomas Kuranda for the incident that occurred on or about 1/10/2005, or any other actions.” The Assignment Letter provides no other description of the lawsuit.
Three days after entering into the Funding Agreement, the Debtor filed a voluntary petition for relief under chapter 7 of the Bankruptcy Code dated September 7, 2007 (the “Petition Date”). On the same day, the Trustee was appointed in accordance with 11 U.S.C. § 701(a)(1). For *43over two and a half years, the Trustee by and through his counsel attempted to collect on the Judgment Amount by levying on the property of the judgment defendants and opposing multiple attempts by the judgment defendants to challenge the Judgment Amount in both the state and federal courts. On January 7, 2010, the parties entered into a Settlement and Mutual Release (the “Settlement Agreement”) that settled all claims and issues relating to the State Court Proceeding and claims made by the defendants against the Debt- or. As part of the Settlement Agreement, the judgment defendants have agreed to pay and have already posted payment with the Chapter 7 Trustee in the amount of $556,000 (“Settlement Amount”). On February 3, 2010, the Trustee filed a motion with this Court to compromise the lawsuit and approve the settlement agreement. The Settlement Amount represents in excess of 160% of the Arbitration Award of $340,782.50 entered in January 2006 and 125% of the amount of the judgment entered on July 13, 2007. After receiving no objection to the Trustee’s motion, this Court issued an Order dated February 22, 2010, approving the settlement agreement.
LSC filed a proof of claim on December 6, 2010, asserting a secured claim against the estate in the amount of $38,870.81 plus any accrued interest (the “Proof of Claim”).2 LSC asserts that its claim arises from the monies advanced pursuant to the Funding Agreement. As evidence of its claim, LSC attached a copy of a letter dated November 11, 2010, from LSC to the Debtor’s counsel addressing the payoff amount. In addition, LSC attached a copy of the Debtor’s client activity statement. The Debtor did not list LSC’s claim on its schedules.
On February 21, 2011, the Trustee filed the Objection objecting to the Proof of Claim on the ground that LSC failed to attach a statement of account or other adequate evidence of any secured debt. The Trustee also asserted that LSC’s interest was unperfected as of the Petition Date because, as of that date, LSC held no enforceable lien against the proceeds of the Debtor’s lawsuit. The Trustee argues that the Funding Agreement and Assignment Letter did not assign to LSC any interest in the Arbitration Award or Judgment Amount. Rather, the Trustee states that pursuant to the explicit terms of the Funding Agreement and Assignment Letter, the Debtor assigned to LSC an “interest in the proceeds of my lawsuit.” Amended Proof of Claim, Exh. T-2. Because the proceeds of the Debtor’s lawsuit did not exist until the date of the Settlement Agreement, the Trustee argues that LSC’s lien could not attach until after the execution of the Settlement Agreement, an event that occurred postpetition. On this basis, the Trustee argues that LSC’s claim should be characterized as unsecured.
In response to the Trustee’s Objection, LSC filed an amended proof of claim dated April 26, 2011 (the “Amended Proof of Claim”). The Amended Proof of Claim supplemented the writings originally submitted by LSC as proof of its claim. As further evidence of its claim, LSC included three attachments with its Amended Proof of Claim: (1) copies of documents evidencing the agreement between the Debtor and LSC that includes a copy of the security agreement between the Debtor and LSC as well as copies of two negotiated checks made out to the Debtor from LSC in the amount of $30,000 and $4,600; (2) a copy of a letter dated November 11, 2010, from *44LSC to the Debtor’s counsel addressing the payoff amount and a copy of the Debt- or’s client activity statement;3 and (3) a copy of a praecipe to enter judgment on arbitration award filed with the Court of Common Pleas of Montgomery County, Pennsylvania as of July 13, 2007.
LSC disputes the Trustee’s characterization of its claim as being unsecured. LSC argues that the Funding Agreement transferred to it an assignment of an interest in an existing judgment and not a future interest because the Arbitration Award was entered in Montgomery County Court of Common Pleas prior to the execution of the Funding Agreement. On this basis, LSC states that its interest in the Arbitration Award was perfected prior to the Petition Date.
This Court held an evidentiary hearing on April 26, 2011, to address the parties’ arguments. At the hearing, this Court heard the testimony of the Trustee as to the history of the State Court Action. Significantly, the parties agreed that there exists no dispute as to the relevant facts and agreed to allow this Court to take judicial notice of the exhibits to both the original Proof of Claim and the Amended Proof of Claim to be moved into evidence. However, the parties did disagree as to the application of New York law. On the one hand, the Trustee argued that the Funding Agreement assigned to LSC the “proceeds of the lawsuit.” On this basis the Trustee argued that LSC had an unsecured claim as of the Petition Date because LSC’s security interest could not attach to the proceeds of the State Court Action until such proceeds were collected by the Trustee, an event that occurred post-petition.
On the other hand, LSC argued that under New York when a party assigns its interest in the proceeds of a lawsuit and when that party is then in possession of a judgment in that lawsuit, the security interest attaches immediately upon execution of the assignment.
Unable to resolve this issue from the bench, this Court requested that the parties submit post-trial briefs addressing the application of New York law to the facts of this case, and specifically, the time at which LSC’s security interest attached to the proceeds of the State Court Action. This Court now being in possession of each party’s post-trial brief and having given due consideration to the arguments made in both is now ready to issue its decision in this matter.
Legal Discussion
I. The Parties’ Respective Burdens
Allowance of a proof of claim is governed by 11 U.S.C. § 502(a) and Federal Rule of Bankruptcy Procedure 3001(f). The Third Circuit has defined each party’s respective burden in proof of claim litigation.
“The burden of proof for claims brought in the bankruptcy court under 11 U.S.C.A. § 502(a) rests on different parties at different times. Initially, the claimant must allege facts sufficient to support the claim. If the averments in his filed claim meet this standard of sufficiency, it is ‘prima facie ’ valid. In other words, a claim that alleges facts sufficient to support a legal liability to the claimant satisfies the claimant’s initial obligation to go forward. The burden of going forward then shifts to the objector to produce evidence sufficient to negate the prima facie validity of the filed claim. It is often said that the *45objector must produce evidence equal in force to the prima facie case. In practice, the objector must produce evidence which, if believed, would refute at least one of the allegations that is essential to the claim’s legal sufficiency. If the objector produces sufficient evidence to negate one or more of the sworn facts in the proof of claim, the burden reverts to the claimant to prove the validity of the claim by a preponderance of the evidence. The burden of persuasion is always on the claimant.”
In re Allegheny Int’l Inc., 954 F.2d 167, 173-74 (3d Cir.1992) (citations omitted).
Here, the parties do not dispute whether LSC has met its prima facie burden and agree that the law of the State of New York controls the interpretation of the agreements. Rather, the parties concede that the only dispute relates to the interpretation of the language of the Funding Agreement and the Assignment Letter. Specifically, the parties disagree as to whether, as a matter of law, the Debtor’s interest in the “proceeds of the lawsuit” remained contingent as of the Petition Date. The Trustee argues that the Debt- or’s interest in the “proceeds of the lawsuit” remained contingent until January 7, 2010, the date of the Settlement Agreement. On the other hand, LSC argues that the Debtor’s interest in the “proceeds of the lawsuit” became fixed as of June 10, 2007, the date of the Confirmation Order confirming the Arbitration Award. Ultimately, this Court must decide whether, according to the terms of the Funding Agreement and applicable New York law, LSC’s security interest in the proceeds of the lawsuit attached pre or post-petition.
II. New York Law Governing the Assignment of the Proceeds of a Lawsuit
To determine the status of LSC’s claim, this Court must determine when the Debt- or’s interest in the “proceeds of the lawsuit” became fixed. Complicating matters, each party advocates a separate interpretation of the relevant contractual term. The Trustee argues that the Debtor intended to transfer a sum of money and not the Debtor’s interest in either the Arbitration Award or the Judgment Amount. On this basis, the Trustee argues that the Debtor’s interest could not become fixed until the Debtor was actually in possession of the money paid as a result of the Settlement Agreement. In response, LSC argues that the Debtor intended to transfer the proceeds of his lawsuit inclusive of his interest in the Arbitration Award and Judgment Amount.
The determination of whether a contractual term is ambiguous constitutes a question of law. Seiden Associates, Inc. v. ANC Holdings, Inc., 959 F.2d 425, 429 (2d Cir.1992); Kass v. Kass, 91 N.Y.2d 554, 566, 673 N.Y.S.2d 350, 696 N.E.2d 174 (1998). In determining whether a contractual term is ambiguous, this Court must look within the “four corners of the document” and interpret the disputed language in accordance with the parties’ intent. Kass v. Kass, 91 N.Y.2d 554, 566, 673 N.Y.S.2d 350, 696 N.E.2d 174 (1998). Language that has a plain meaning “does not become ambiguous merely because the parties urge different interpretations in the litigation.” JA Apparel Corp. v. Abboud, 568 F.3d 390, 396 (2d Cir.2009). As stated by the Second Circuit, “[ajmbiguous language is language that is capable of more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business.” Revson v. Cinque & Cinque, P.C., 221 F.3d 59, 66 (2d *46Cir.2000) (quotations omitted). If this Court determines that the language is ambiguous, it may consider extrinsic evidence in deciding between two reasonable interpretations. Seiden Associates, Inc. v. ANC Holdings, Inc., 959 F.2d 425, 429 (2d Cir.1992).
In determining the threshold question of whether the term “proceeds of my lawsuit” is ambiguous, this Court concludes that its meaning is clear. While this Court acknowledges that the Funding Agreement is not the model of draftsmanship, this Court is not convinced of the Trustee’s interpretation. Specifically, this Court finds that the Trustee’s interpretation confuses the time at which the Debtor’s obligation to pay the proceeds to LSC arises with the time at which the Debtor’s interest in the proceeds became sufficiently fixed to allow the attachment of LSC’s lien.
Under New York law, the assignment of the proceeds of a lawsuit does not become an enforceable security interest until the grantor’s interest in the proceeds becomes fixed. Until either a settlement is reached or a judgment is entered, a grantor’s interest in the proceeds of a lawsuit remains a contingent, future interest. Law Research Serv. v. Martin Lutz Appellate Printers, 498 F.2d 836, 838 (2d Cir.1974). However, upon entry of a judgment, a grantor’s interest becomes a fixed, present interest. Law Research Serv. v. Martin Lutz Appellate Printers, 498 F.2d 836, 838 (2d Cir.1974). In this case, the Debtor was the holder of an existing judgment as of the date of the execution of the Funding Agreement and the Assignment Letter. As a result, the Debtor’s interest in the proceeds of the lawsuit became a fixed, present interest as of the date of the Confirmation Order. Corn v. Marks (In re Marks), 192 B.R. 379, 384 (E.D.Pa.1996) (“A Pennsylvania state court’s judgment confirming an arbitration award is accorded the same status as any other state court judgment.”). For this reason, this Court finds that LSC’s lien attached no later than September 6, 2007, the date of the Assignment Letter.4
The Trustee attempts to avoid this outcome by relying on In re Andrade, Bky. No. 10-42877, 2010 WL 5347535 (Bankr. E.D.N.Y. Dec. 21, 2010) and Dunlap-McCuller v. Riese Organization, et al., Civ. No. 87-3961, 1995 WL 422141 (S.D.N.Y. Jul. 18, 1995). However, a close reading of both decisions indicates that the Trustee’s reliance is misplaced.
Both Andrade and Dunlap-McCuller address a substantially similar factual and procedural situation. Like the Debtor, the debtor in both decisions each executed a prepetition assignment of the proceeds of a pending lawsuit that was subsequently settled postpetition. After filing for bankruptcy and appointment of a chapter 7 trustee, the trustee in each case challenged the secured status claimed by the assignee on the ground that, as of the petition date, the assignee’s interest remained contingent and therefore the grantee’s lien had not yet attached. In re Andrade, Bky. No. 10-42877, 2010 WL 5347535, at *2 (Bankr.E.D.N.Y. Dec. 21, 2010). Contrary to the Trustee’s arguments, neither decision turned on whether the debtor intended to create a future interest in either a sum of money or a judgment. Rather, the decisions relied upon the fact that prior to the petition date neither debtor had yet obtained either a settlement of the lawsuit or a judgment on the claim. As a result, both debtors held as of their respective petition dates contingent, future interests to which each grantee’s lien could not at*47tach. For this reason, Andrade and Dunlap-McCuller are easily distinguishable.
Here, the Debtor, unlike the debtors in Andrade and Dunlap-McCuller, obtained a judgment prior to the Petition Date.5 As recognized by the court in An-drade, “[t]he assignee’s lien comes into existence only when a judgment is entered or a settlement is reached.” In re Andrade, Bky. No. 10-42877, 2010 WL 5847535, at *2 (Bankr.E.D.N.Y. Dec.21, 2010). Similarly, the court in Dunlap-McCuller stated that the “lien comes into existence only when the judgment was entered.” Dunlap-McCuller v. Riese Organization, et al., Civ. No. 87-3961, 1995 WL 422141, at *1 (S.D.N.Y. Jul. 18, 1995). Because no prepetition judgment had been entered, both decisions held that the date of the postpetition settlement controlled for determining the status of each grantee’s lien. In Andrade, the court specifically distinguished the case before it from cases like the Debtor’s where “when the assignment was made the lawsuit had already been reduced to judgment and therefore the lien attached at the point of assignment.” In re Andrade, Bky. No. 10-42877, 2010 WL 5347535, at *2 (Bankr. E.D.N.Y. Dec. 21, 2010) (distinguishing Law Research Serv. v. Martin Lutz Appellate Printers, 498 F.2d 836 (2d Cir.1974)).
Here, the Debtor obtained a judgment confirming the Arbitration Award prior to executing the assignment of the “proceeds of my lawsuit.” On this basis, this Court finds that as of the date of the Funding Agreement the Debtor held a fixed, present interest against which LSC’s lien attached prepetition. Law Research Serv. v. Martin Lutz Appellate Printers, 498 F.2d 836, 838 (2d Cir.1974) (“it is clear that the assignment of an existing judgment is of a present, not a future, interest.”).
The Trustee’s attempt to avoid this outcome by interpreting the Funding Agreement to grant only an interest in specific money is also unavailing. The assignment in Dunlap-McCuller employed identical language to the assignment contained in the Funding Agreement. The relevant language provided for the assignment of “the proceeds of the lawsuit.” Despite the Trustee’s argument that the use of the term “proceeds” signaled the parties’ intent to have LSC’s lien attach only to money and not a judgment or arbitration award, the decision in Dunlap-McCuller turned on whether the lawsuit matured by judgment or settlement prior to the debt- or’s petition date. Dunlap-McCuller v. Riese Organization, et al., Civ. No. 87-3961, 1995 WL 422141, at *1 (S.D.N.Y. Jul. 18, 1995) (stating the “lien comes into existence only when the judgment was entered”). The same logic applies here and precludes this Court adopting the interpretation of the Funding Agreement now advocated by the Trustee.
Summary
This Court finds that prior to the Petition Date, the Debtor held a fixed, present interest in “the proceeds of the lawsuit.” Therefore, according to New York law, LSC has established that its lien attached to the proceeds of the lawsuit prior to the Petition Date. For this reason, the Trustee’s Objection is OVERRULED.
. The claim register lists the dollar amount claimed on Proof of Claim No. 16 as $38,870.81. However, a further review of the claim reveals a payoff in the amount of $141,255.94 as of November 11, 2010. The precise amount of LSC's claim appears unclear. However, that issue has not been raised in the Objection and will not be addressed by this Court.
. As noted in an earlier footnote, in the Proof of Claim LSC also lists a payoff in the amount of $141,255.94.
. The second attachment to the Amended Proof of Claim is identical to the attachments included with LSC’s original Proof of Claim.
. The Funding Agreement was executed on September 4, 2007.
. The fact that the defendants in the State Court Action later appealed the Judgment Amount does not affect LSC's status. Law Research Serv. v. Martin Lutz Appellate Printers, 498 F.2d 836, 839 (2d Cir.1974) (recognizing that fact that judgment is subject to appeal or modification does not change status of lien holder). Therefore, according to the logic of Andrade, LSC’s claim must be determined to be secured. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494619/ | MEMORANDUM OPINION
CARLOTA M. BÓHM, Bankruptcy Judge.
The matter before the Court is the determination of appropriate sanctions pursuant to a finding of civil contempt. The Honorable Bernard Markovitz, to whom this case was previously assigned, heard argument on the Trustee’s Motion for Finding of Civil Contempt, Imposition of Sanctions, for Authority to “Junk” Assets, and Request for Expedited Hearing (“Motion”) and, by Order dated December 20, 2011, found the Debtor in contempt of the *51Court’s April 1, 2011 Order and Court directives. After the case was transferred to the undersigned, a hearing solely on the matter of sanctions was held on January 31, 2012. For the reasons set forth below, sanctions for civil contempt will be imposed in the form of rental payments due to the bankruptcy estate, compensation of the Trustee and his counsel for fees and costs resulting from Debtor’s violations of Court Orders and his duties under the Bankruptcy Code, and daily fines for failure to comply going forward.
I. Jurisdiction
The Court has subject jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. This is a core matter pursuant to 28 U.S.C. § 157(b)(2)(A), (E), (0).
II. Background
On July 30, 2010, Michael J. Free d/b/a Electra Lighting commenced this bankruptcy case by filing a petition for relief under Chapter 13. On February 1, 2011, the case was converted to a case under Chapter 7 and James R. Walsh was appointed as trustee. At the time of conversion, the case was assigned to the Honorable Bernard Markovitz.
At the Meeting of Creditors, the Trustee requested that Debtor produce within ten days, inter alia, the keys to Debtor’s North Huntingdon Property,1 keys to two ski chalets located in Westmoreland County near Seven Springs, an accounting of rent from the Seven Springs properties, and the rent itself. The Debtor was also advised that he must cease business operations. When the Trustee did not receive the items requested, he reiterated his demands and warned that he would be forced to commence turnover litigation if he could not obtain cooperation. His efforts were to no avail.
On March 30, 2011, the Trustee filed at Adv. No. 11-2187 a Complaint to Compel Turnover of Property of the Bankruptcy Estate Pursuant to 11 U.S.C. § 542, Recover Unauthorized Post-Petition Transfers Pursuant to 11 U.S.C. § 549, to Deny Discharge Pursuant to 11 U.S.C. § 727, for Injunctive Relief and/or Temporary Restraining Order Pursuant to Rule 7065, and Request for an Expedited Preliminary Hearing Thereon. The Complaint was premised upon Debtor’s failure to turnover assets as requested by the Trustee, his continued business operations, and post-petition sale of inventory.
On April 1, 2011, an expedited hearing before the Honorable Jeffrey A. Deller was held on the Trustee’s request for a preliminary and permanent injunction. At the hearing, no defense was offered in response to the request for preliminary injunction. In ruling, Judge Deller stated the undisputed facts: Debtor continued to dispose of property of the bankruptcy estate in violation of the automatic stay, breached his duties pursuant to §§ 521, 541, and 542 of the Bankruptcy Code, in*52terfered with the Court’s jurisdiction, and hindered the Trustee’s ability to liquidate assets.
Therefore, for the reasons stated on the record at the hearing, an Order was entered enjoining the Debtor and his agents from accessing the commercial buildings housing the Electra Lighting business, operating the business, and selling or transferring inventory of the business. In addition, the Debtor was ordered to turn over all keys and access devices to the business and to any and all rental properties. The Order provided Debtor with five days to “submit a written accounting to the Trustee of all rental income received after the date of the conversion of this case” and directed Debtor to immediately turn over all rental income received post-conversion. Debtor was also directed to submit a written accounting within five days “of all business inventory or other assets sold or transferred after the conversion of this case.... ” The Order provided clear consequences for non-compliance: “[fjailure to immediately and completely abide with the terms of this Order shall constitute contempt of Court and will subject the Debtor to sanctions and penalties, including but not limited to the United States Marshal taking Debtor into custody and bringing him before the Court to answer for his conduct.” The April 1, 2011 Order was not appealed.
Shortly thereafter, on April 8, 2011, the Trustee filed a Motion for Finding of Civil Contempt and Imposition of Sanctions due to Debtor’s failure to comply with the terms of the April 1, 2011 Order. At the hearing on May 5, 2011, Judge Markovitz recognized the shocking level of disregard for Court orders and found the Debtor’s behavior to be among the worst he had seen in twenty-five years on the bench. (Audio Recording of Hearing Held in Courtroom B on May 5, 2011 (9:56-57 AM)). In an attempt to express the gravity of the situation to the Debtor, who was present at the hearing, Judge Markovitz noted the potential for criminal repercussions. (Audio Recording of Hearing Held in Courtroom B on May 5, 2011 (9:58-10:02 AM)). Following the hearing, the parties entered into a consent order whereby the Debtor voluntarily agreed to waive his entitlement to discharge and his right to claim any exemptions.
Subsequently, all matters in the Adversary Proceeding were resolved pursuant to the entry of an Order on May 18, 2011. In that Order, Debtor was found “liable for each and every transfer of estate property from February 1, 2011, forward, plus all costs of this action and interest....” Thereafter, the adversary proceeding was closed. Despite being found liable for post-conversion transfers and the significance of the loss of his discharge and exemptions, these consequences proved insufficient to coerce Debtor to cooperate and comply in the future.
On October 17, 2011, the Trustee filed the Motion currently before the Court seeking a finding of civil contempt and imposition of sanctions. The first hearing on the Motion was held on October 25, 2011, before Judge Markovitz. The Court was informed that, although the Trustee changed the locks at the North Hunting-don property, Debtor managed to enter and operate the business in violation of the April 1, 2011 injunction. Apparently without any defense to the accusations, Counsel for the Debtor stressed to the Court that, despite the Debtor’s conduct, significant assets existed to pay creditors in full. Judge Markovitz again remarked several times on the record that Debtor was very close to imprisonment. The Debtor was warned not to enter the property, obstruct the Trustee, utilize estate assets, or violate court orders as such conduct would result *53in the Debtor being taken into custody by the United States Marshal. The hearing was continued.
By the time of the next hearing, it became apparent that the Debtor did not heed Judge Markovitz’s clear warning. Counsel for the Trustee reported several troubling items to the Court. First, the Trustee reported his discovery of an asset, another ski chalet, owned by Debtor which had not been disclosed. Second, the Debt- or continued to impede the Trustee. On July 19, 2011, Debtor was the successful bidder for, inter alia, the inventory of the North Huntingdon store location (“North Huntingdon Inventory”). Despite the Trustee’s denial of Debtor’s request to rent the North Huntingdon Property, Debtor refused to remove the inventory and continued to use the estate property as a rent-free storage facility. In addition, the Trustee reported that he had yet to receive certain firearm licenses from the Debtor so that those assets could be sold. Debtor’s Counsel acknowledged that the Debtor needed to provide the Trustee with additional information regarding the firearms and sought an extension of time, until Friday of that week (December 23, 2011), to provide this information. Despite the argument that Debtor’s multiple failures to comply with the Court’s Orders were “mistakes” and Debtor’s plea “again for one more chance”, Judge Markovitz concluded on the record that Debtor’s actions seemed intentional. At the conclusion of the hearing, the matter was taken under advisement.
Upon consideration of the Motion after the hearing, Judge Markovitz entered an Order finding that “the Debtor has entered onto, continued to utilize, liquidated, otherwise failed to vacate or turn over, and failed to disclose bankruptcy estate property, all in (a) violation of, inter alia, a Bankruptcy Court Order entered on April 1, 2011, at Adv. No. 11-2187-BM, Doc. No. 7, as well as this Court’s oral directives as set forth at various prior hearings, and (b) breach of the Debtors duties as imposed by various provisions of the Bankruptcy Code[.]” Accordingly, Judge Markovitz found the Debtor in contempt. A hearing was scheduled on January 31, 2012 “to determine the appropriate sanction for such contempt by the Debtor.” The December 20, 2011 Order was not appealed.
On January 3, 2012, this case was reassigned. The hearing on sanctions was held on January 31, 2012, and was the first proceeding in this matter to be heard by the undersigned. The matter is ripe for decision.
III. Sanctions Hearing
A finding of contempt having already been made by Judge Markovitz, the only matter remaining for this Court to address is the imposition of sanctions. At the hearing on January 31, 2012 (the “Sanctions Hearing”), Counsel for the Trustee called two witnesses, the Trustee and Linda Daniels (the “Realtor”), who was retained by the Trustee to market the North Huntingdon Property. The Court finds that these witnesses testified credibly. Debtor’s Counsel called no witnesses2 and *54sought one more chance and “mercy” on behalf of his client.
In addition to his pleas for mercy, Counsel for Debtor repeatedly emphasized his belief that sufficient assets exist to pay creditors in full. The Debtor seems to argue no harm, no foul. We believe there has been great harm to the integrity of the bankruptcy system. Furthermore, at this time, whether there are sufficient assets to pay creditors has not been and cannot be confirmed. Harm has resulted from Debt- or’s misconduct, which has created delay and increased administrative expenses. In addition, Debtor recently filed an appeal, which will result in additional administrative expenses. See note 1 supra. That appeal, if successful, could have a significant impact on the status of this case and the amount of funds needed to pay all creditors in full. Thus, the Trustee must continue to liquidate assets. The Debtor cannot attempt to excuse or mitigate his misconduct by asserting a fact which has not been confirmed.
We turn now to our findings of violations of Court Orders and non-compliance by Debtor. We incorporate herein the findings made by Judge Deller and Judge Markovitz and consider the testimony provided at the Sanctions Hearing.
Continued Use and Sale of Estate Property
It is undisputed that Debtor continued to access the North Huntingdon Property after conversion of the case to Chapter 7. The Trustee testified that when he first learned that the Debtor was accessing the store, he engaged the services of a locksmith and the locks were changed. Subsequently, the Trustee learned that the Debtor managed to enter the store and was continuing to operate the business. The locksmith was once again engaged to change the locks on the North Huntingdon Property. Thus, due to the Debtor’s misconduct, the estate paid for the locks to be changed twice. This is an additional expense for the estate due to Debtor’s misconduct.
In July 2011, shortly before the sale of the inventory, the Realtor testified that she visited the North Huntingdon Property. While there, she witnessed Debtor’s sale of merchandise. Therefore, prior to his purchase of the North Huntingdon Inventory and after he had been enjoined from entering the property and operating the business, not only did he enter the property in violation of the Order but he sold merchandise which was property of the estate.
After purchasing the North Huntingdon Inventory, Debtor refused to remove the assets from the store. The inventory filled the premises, and such conditions, according to the Realtor, negatively impact the ability to find a buyer. Debtor’s refusal to remove the inventory benefitted him to the extent that he did not have the expense of removing the inventory and storing it elsewhere. At the same time, Debtor made the North Huntingdon Property less attractive to potential purchasers to the detriment of the bankruptcy estate.
On October 24, 2011, the Trustee testified that he personally observed Debtor’s continued operation of the business despite (1) the injunction from doing so as stated in the April 1, 2011 Order, (2) the April 2011 motion for contempt and sanctions, resulting in waiver of Debtor’s discharge and exemptions, and (3) the current motion for contempt and sanctions before the Court. When the Debtor approached the *55Trustee outside of the store, the Trustee once again reminded him that he was not to be operating the business. Debtor’s conduct, without question, was willful.
The Trustee testified that one of the consequences of the Debtor’s continued operation of the store was the loss of insurance due to the presence of an unauthorized occupant. In order to comply with his duty to maintain insurance, the Trustee was forced to switch to a higher risk carrier at a higher cost. Debtor’s actions resulted in yet another expense to the estate.
It has been established that, after conversion of this case, Debtor entered into the store and sold merchandise. On that basis, the April 1, 2011 Order required Debtor to submit a written accounting of all inventory or other assets sold. Subsequently, the May 18, 2011 Order found that “Defendant [Debtor] is liable for each and every transfer of estate property from February 1, 2011, forward.... ” Despite these Orders, based on the testimony provided, Debtor did not provide the accounting of assets sold and continued to enter the store and operate the business.
Debtor hindered the Trustee’s attempts to liquidate assets for the benefit of creditors and continued to create additional expenses for the estate. The Debtor has established a pattern of conduct of disregarding Court Orders and doing as he pleases. We find that he has acted unreasonably and vexatiously throughout the course of this bankruptcy case causing increasing expenses, disruption, and delay.
Disclosed Westmoreland County Ski Chalets
The Trustee sought an accounting of the rent received from the ski chalets located in Westmoreland County and the rental income itself. Despite the entry of the April 1, 2011 Order, requiring an accounting of rental income received post-petition and turnover of that income, the Trustee reported that no such turnover was made. After being ordered to do so by this Court at the Sanctions Hearing, on February 8, 2012, eleven months after the initial order to do so, Debtor filed an affidavit reporting that he received no rent from the ski chalets after his bankruptcy case was converted to Chapter 7. Although the Debtor has not established credibility with this Court, no evidence to the contrary has been presented.
Firearms
The Court has been informed that certain firearms remain in the Debtor’s possession as the Trustee indicated that he does not have the appropriate licenses and permits to take possession of them. After repeated demands for the necessary documentation, Debtor has turned over only copies despite the Trustee’s insistence that he must obtain the originals in order to retain a broker to sell these assets. At the Sanctions Hearing, the Court ordered the immediate turnover of said items or, if the Debtor did not possess the necessary documentation, the filing of an affidavit to that effect. Accordingly, after another demand by the Trustee, on February 8, 2012, Debt- or filed an affidavit stating that he possesses only copies and no originals of the titles to the firearms. Although Debtor has a history in this case of refusing to cooperate and concealing assets, there is no evidence to the contrary of his sworn statement.
As the Trustee must continue his efforts to liquidate the firearms currently in the Debtor’s possession, the Debtor’s cooperation is necessary. However, by way of status report, the Trustee reported that he demanded, but had yet to receive, a complete list of all firearms including make, model and serial number. In his February 14, 2012 Status Report, the Trustee informed the Court that his counsel at*56tempted to coordinate with Debtor to arrange dates and times for a firearm liquidator to inspect the firearms. However, according to the Trustee, Debtor has once again refused to cooperate.
Undisclosed Fayette County Property
When the Motion was filed, the Trustee had yet to learn about Debtor’s ski chalet in Fayette County (the “Fayette County Property”) and its contents, including, inter alia, four snow mobiles, a 1932 Ford automobile, a John Deere tractor, an Ar-iens lawnmower, a work bench with various tools, and a trailer. Ultimately, the Trustee was informed about the Debtor’s ownership of the Fayette County Property, which Debtor failed to disclose. Although the discovery of the Fayette County Property was raised by the Trustee at the December 20, 2011 hearing and Counsel for Debtor directed his client on the record to turn over the keys at that time, Debtor did not turn over keys to the property until the conclusion of the Sanctions Hearing, over one month later. The delay in compliance is inexplicable, inexcusable, and a willful violation of Debtor’s duties under the Bankruptcy Code.
Thus, in a case that was converted to Chapter 7 on February 1, 2011, the Trustee’s first opportunity to gain access to the Fayette County Property came one year later. In a status report filed February 6, 2012, the Trustee reported that the keys to the snowmobiles and keys, title, and registration of the 1932 Ford automobile had yet to be turned over, despite his demand.
The Debtor’s February 8, 2012 Affidavits, prepared in response to the Court’s directive at the Sanctions Hearing, provide that the keys to the 1932 Ford are in the vehicle and that Debtor does not believe that he has either the title or registration to the vehicle. As to the snowmobiles, he stated that, to his knowledge and recollection, the keys are in the ignitions. The Trustee’s February 14, 2012 Status Report states that “[t]o date, the Trustee or his counsel has not received the keys, title and/or registration to the Ford automobile located at the undisclosed Fayette County property. Nor has the Trustee received the keys to the four (4) snowmobiles discovered at the undisclosed Fayette County property.” Although Debtor claims he does not have the title and registration for the 1932 Ford, it is apparent that the keys are not where Debtor led the Trustee to believe.
Conclusion
We find the Debtor has acted willfully, vexatiously, wantonly, and in bad faith. His inappropriate conduct has negatively impacted the entire bankruptcy case. The Debtor has consistently acted in blatant disregard of this Court’s Orders and his duties under the Bankruptcy Code causing disruption and delay. Although the facts established at the Sanctions Hearing alone are sufficient to justify the imposition of sanctions, we note that even after the Sanctions Hearing, Debtor continues in his pattern of misconduct. This continued intentional behavior results in the Trustee filing additional status reports to bring these matters to the Court’s attention. The Debtor has persisted in his willful misconduct despite the attempts of three bankruptcy judges to dissuade him from future misconduct. The failure to cooperate and comply while the Debtor is facing sanctions for civil contempt is shocking to the Court. The Debtor must be sanctioned to compensate the Trustee and the estate and to deter him from future misconduct.
IV. Sanctions
The Motion before the Court sought a finding of civil contempt, and that Motion was granted by the Order dated December 20, 2011. Pursuant to a bank*57ruptcy court’s civil contempt power, derived from 11 U.S.C. § 105(a), a court may impose sanctions to remedy violations of its orders. See Bartock v. BAE Survivability Sys., LLC (In re Bartock), 398 B.R. 135, 160 (Bankr.W.D.Pa.2008).
In addition to the Court’s ability to impose sanctions through the contempt power, the bankruptcy court has the inherent power to police itself by sanctioning parties who have “acted in bad faith, vexatiously, wantonly, or for oppressive reasons.” Fellheimer, Bichen & Braverman, P.C. v. Charter Techs., Inc., 57 F.3d 1215, 1224 (3d Cir.1995) (citing Chambers v. NASCO, Inc., 501 U.S. 32, 45-46, 111 S.Ct. 2123, 115 L.Ed.2d 27 (1991)). Sanctions imposed pursuant to the inherent power vindicate the court’s authority while avoiding the need to “resort to the more drastic sanctions available for contempt of court and making the prevailing party whole for expenses caused by his opponent’s obstinacy.” Id. Although civil contempt has been found on the facts of this case, based upon Debtor’s persistent, willful, bad faith conduct, the Court’s inherent authority provides an alternative basis for sanctions.
“There are two types of contempt: criminal and civil. Whether a sanction for contempt is criminal or civil depends on the character of the sanction imposed, not on the subjective intent of the court.” Walsh v. Bracken (In re Davitch), 336 B.R. 241, 251 (Bankr.W.D.Pa.2006). Whereas a sanction is civil if its purpose is either to coerce compliance with court orders or compensate for losses sustained due to non-compliance, a sanction is criminal and punitive where its purpose is to vindicate the authority of the court, providing no “opportunity to repent or change one’s mind”. Id.3
The forms of civil sanctions are many and varied, providing judges with the ability to fashion an appropriate remedy. Latrobe Steel Co. v. United Steelworkers of America, 545 F.2d 1336, 1344 (3d Cir.1976). Sanctions for civil contempt may take the form of incarceration, fines, reimbursement for losses incurred in pursuing compliance with orders, or a combination of these. Id.
At the sanctions hearing, Counsel for Debtor primarily impressed upon the Court that, despite the delays and problems resulting from Debtor’s conduct, sanctions at this point may simply amount to “flogging” where there are sufficient assets to pay creditors. (Audio Recording of Hearing Held in Courtroom B, January 31, 2012 (11:02-04, 11:08 AM)). Counsel for Debtor suggested that it may be sufficient for the Court to “[j]ust simply remind [the Debtor] to stay out of [the] North Huntingdon [Property] ... and continue to move this case forward.” (Audio Recording of Hearing Held in Courtroom B, January 31, 2012 (11:08 AM)). We disagree. First, it has not been confirmed, and cannot be confirmed at this point in time, that there are sufficient assets to *58satisfy creditors in full while administrative costs continue to accumulate. See discussion supra p. 7. Furthermore, we find that it is inappropriate to disregard the abhorrent conduct of the Debtor on the sole basis that there may be sufficient assets to pay creditors in full. Second, based upon the record in this case, a “reminder” would clearly be insufficient for this Debtor. The Court has no reason to believe that a reminder at this time would be any more effective than previous orders and directives which Debtor has disregarded as though they were simply suggestions. Despite multiple reminders by his counsel, motions by the Trustee, and orders and directives on the record by this Court, the Debtor has continued to willfully act in direct contravention of his duties under the Bankruptcy Code. The Debtor has flouted the authority of this Court and has hindered the Trustee every step of the way. The serious nature of this matter was not lost on Debtor’s Counsel, who acknowledged that his client is in need of the Court’s mercy.4 Although willfulness is not a requisite element of civil contempt, willfulness is relevant to determination of the sanction to be imposed. See Harley-Davidson, Inc. v. Morris, 19 F.3d 142 (3d Cir.1994).
At the conclusion of the Sanctions Hearing, Counsel for the Trustee clarified the relief sought. The Trustee seeks an order (1) directing the Marshal to immediately take the Debtor into custody; (2) ordering imprisonment of the Debtor; (3) requiring Debtor to pay rent for the use of the North Huntingdon Property from August 2011 through closing on the sale of that North Huntingdon Property; (4) requiring turnover of all of the original certificates for the firearms; (5) awarding Counsel fees to the Trustee associated with the preparation, filing, and presentation of this Motion. The Motion also seeks imposition of such additional sanctions as the Court deems appropriate. Based upon the record before us, we consider the forms of sanctions and what sanctions best fit the circumstances of this case.
Sanctions for civil contempt may be divisible into two categories: remedial and coercive. See Latrobe Steel Co. v. United Steelworkers of America, 545 F.2d 1336, 1344 (3d Cir.1976). Remedial sanctions are backward looking and are imposed to compensate the aggrieved party for damages caused by non-compliance. Id. Coercive sanctions, on the other hand, are forward looking and are intended to coerce the defiant party to comply by setting forth penalties in advance which will be imposed for non-compliance. Id. The Court finds that both forms of sanctions are appropriate in this case.
Remedial Sanctions
Rental Payments for Use of the North Huntingdon Property
In the Motion, the Trustee seeks rent for the period of time that the North Huntingdon Inventory remained in the North Huntingdon Property after the Debtor’s purchase of the inventory. Debt- or refused to remove the inventory thereby benefiting himself at the expense of the estate and interfering with the marketing of the North Huntingdon Property. In terms of sanctions, payment of rent for the period of time that the premises were used after repeated demands to vacate fulfills the remedial purpose of a civil sanction in that it makes the estate whole and compensates for the damage caused by Debt- *59or’s refusal to cooperate. However, notwithstanding a finding of civil contempt, the Debtor has an obligation to pay the estate the rental value of the property. The payment of rent is not a penalty imposed on Debtor, but rather is a debt he owes to the estate.
The Court was not presented with testimony regarding the appropriate rental value of the North Huntingdon Property. At the Sanctions Hearing, Counsel for the Trustee represented that $1,000.00 per month is the appropriate rental value as suggested by the Realtor. The Debtor contended that the monthly rental fee sought by the Trustee was high and proposed that half of that amount is appropriate. It is clear that rent is due for the unauthorized use of the property. Based upon the amounts proposed by the parties, we find that rent in the amount of $750.00 per month is appropriate, beginning with the month of August 2011 and continuing through February 2012. If the Trustee contends that rent is due beyond February 2012, he may file an appropriate motion seeking additional rent. Due to the large quantity of inventory located on the premises, the size of the facility, and the inconvenience caused by the failure to remove the items, $750.00 per month may be a bargain for the Debtor.
Fees and Expenses of Trustee and Counsel
The Trustee also seeks payment of his “counsel fees and expenses associated with the preparation, filing, and presentation of this Motion[.]” We agree with the finding in Robin Woods Inc. v. Woods. An award of counsel fees and expenses is remedial in nature and intended to compensate for losses incurred as a result of Debtor’s noncompliance. See Robin Woods Inc. v. Woods, 28 F.3d 396, 401 (3d Cir.1994). Due to the Debtor’s misconduct throughout this case, the Trustee’s Counsel has been forced to file a complaint for recovery of post-petition transfers, obtain an injunction, and file two motions for civil contempt and sanctions. See Part II supra. The Trustee and his counsel have made repeated demands for compliance and cooperation, but those demands have fallen on deaf ears. Due to Debtor’s continued operation of the business, sale and use of estate property, failure to provide account-ings of property, and a number of other violations of Orders and his duties under the Bankruptcy Code, the Trustee’s Counsel had no choice but to bring the Debtor’s brazen misconduct to the attention of this Court by way of various motions and pleadings. We find that it would be inappropriate to burden the estate, potentially to the detriment of creditors, due to fees and costs resulting directly from Debtor’s inexcusable obstinacy. Therefore, the Trustee is entitled to payment of his counsel fees and expenses for these efforts and those will be awarded.
Furthermore, not only has the Trustee’s Counsel incurred excessive fees due to Debtor’s misconduct, but we also find that the Trustee has been forced to go above and beyond what is required in a typical bankruptcy case due to the egregious behavior of the Debtor. The Trustee was forced to have the locks on the North Huntingdon Property changed twice. He was compelled to find a higher risk insurance carrier for the property as a result of Debtor’s continued unauthorized entry and use. His efforts to market the North Huntingdon Property were hindered by Debtor’s failure to remove the massive amount of inventory which he purchased. The list of Debtor’s interference and misconduct is extensive. See Part II supra. Therefore, we find that the Trustee is entitled to an award of his fees for his actual recorded time and expenses resulting from Debtor’s refusal to cooperate and *60Trustee’s efforts to compel Debtor’s compliance. See Rothchild’s Jewelers, Inc., 337 B.R. 561, 569 (Bankr.E.D.Va.2004) (“Ordinarily, a chapter 7 trustee’s compensation is based upon the statutory schedule set out in Code § 326(a). However, because the fee request here represents an award of sanctions, the trustee will be allowed the full amount of his attorney time charges.”). We find that, in addition to attorney’s fees, it is appropriate to compensate the Trustee in the form of a civil fine for his time spent and expenses incurred investigating and demonstrating Debtor’s violations and preparing for contempt litigation, and we grant the Trustee reimbursement for actual fees and costs incurred. Cf. Robin Woods, 28 F.3d at 400-M01. However, at the conclusion of this case, when the Trustee files his Final Account, the Trustee will not be permitted a double recovery from the estate and Debtor. Thus, if the Trustee’s statutory fee at the conclusion of this case is less than the monies recovered from Debtor, no further recovery from the estate shall be made. To the extent his statutory fee exceeds the monies received from Debtor, he shall credit the estate for the amount received and may only request the difference as an administrative expense. Thus, the Trustee is made whole by payment for his full time spent due to Debtor’s noncompliance with Court Orders and bad faith misconduct. Therefore, Debtor is being held responsible for the amounts expended due to his own willful, inexcusable misconduct.
The Trustee and his counsel shall file fee petitions setting forth their fees and expenses on or before March 15, 2012. The fee petitions shall include their recorded time related to efforts taken as a direct result of Debtor’s violations of this Court’s Orders and his duties under the Bankruptcy Code. In analyzing the time records submitted, the Court will apply the lodestar formula, taking into account the hours reasonably expended at a reasonable rate. See Loughner v. Univ. of Pittsburgh, 260 F.3d 173, 177 (3d Cir.2001). The Debtor shall have until March 26, 2012 to file an objection to the time records submitted. Upon the Court’s review of the fee petitions and any objections thereto, Debtor will be ordered to pay the appropriate sums and judgment will be entered against the Debtor without further hearing. To the extent further action by the Trustee is necessitated by any continued misconduct, the Trustee, on behalf of himself and his counsel, may file an appropriate motion seeking additional fees and expenses.
Coercive Sanctions
Fines for Non-Compliance
Due to Debtor’s consistent disregard for the Orders of this Court and to ensure that the Trustee can complete his duties with the cooperation of the Debtor, we find it necessary to make the Order accompanying this Memorandum Opinion self-effectuating. Therefore, we will incorporate sanctions for potential failure to comply as stated herein.
As set forth above, the bankruptcy estate is owed rent from August 2011 through the end of February (seven months), totaling $5,250.00, for the Debt- or’s continued unauthorized use of the North Huntingdon Property. The rent is due to the bankruptcy estate on or before March 15, 2012. Failure to pay the amount by the deadline provided will result in the daily accumulation of fines payable to the Court. The Court finds the appropriate fine to be $500.00 per day after March 15, 2012 until the full amount is paid.
In violation of the April 1, 2011 Order, Debtor failed to provide an accounting of the goods he sold and the income received from those unauthorized post-conversion *61sales. As of the Trustee’s Status Report filed February 13, 2012, the accounting still had not been provided. The Debtor ignored the Order for over ten months without explanation or request for extension. Debtor shall provide an accounting of the goods he sold and the income he received, to date, from the unauthorized post-conversion sales in the manner set forth in the April 1, 2011 Order, which provides as follows:
The Debtor shall ... submit a written accounting to the Trustee of all business inventory or other assets sold or transferred after the conversion of this case to Chapter 7, which accounting shall include, at a minimum, the name and address of the payor, a description of the item(s) sold or transferred, the date of the sale/transfer, the amount of the sale/transfer, the form of payment, and any and all documentation of said payments, including without limitation receipts, copies of checks, deposit slips, etc.
By Order dated May 18, 2011, Debtor was found “liable for each and every transfer of estate property from February 1, 2011, forward, plus all costs of [the] action and interest at 6% per annum” from March 30, 2011. The Debtor shall file the aforesaid accounting and reimburse the estate for proceeds received from the sales on or before March 15, 2012. Failure to do so by the deadline provided will result in the daily accumulation of fines payable to the Court. The Court finds the appropriate fine to be $500.00 per day after March 15, 2012 until Debtor fully complies. No extensions of the deadline will be granted. Debtor had plenty of time to compile the accounting previously ordered.
In the Trustee’s February 13, 2012 Status Report, the Trustee reiterated his previous demands for an itemized list of the firearms. Although the Trustee also sought documentation related to the firearms, such as permits and licenses, Debtor has stated by way of affidavit that he has provided to the Trustee all documentation within his possession. Therefore, no further order relating to the documentation will be entered. However, Debtor must comply with the Trustee’s demand to file the itemization, which shall include the location, make, model, and serial number for each firearm. Debtor shall do so on or before March 15, 2012. Failure to do so by the deadline provided will result in the daily accumulation of fines payable to the Court. The Court finds the appropriate fine to be $500.00 per day after March 15, 2012 until Debtor fully complies.
By way of the Trustee’s February 14, 2012 Status Report, the Court has been advised that despite Counsel for the Trustee’s request that the Debtor provide available dates and times for a firearm liquidator to inspect the firearms, Debtor refused to provide the requested information and further refused to deal with anyone other than the Trustee directly. Debtor shall provide at least four available dates and times in March 2012 to the Trustee or Trustee’s Counsel on or before Monday, March 5, 2012, and shall cooperate with the Trustee and Trustee’s Counsel. Failure to provide the information by the deadline provided will result in the daily accumulation of fines payable to the Court. The Court finds the appropriate fine to be $500.00 per day after March 5, 2012 until Debtor fully complies.
Upon the expiration of the deadlines imposed herein, the Trustee shall file a status report indicating, as to each item, whether the Debtor has fully and timely complied. Failure to comply will result in this Court ordering the United States Marshal to take Debtor into custody and bring him before this Court to answer for his conduct.
*62
Incarceration
When incarceration is imposed as a civil sanction, the purpose is not punishment. Instead, confinement is imposed for an indefinite period which will conclude only upon compliance with the court’s order. Latrobe Steel, 545 F.2d at 1344. Here, the Trustee seeks imprisonment of “the Debtor for, at a minimum, the pen-dency of this Chapter 7 case in order to prevent the Debtor from interfering with the Trustee’s liquidation of the assets of the estate[.]” The purpose of the requested sanction is not to punish the Debtor, but rather appears to be, in the Trustee’s opinion, the only way to put a stop to Debtor’s continuous interference and his refusal to comply with this Court’s Orders.
Although nothing excuses Debtor’s conduct, the Court finds that incarceration for civil contempt is not the most appropriate tool to obtain Debtor’s compliance at this time. We are cognizant of the drastic nature of that sanction and, as provided above, will utilize fines in the alternative to imprisonment. We note, however, that the case is still proceeding and Debtor’s duty to cooperate continues. The Court is well versed on the Debtor’s past conduct and will provide no second chances should it come to the Court’s attention that Debtor is interfering with the Trustee in any way despite the imposition of daily fines for misconduct. If the Court is convinced that compliance can be obtained only by incarceration, we will not hesitate to order the Debtor to be taken into custody. At this point in time, the Court is showing mercy on Debtor as repeatedly requested by Debtor’s Counsel.
Ability to Pay
As monetary sanctions will be imposed, we consider whether the amounts are appropriate in light of the Debtor’s ability to pay. Here, the Court has little doubt that Debtor can afford to pay the amount imposed as sanctions. Debtor has been the successful bidder in sales brought by the Trustee. On February 7, 2012, Debtor successfully bid $215,000.00 for the North Huntingdon Property. Debtor paid the nonrefundable ten percent deposit, and closing is to occur in early March 2012. If Debtor has sufficient funds to pay for these assets, the Court sees no reason why he should be excused from payment of these sanctions which have accrued as a result of his own wanton misconduct. Furthermore, to the extent any daily fines will be imposed, those will begin to accumulate only after failure to do as ordered. Thus, payment of those daily fines can be avoided by simply complying.
V. Conclusion
The Debtor’s willful bad faith conduct has delayed distribution to creditors and caused the administrative expenses in this case to be astronomical. As a result, the fees and expenses incurred by the Trustee and Trustee’s Counsel shall be paid by Debtor. In addition, Debtor shall compensate the estate for his unauthorized use of the North Huntingdon Property as storage. Further failure to cooperate or noncompliance will result in imposition of daily fines. The sanctions imposed would be even more severe if it were not for the fact that the Debtor previously waived any right to a discharge and entitlement to exemptions. The Trustee shall continue to liquidate assets pursuant to his duty to ensure maximum payment to creditors. An appropriate Order will be entered.
. Prior to conversion, Debtor operated a lighting supply and fixtures business. One of Debtor’s business locations was 10561 Center Highway, North Huntingdon, PA (the “North Huntingdon Property”), a commercial building owned by Debtor prior to the commencement of his bankruptcy case. The North Huntingdon Property was sold at Sheriff’s Sale to S & T Bank. However, Debtor refused to vacate and S & T Bank commenced ejectment proceedings. Thereafter, Debtor filed his bankruptcy petition. Pursuant to the settlement between the Chapter 7 Trustee and S & T Bank approved by the Court on August 2, 2011, S & T Bank conveyed the North Hun-tingdon Property to the bankruptcy estate. The Bankruptcy Court’s Order approving the settlement was affirmed on appeal, and on February 10, 2012, Debtor filed his Notice of Appeal of said Order to the Third Circuit Court of Appeals.
. At the Sanctions Hearing, the Debtor sought the opportunity to make a statement against the advice of his counsel, who would not question Debtor due to ethical concerns. Trustee’s Counsel objected as Debtor would be providing his statement directly to the Court and his ability to cross-examine would be impaired. The objection was sustained. The Court concluded that a statement by Debtor would not have impacted the outcome of this matter. First, Debtor had already been found in contempt by the time of the Sanctions Hearing. Second, the purposes of the sanctions imposed herein are to (1) fully compensate for the harm caused by Debtor's violations of Court Orders and his duties un*54der the Bankruptcy Code and (2) coerce him to comply as this case proceeds. The second form of sanctions will only arise upon future non-compliance. Any statement by Debtor would not have impacted the Court's intent to achieve these results.
. The conduct of this Debtor has been egregious as indicated by three different bankruptcy judges who have heard proceedings in this case. At no point has the Debtor portrayed remorse. Although a term of imprisonment and a sizeable fine appear to be fitting sanctions for Debtor's willful and vexatious behavior, having found the Debtor in civil contempt, the Court is not imposing punitive sanctions. However, the Trustee advised the Court that, upon discovery of undisclosed assets, the Trustee complied with his duty and reported the matter to the United States Trustee with the recommendation that appropriate action be taken. (Audio Recording of Hearing Held in Courtroom B on December 20, 2011 (11:13-14 AM)). Therefore, to the extent the United States Attorney is apprised of the matter by the United States Trustee and acts on the recommendation, the Debtor may face punitive consequences in the appropriate forum.
. "It’s bad, Your Honor. I mean, essentially, I’m here to ask for mercy for Mr. Free in this regard." (Audio Recording of Hearing Held in Courtroom B, January 31, 2012 (10:31 AM)). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494622/ | ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANTS’ CROSS-MOTION FOR SUMMARY JUDGMENT
SIDNEY B. BROOKS, Bankruptcy Judge.
THIS MATTER is before the Court for consideration of:
(1) Stephanie M. Martin’s (the “Plaintiff’) Motion for Summary Judgment (the “Plaintiffs Motion for Summary Judgment”);1
(2) the Defendants’ Response thereto;2
(3) the Plaintiffs Reply thereto;3 and
(4) Gary David Hauck’s and Brenda Kay Hauck’s (the “Defendants”) Cross-Motion for Summary Judgment (the “Defendants’ Cross-Motion for Summary Judgment”),4 including the Defendants’ Affidavit.5
I. Summary
This adversary proceeding concerns the dischargeability of a debt arising out of a stipulation (the “Stipulation”) to the entry of a judgment (the “Stipulated Judgment”) against the Defendants in the amount of $200,000.00 for “Deceit Based on Fraud ... and Civil Theft under [Colo.Rev.Stat.] § 18-4-401 ... as contained in Plaintiffs First Amended Complaint and Jury Demand ...”6
Plaintiff asserts that the Stipulation and Stipulated Judgment whereby the parties agreed that the Stipulated Judgment would enter on the claims for “Deceit Based on Fraud” and “Civil Theft” establishes that the obligation is nondischargeable under 11 U.S.C. § 523(a)(2)(A) and 11 U.S.C. § 523(a)(4).
The Defendants acknowledge that the Stipulation and Stipulated Judgment did enter against them on the claims for “Deceit Based on Fraud” and “Civil Theft under Colo.Rev.Stat. § 18-4-401.” However, the Defendants’ deny that the Stipulated Judgment should be binding and deemed nondischargeable under section 523 of the Bankruptcy Code. Further, the Defendants assert that they have little or no memory of any part of the mediation including any discussion about the Stipulation and Stipulated Judgment entering specifically on these two claims.
A fundamental question before the Court is whether the choice to agree to stipulate to judgment on two specific claims for relief — as contained in the state court complaint, wherein five claims for relief were sought — constitutes the parties’ intent to be bound by the terms of the agreement in any subsequent actions.
If the Court construes the Stipulation as one in which the parties knew and understood, or intended, it to be binding and enforceable in the future, then the doctrine *156of issue preclusion (collateral estoppel) will bar the Court from re-litigating the issue. If, however, the Court cannot construe the Stipulation as such then the doctrine of issue preclusion does not bar this Court from addressing the issue on its merits. Based upon the facts of this case and for the reasons stated herein, this Court concludes that the parties did intend to be bound by the terms of the agreement in subsequent actions and that issue preclusion prevents this Court relitigating these matters.
II. Factual Background
A. Events Leading Up to State Court Litigation
The Plaintiff was the owner of record of two parcels of real property, including a single-family home, known by street and number as 5821 West 7th Avenue, Lakewood, Colorado (the “Property”). In 2006, the Plaintiff, who was then sixty years old, and had an annual income of $27,000, was experiencing difficulties in making payments on her adjustable rate mortgage on the Property, which had risen to approximately $2,400 per month.
The Plaintiff consulted the Defendants regarding her financial situation. The Defendants, both real estate agents, told the Plaintiff she could not qualify for a traditional mortgage loan and offered to purchase the Property from her in exchange for rent payments from the Plaintiff. The Defendants also offered the Plaintiff the option to repurchase the Property at a later date.
In September 2006, the Plaintiff and the Defendant, Gary D. Hauck, entered into a contract whereby:
il) the Defendant, Gary D. Hauck, purchased the Property for $430,000,
(2) the Plaintiff paid the closing costs up to $12,000.00 and a $20,000 fee to the Defendant, Gary D. Hauck, and
(3) the Plaintiff gave the Defendant, Gary D. Hauck, her boat, and
(4) the contract provided that the Plaintiff would loan $138,000 to the Defendant, Gary D. Hauck, at a rate of 4%, with the remaining portion of the sale price financed by the Defendant, Gary D. Hauck.7 The contract stated that the loan would be secured by a second deed of trust on the property. The promissory note was to have a term of 40 years.
The closing on the sale of the Property was held on October 3, 2006. The settlement statement prepared prior to closing reflected that the buyers, who now included Defendant Brenda K. Hauck, had obtained a new loan in the amount of $292,000.00 from Mortgage Lenders Network USA, Inc., of Middletown, Connecticut (“First Lender”). The settlement statement also reflected that the second mortgage would be carried by Plaintiff in the amount of $138,000.00.
The $292,000.00 in financing obtained by Defendants was in the form of an adjustable rate mortgage with an initial rate of 8.6% with a monthly payment starting at $2,584.76, an amount greater than Plaintiffs previous mortgage payment.
Defendants took title to the Plaintiffs Property by way of a warranty deed dated October 2, 2006.
On October 3, 2006, the Defendants prepared a rental agreement pursuant to which the Plaintiffs mother, who was receiving $520.00 per month in housing assis*157tance, authorized her housing assistance to be paid directly to the Defendants and to be applied to the mortgage payment. After deducting the $520.00 payment from the $2,584.76 monthly mortgage payment, the rental agreement called for the Plaintiff to pay the remaining $2,064.76 monthly rent. The Plaintiff did not sign the rental agreement but made payments pursuant to the agreement. The Defendants prepared an addendum to the rental agreement which purported to provide the Plaintiff with an option to repurchase the Property for $320,000 but was signed by only one of the Defendants.
At the time that the Defendants took title to the Property by way of a warranty deed dated October 2, 2006, the Defendants assured the Plaintiff she remained the true owner of the Property and should her financial condition fail to improve, the Defendants could sell the Property and pay the Plaintiff the net proceeds of the sale, less the $20,000 fee. This was not reduced to writing. After closing, the Defendants instructed the Plaintiff to sign the $138,000 note “paid in full” because “it had to be done,” which she did although she alleged the Defendants had not paid any portion on the note.8 The Plaintiff alleges the Defendants forced her to sign the release. The Defendants failed to make mortgage payments on the Property despite the Plaintiff paying monthly rent. The Property was foreclosed by the First Lender.
B. The State Court Litigation, Bankruptcy Filing, and the Motions Presently before the Court
On July 20, 2007, Plaintiff sued Defendants by filing a Complaint (“State Court Action”) in the District Court for Jefferson County, Colorado (“State Court”).
On December 21, 2007, Plaintiff filed her First Amended Complaint in the State Court Action. Specifically, Plaintiffs First Amended Complaint and Jury Demand sought five claims for relief:
(1) The First Claim for Relief sought judgment for extreme and outrageous conduct by the Defendants against the Plaintiff.
(2) The Second Claim for Relief sought judgment for deceit based on fraud.
(3) The Third Claim for Relief sought judgment for civil conspiracy.
(4) The Fourth Claim for Relief sought judgment for civil theft under Colo. Rev.Stat. § 18-4-401.
(5) The Fifth Claim for Relief sought the imposition of a constructive trust on the Property.
Almost two-years into the State Court Action, on March 25, 2009, Plaintiff filed a Motion for Entry of Default Judgment. On April 30, 2009, the State Court entered judgment in favor of the Plaintiff and against Defendants, jointly and severally, in the amount of $516,520.00.
On July 14, 2009, the Defendants filed a Motion to Vacate Judgment and Set Aside Default in the State Court Action. On August 3, 2009, the Court in the State Action entered an Order Granting Defendants’ Motion. On August 12, 2009 (two-years after the filing of the original Complaint), the Defendants filed their Answer in the State Court Action. The State Court Action was subsequently set for a five-day jury trial commencing on August 16, 2010.
On May 6, 2010, Plaintiff and Defendants and each of their respective legal counsel attended a settlement conference presided over by a retired Colorado Dis*158trict Court Judge, the Honorable Kim H. Goldberger. At the conclusion of the settlement conference, on May 6, 2010, the Plaintiff and the Defendants reached an agreement stipulating to the entry of a judgment in the amount of $200,000. Pursuant to the Stipulation, judgment was to enter for the Plaintiff against the Defendants jointly and severally, based only on — expressly—“deceit based on fraud (2nd Claim for Relief) and civil theft under C.R.S. § 18-4-401 (4th Claim for Relief).” The Judgment was not to be entered based on the other claims for relief, that is: the First Claim for Relief for extreme and outrageous conduct; the Third Claim for Relief for civil conspiracy; and the Fifth Claim for Relief seeking imposition of a constructive trust on the Property.
For context in this decision, the Plaintiff asserted in her Second Claim for Relief that:
28. Defendants, and each of them, made representations of a past or present fact(s).
29. The fact(s) was material.
30. At the time the representation(s) was made, Defendants, and each of them, knew the representation was false.
31. Defendants made the representation(s) with the intent that Plaintiff would rely on the representation(s).
32. Plaintiff relied upon the representation^).
33. Plaintiffs reliance was justified.
34. Such reliance has caused injuries and damages to Plaintiff.9
The Plaintiff further asserted in her Fourth Claim for Relief as contained in the State Court Action the following:
41. Defendants, and each of them, knowingly obtained title to, and exercised control over, the Property and the Plaintiffs equity in the Property by deception, and intended to permanently deprive Plaintiff of the use or benefit of the Property and Plaintiffs equity in the Property.
42. Pursuant to C.R.S. § 18-4-405, Plaintiff is entitled to recover from the Defendants three times her actual damages, costs of this action, and reasonable attorney fees.10
The State Court entered its Stipulated Judgment approving the Stipulation on May 14, 2010, but the Stipulated Judgment was made effective May 6, 2010. The Stipulated Judgment provided that:
The Court, having reviewed the Parties’ Stipulation, hereby enters judgment against Defendants Gary D. Hauck and Brenda K. Hauck, jointly and severally, and in favor of Plaintiff Stephanie M. Martin in the amount of $200,000, said entry of judgment being based on Plaintiffs 2nd Claim for Relief, Deceit Based on Fraud, and 4th Claim for Relief, Civil Theft pursuant to C.R.S. § 18-4-401, as stated in the Plaintiffs First Amended Complaint and Jury Demand, filed December 21, 2007.11
On August 17, 2010, the Defendants filed for bankruptcy relief under Chapter 7.
The Plaintiff filed her Complaint (“Complaint”) commencing this adversary proceeding on November 11, 2010. In her Complaint, Plaintiff seeks a determination *159that the debt arising from the Stipulated Judgment should be determined nondis-chargeable on the basis of collateral estop-pel. The Defendants, by their pro se Amended Answer to the Complaint, denied most of the factual substantive and material assertions of the Complaint. The affirmative defenses raised by the Defendants included: (1) Plaintiffs failure to state a claim upon which relief could be granted; (2) equitable doctrines of estoppel, waiver and laches; (3) Plaintiffs failure to mitigate damages; (4) Plaintiffs failure to act or Plaintiffs consent to the Defendants’ acts; (5) Plaintiffs damages are remote, speculative and conjectural; (6) Plaintiffs unclean hands; (7) Plaintiffs assumption of risk; (8) Plaintiffs claims are barred by duress on her “importuning” Defendants; (9) Plaintiffs claims are barred by failure of consideration and contributory negligence; and (10) Plaintiffs failure to comply with conditions precedent.
On August 15, 2011, the Plaintiff filed her Motion for Summary Judgment,12 in which the Plaintiff argued collateral es-toppel prevents relitigation of her claims under section 523(a)(2)(A) and (a)(4). Specifically, the Plaintiff alleged that the Defendants willingly and knowingly entered into the Stipulated Judgment as to the Plaintiffs claims of deceit based on fraud and civil theft, the elements of which the Plaintiff argued were actually litigated and conclusively determined. Those issues, the Plaintiff argues, render the entire debt of the Stipulated Judgment nondischargeable.
The Defendants argue in their Response and Cross-Motion for Summary Judgment that:
(1) the issues sought to be precluded were not actually litigated under the Stipulated Judgment and
(2) the Defendants never intended the Stipulated Judgment to resolve the particular issues as to future proceedings.
III. Issues
There are two central issues before the Court:
(A) Whether, under Colorado law, issue preclusion or claim preclusion bars relitigation of the issues contained in the Complaint.
(B) Whether the choice to agree to stipulate to judgment on just two specific and exclusive claims for relief as contained in Complaint in the State Court Action, wherein five claims for relief were sought, can constitute the parties’ intent to be bound by the terms of the agreement in any subsequent actions.
In summary and as discussed below, this Court concludes that under the specific facts of this case issue preclusion bars relitigation of this matter because: (1) the issue to be precluded is identical to an issue actually litigated and necessarily adjudicated in the prior proceeding; (2) the party against whom estoppel was sought was a party to or was in privity with a party to the prior proceeding; (3) there was a final judgment on the merits in the prior proceeding; and (4) the party against whom the doctrine is asserted had a full and fair opportunity to litigate the issues in the prior proceeding.13
On the second issue, the Court concludes that, yes, a knowing and deliberate *160agreement and stipulated judgment to the two specific and exclusive claims for relief in prior litigation can constitute the parties’ intent to be bound by the terms of the agreement. And, with respect to the Stipulation and corresponding Stipulated Judgment in the State Court Action, the parties, by the specification of the bases for relief upon which the State Court Judgment was to enter manifested their intent to resolve their dispute based on culpability admitted on those two select and exclusive claims alone, and judgment entered accordingly. Moreover, unlike many other agreements, which contain “hold harmless” provisions or a statement that the agreement does not constitute an admission or confession of liability, this agreement specifies that the Defendants admit that they committed “deceit based on fraud (2nd Claim for Relief) and civil theft under C.R.S. § 18-4-401 (4th Claim for Relief).”14
IV. Discussion
A. Standard for Summary Judgment
Summary judgment is appropriate if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.15
The moving party bears the initial burden of showing the absence of any genuine issue of material fact.16 Once the moving party meets its burden, the burden shifts to the nonmoving party to demonstrate that genuine issues remain for trial as to those dispositive matters for which the nonmoving party must carry the burden of proof.17 The nonmoving party may not rest on its pleadings, but must set forth specific facts.18 When applying this standard, the court must examine the factual record and reasonable inferences therefrom in the light most favorable to the party opposing summary judgment.19
The Plaintiff submits there is no genuine issue of material fact as to her claims pursuant to 11 U.S.C. §§ 523(a)(2) and (a)(4).20 This Court agrees.
B. The Distinction Between Claim Preclusion and Issue Preclusion
1. Terminology
As the Supreme Court of Colorado has stated:
*161As an initial matter, we clarify the terminology used in our analysis. This Court uses the terms “claim preclusion” and “issue preclusion” rather than “res judicata” and “collateral estoppel.” See Farmers High Line Canal and Reservoir Co. v. City of Golden, 975 P.2d 189, 196 n. 11 (Colo.1999). In prior opinions, we have used the phrases interchangeably, however as noted by the United States Supreme Court in Migra v. Warren City Sch. Dist. Bd. Of Educ., 465 U.S. 75, 77 n. 1, 104 S.Ct. 892, 79 L.Ed.2d 56 (1984), use of the phrases “res judicata” and “collateral estoppel” can lead to confusion because “res judi-cata” is commonly used as an overarching label for both claim and issue preclusion. Id.21
A determination of whether claim preclusion or issue preclusion should be applied to a state court judgment requires that this Court look to the preclusion law of the state — here, Colorado — where the judgment was entered.22 Indeed, “the full faith and credit statute, 28 U.S.C. § 1738, ‘directs a federal court to refer to the preclusion law of the State in which judgment was rendered.’ ”23 For the purposes of this opinion, the Court will also use the terms claim preclusion and issue preclusion so as to conform with the Supreme Court of Colorado’s terminology.
2. Claim Preclusion
“Claim preclusion works to preclude relitigation of matters that have already been decided as well as matters that could have been raised in a prior proceeding but were not.”24 Claim preclusion is defined as an “affirmative defense barring the same parties from litigating a second lawsuit on the same claim, or any other claim arising from the same transaction or series of transactions and that could have been — but was not — raised in the first suit.”25
[Claim preclusion] ensures the finality of decisions. Under [claim preclusion], “a final judgment on the merits bars further claims by parties or them privies based on the same cause of action.” Montana v. U.S., 440 U.S. 147, 153, 99 S.Ct. 970, 973, 59 L.Ed.2d 210 (1979). It prevents litigation of all grounds for, or defenses to, recovery that were previously available to the parties, regardless of whether they were asserted or determined in the prior proceeding. Chicot County Drainage District v. Baxter State Bank, 308 U.S. 371, 378, 60 S.Ct. 317, 320, 84 L.Ed. 329, rehearing denied, 309 U.S. 695, 60 S.Ct. 581, 84 L.Ed. 1035 (1940). “[Claim preclusion] thus encourages reliance on judicial decisions, bars vexatious litigation, and frees the courts to resolve other disputes.” Brown v. Felsen, 442 U.S. 127, 131, 99 S.Ct. 2205, *1622209, 60 L.Ed.2d 767 (1979). “Because [claim preclusion] may govern grounds and defenses not previously litigated, ... it blockades unexplored paths that may lead to truth ... It therefore is to be invoked only after careful inquiry.” Id., at 132, 99 S.Ct. at 2210.
[Claim preclusion] stands for the proposition that “a judgment rendered by a court of competent jurisdiction upon a question involved in one suit is conclusive upon that question in any subsequent litigation between the same parties. A judgment may be erroneous in law, but if it becomes final it is still binding and conclusive as between the parties upon the question involved.” Goldsmith v. M. Jackman & Sons, Inc., 327 F.2d 184, 185 (10th Cir.1964).26
Under claim preclusion, for a claim in a second judicial proceeding to be precluded by the previous judgment, there must exist:
(1) finality of the first judgment,
(2) identity of subject matter,
(3) identity of claims for relief, and
(4) identity or privity between parties to the actions.27
In this instance, three of the elements are met for claim preclusion. First, the Stipulation and State Court Judgment are final. Second, the subject matter is distinctly identified and specifically designated. Third, the parties are the same as in the prior State Court Action.
Arguably, because of the language of the State Court Complaint as contained in the Second and Fourth Claims for Relief — which use virtually identical verbiage as contained in 11 U.S.C. § 523(a)(2)(A) and (4) — claim preclusion may be applicable. That is, the claims for relief, which are articulated in the Plaintiffs Complaint, distinctly and specifically embody the same content and character of 11 U.S.C. § 523(a)(2)(A) and (4). Nevertheless, courts generally hold that claim preclusion cannot bar relitigation in the context of dischargeability proceedings and that only issue preclusion may be applicable.28
*1633. Issue Preclusion
“[I]ssue preclusion, is a judicially created, equitable doctrine that operates to bar relitigation of an issue that has been finally decided by a court in a prior action.”29 Issue preclusion, where applicable, precludes relitigation of issues decided by another court. Issue preclusion may preclude relitigation of the factual bases for a non-dischargeability claim if elements of the claim for non-dischargeability are identical to elements actually litigated and determined in the prior action.30
“Issue preclusion applies “[w]hen an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, [such that] the determination is conclusive in the subsequent action between the parties, whether on the same or a different claim.” The Colorado Supreme Court has held that:
Issue preclusion bars relitigation of an issue if: (1) the issue sought to be pre-eluded is identical to an issue actually determined in the prior proceeding; (2) the party against whom estoppel is asserted has been a party to or is in privity with a party to the prior proceeding; (3) there is a final judgment on the merits in the prior proceeding; and (4) the party against whom the doctrine is asserted had a full and fair opportunity to litigate the issue in the prior proceeding. Only when each of these elements has been satisfied are the equitable purposes of the doctrine furthered by issue preclusion.31
Under Colorado law,
A final judgment determines the rights of the parties involved. “To constitute a final judgment the trial court’s ruling must dispose of the entire litigation on the merits, and leave the court nothing to do but execute the judgment.” When a default has been entered but damages have not been proven, there can be no final judgment.32
*164As a general rule, “a judgment is final and therefore appealable if it disposes of the entire litigation on its merits, leaving nothing for the court to do but execute the judgment.”33
In this case, the parties agreed to specific language in their Stipulation, whereby they agreed and understood that judgment was to enter for the Plaintiff against the Defendants jointly and severally, based only and specifically on “deceit based on fraud (2nd Claim for Relief) and civil theft under C.R.S. § 18-4-401 (4th Claim for Relief).” Moreover, the State Court entered a specific Judgment, which provided:
The Court, having reviewed the Parties’ Stipulation, hereby enters judgment against Defendants Gary D. Hauck and Brenda K. Hauck, jointly and severally, and in favor of Plaintiff Stephanie M. Martin in the amount of $200,000, said entry of judgment being based on Plaintiffs 2nd Claim for Relief, Deceit Based on Fraud, and 4th Claim for Relief, Civil Theft pursuant to C.R.S. § 18-4-401, as stated in the Plaintiffs First Amended Complaint and Jury Demand, filed December 21, 2007.34
4. Issue Preclusion and 11 U.S.C. § 523(a)(2)(A)
Pursuant to 11 U.S.C. § 523(a)(2)(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
To prevail under 11 U.S.C. § 523(a)(2)(A), Plaintiff must carry the burden of proof and demonstrate that:
(1) The debtor made a false representation;
(2) The debtor made the representation with the intent to deceive the creditor;
(3) The creditor relied on the representation;
(4) The creditor’s reliance was justifiable;
(5) The debtor’s representations caused the creditor to sustain a loss.35
Defendants, by agreeing to the specific terms of the Stipulation and entry of the Stipulated Judgment, with the assistance of able counsel and with the guidance of a retired Colorado State Court Judge serving of a mediator, admitted that the components of the Second Claim for Relief as contained in the State Court Complaint:
(1) At the time the representation(s) was (were) made, Defendants, and each of them, knew the representation(s) was (were) false.36
(2) Defendants made the representation(s) with the intent that Plaintiff would rely on the representation(s).37
*165(3) Plaintiff relied upon the representation(s).38
(4) Plaintiffs reliance was justified.39
(5) Such reliance caused injuries and damages to Plaintiff.40
Each of the elements of 11 U.S.C. § 523(a)(2)(A) have been met by the Defendants’ admission with respect to the Second Claim for Relief as contained in the State Court Complaint and as contained in the Stipulation and as incorporated in the Stipulated Judgment.
5. Issue Preclusion and 11 U.S.C. § 523(a)(ti
In addition to 11 U.S.C. § 523(a)(2)(A), the Plaintiff here requests that this Court determine that relitigation of this matter should be precluded with respect to a determination of nondischargeability under 11 U.S.C. § 523(a)(4). Plaintiff asserts that this proceeding is identical to the issue actually determined in the prior proceeding — that is, whether the Defendants’ admission to civil theft pursuant to Colo. Rev.Stat. § 18^-405 satisfies the requirement under 11 U.S.C. § 523(a)(4).41
Under 11 U.S.C. § 523(a)(4), a debt may be determined nondischargeable “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny ...” The focus in this adversary proceeding is on the “embezzlement” or “larceny” component of 11 U.S.C. § 523(a)(4).
The Tenth Circuit has concluded that:
For purposes of establishing nondis-chargeability under section 523(a)(4), embezzlement is defined under federal common law as “the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hand it has lawfully come.”42
On the other hand,
Larceny is the fraudulent and wrongful taking and carrying away of the property of another with intent to convert the property to the taker’s use without the consent of the owner. As distinguished from embezzlement, the original taking of the property must be unlawful. For purposes of section 523(a)(4), a bankruptcy court is not bound by state law definition of larceny but, rather, may follow federal common law which defines larceny as “felonious taking of another’s personal property with intent to convert it or deprive the owner of same.”43
Colorado law has merged larceny, stealing, embezzlement, false pretenses, confidence games, and shoplifting as “theft.” Specifically, under state statute:
If any law of this state refers to or mentions larceny, stealing, embezzlement (except embezzlement of public monies), false pretenses, confidence games, or shoplifting, that law shall be interpreted as if the word “theft” were substituted therefore; and in the enactment of sections 18-^ — 401 to 18-4-403 it *166is the intent of the general assembly to define one crime of theft and to incorporate therein such crimes, thereby removing distinctions and technicalities which previously existed in the pleadings and proof of such crimes.44
This Court believes that Colorado’s theft statute was meant to encompass a spectrum of acquisition crimes, including embezzlement and larceny45 Several courts have concluded that, where the crimes of embezzlement, conversion and larceny are consolidated into a single theft statute and the statutory offense of theft is consistent with the federal definition of embezzlement or larceny, issue preclusion may be utilized to except a debt for such offenses.
The Stipulated Judgment, when viewed in the context of those admissions to the allegations of the Fourth Claim for Relief, precludes this Court from relitigat-ing this matter and this Court will grant the Stipulated Judgment full force and effect and determine that the State Court Judgment is not dischargeable under 11 U.S.C. § 523(a)(4).
C. Stipulated Judgments
In Nichols v. Board of County Commissioners of the County of La Plata, Colorado,46 the Tenth Circuit Court of Appeals reviewed Colorado law of issue preclusion. The Tenth Circuit held “[f]or an issue to be actually litigated ... ‘the issue must [have been] submitted for determination and then actually determined by the adjudicatory body.’ ”47 Although the Tenth Circuit found “the Colorado courts have not yet decided whether a settlement agreement and consent decree are ‘actually determined by the adjudicatory body’ for the purposes of collateral estoppel,”48 the Tenth Circuit decided “consent judgments ordinarily support claim preclusion but not issue preclusion”49 and ruled a settlement agreement does not have pre-clusive effect on any of the issues in controversy in the instant litigation because the issues were not “actually litigated and necessarily adjudicated” under Colorado’s collateral estoppel test. This Court will conduct its own analysis of the issue under Colorado law.
“The Colorado Supreme Court ... relies on the Restatement (Second) of Judgments § 27 (1982) when formulating collateral es-toppel principles.”50 The Restatement provides:
When an issue of fact or law is actually litigated and determined by a valid and final judgment, and the determination is essential to the judgment, the determination is conclusive in a subsequent action between the parties, whether on the same or a different claim.51
Hence, for the Stipulation and the Stipulated Judgment to have collateral estoppel effect, the issue to be precluded must have been “actually litigated” in the prior proceeding. The parties dispute whether the *167elements of the Plaintiff’s claims of fraud based on deceit and civil theft were “actually litigated” prior to entry of the Stipulated Judgment. It is undisputed that the Stipulated Judgment did not enter after a trial was had on the issues. But, the Stipulated Judgment was the result of two years of litigation, a reconsidered and vacated default judgment, mediation through a former judge and with representation of the parties by counsel, and the entry of the Stipulation by the parties.
The comments to the Restatement are instructive as to whether a stipulation can be considered “actually litigated” for purposes of collateral estoppel:
An issue is not actually litigated if ... it is the subject of a stipulation between the parties. The stipulation may, however, be binding in a subsequent action between the parties if the parties have manifested an intention to that effect}52
The Restatement also provides the rationale for the rule that a consent judgment53 is not a judicial determination of any litigated right:
The interests of conserving judicial resources, of maintaining consistency, and of avoiding oppression or harassment of the adverse party are less compelling when the issue on which preclusion is sought has not actually been litigated before. And if preclusive effect were given to issues not litigated, the result might serve to discourage compromise, to decrease the likelihood that the issues in an action would be narrowed by stipulation, and thus to intensify litigation.54
Hence, collateral estoppel does not necessarily bind parties to issues originally at issue but later compromised and settled without a trial on the merits because the issue may not have been actually litigated and determined in the prior proceeding, unless specific language affirmatively points to it. Consent judgments, “while settling the issue definitively between the parties, normally do not support an invocation of collateral estoppel.”55 “[C]onsent agreements ordinarily are intended to preclude any future litigation on the claim presented but are not intended to preclude further litigation on any of the issues presented.”56
For collateral estoppel to apply to a stipulation, the parties must have manifested their intent to do so.57 It is for *168the courts to decide whether such intent is present, and courts have come to different conclusions as to what constitutes a manifestation of intent.58 “Collateral estoppel may only be applied to consent decrees if ‘the parties could reasonably have foreseen the conclusive effect of their actions.’”59
The parties, here, after mediation and with assistance of their own counsel, entered into specific and definitive terms in their Stipulation and in the Stipulated Judgment whereby “Defendants stipulate to the entry of judgment ... based on deceit based on fraud ... and civil theft ...” It is simply disingenuous to contend that the parties did not intend this Stipulated Judgment to operate as a final adjudication of these two particular issues— and for that matter the case as a whole.60 Conversely, if the Defendants were to prevail with their argument that this Stipulated Judgment should not operate as a final adjudication of the State Court Action, likely this Plaintiff could re-assert herein the claims she did not go forward with and to which she stipulated would be dismissed by way of the Stipulation and Stipulated Judgment.
Y. Conclusion and Order
Based on the above and foregoing, it is, therefore,
ORDERED that the Plaintiffs Motion for Summary Judgment is GRANTED; and it is
*169FURTHER ORDERED that Defendants’ Cross-Motion for Summary Judgment is DENIED.
. Docket Nos. 34 and 45.
. Docket No. 43.
. Docket No. 44.
. Docket No. 36. The Plaintiff did not file a response to the Cross-Motion.
. Docket No. 37.
. The Plaintiff's Exhibits D and E.
. The $138,000 financing by the Plaintiff and the $292,000 financing by the Defendants total the purchase price of $430,000.
. This is the basis for the Plaintiff's allegations that the Defendants knowingly and willingly obtained, by false pretenses, the Plaintiff's significant equity in the Property.
.First Amended Complaint and Jury Demand attached as Exhibit B to the Plaintiff's Motion for Summary Judgment, p. 6.
.First Amended Complaint and Jury Demand attached as Exhibit B to the Plaintiffs Motion for Summary Judgment, p. 7.
.Emphasis in original.
. The Plaintiff did not comply with all provisions of Local Bankruptcy Rule 7056-1. However, the issues are not complicated and the Court considers the Plaintiff's Factual Background as undisputed facts based on the authenticity of the Plaintiff's exhibits, a determination with which the Defendant concedes in their Response ¶ C.3 ("the [Defendants] do not dispute the authenticity of any of the documents attached as exhibits.'').
. Bebo Constr. Co. v. Mattox & O'Brien, P.C., 990 P.2d 78, 84-85 (Colo. 1999) (quoting Mi-*160chaelson v. Michaelson, 884 P.2d 695, 700-01 (Colo.1994)).
.A troubling note in this matter is that, in Defendants’ Cross-Motion for Summary Judgment, they cite to Chilcoat v. Minor (In re Minor), 115 B.R. 690 (D.Colo.1990) for the proposition that a general statement in the law is that consent to judgment on fraud based claims does not constitute an admission of liability for fraud. In the Minor decision, the parties had a provision in the judgment that “clearly indicated the parties intent ... reciting that both parties ‘agree that this judgment is not an admission or confession that Defendant has committed securities fraud or common law fraud, but is merely for the purpose of incorporating the settlement of the parties in lieu of litigation of the securities fraud and common law fraud.’ ” Id., at 697.
. See Fed.R.Civ.P. 56(a); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).
. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986).
. Applied Genetics Int’l, Inc. v. First Affiliated Sec., Inc., 912 F.2d 1238, 1241 (10th Cir.1990).
. Id.
. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986); Wright v. Southwestern Bell Tel. Co., 925 F.2d 1288 (10th Cir.1991).
. The Plaintiff does not move for summary judgment on her claim under section 523(a)(6) of the Bankruptcy Code.
. Argus Real Estate, Inc. v. E-470 Public Highway Authority, 109 P.3d 604, 608 (Colo. 2005).
. Marrese v. American Acad, of Orthopaedic Surgeons, 470 U.S. 373, 380, 105 S.Ct. 1327, 1332, 84 L.Ed.2d 274 (1985).
. Nichols v. Board of County Commissioners of the County of La Plata, Colorado, 506 F.3d 962, 967 (10th Cir.2007).
. Argus Real Estate, 109 P.3d at 608.
. Black’s Law Dictionary 1425 (9th ed. 2009)(under the term "res judicata”). Generally,
The principal distinction between claim preclusion and issue preclusion is ... that the former forecloses litigation of matters that have never been litigated. This makes it important to know the dimensions of the "claim” that is foreclosed by bringing the first action, but unfortunately no precise definition is possible.” Charles Alan Wright, The Law of Federal Courts § 100A, at 723 (5th ed. 1994)
Black’s Law Dictionary 263.
. In re Faires, 123 B.R. 397, 401 (Bankr. D.Colo.1991).
. Argus Real Estate, 109 P.3d at 608.
. See, e.g., Goss v. Goss, 722 F.2d 599 (10th Cir.1983). The Tenth Circuit noted that:
Courts have disagreed on whether collateral estoppel should apply to dischargeability determinations involving a bankruptcy court’s exclusive jurisdiction. Where a state court has jurisdiction to determine dischargeability concurrent with that of the bankruptcy court, however, collateral es-toppel should be applied. This result is consistent with the congressional design in giving bankruptcy courts exclusive jurisdiction to determine the dischargeability of certain debts, but not others.
As other cases have noted, the principle of claim preclusion generally does not apply to actions concerning dischargeability of debt. "The principle underlying the rule of claim preclusion is that a party who once has had a chance to litigate a claim before an appropriate tribunal usually ought not have another chance to do so.” Cruz v. Benine, 984 P.2d 1173, 1176 (Colo.1999) (quoting Restatement (Second) of Judgments 6 (1982)). " '[Claim preclusion] not only bars issues actually decided, but also any issues that should have been raised in the first proceeding but were not.’ ” Id. (quoting City & County of Denver v. Block 173 Assocs., 814 P.2d 824, 830 (Colo.1991)).
Although the general rule of claim preclusion would operate to bar all of Plaintiff’s state-law claims, Plaintiff’s requests for a determination of nondischargeability under 11 U.S.C. § 523 are not barred. In Brown v. Felsen, 442 U.S. 127, 99 S.Ct. 2205, 60 L.Ed.2d 767 (1979), the United States Supreme Court determined that "neither the interests served by [claim preclusion], the process of orderly adjudication in the state courts, nor the policies of the Bankruptcy Act, would be well served by foreclosing a creditor in a bankruptcy proceeding from submitting additional evidence” to prove that a debt was nondischargeable. 442 U.S. at 132, 99 S.Ct. *1632205. In nondischargeability proceedings in the bankruptcy court, the dischargeability claim arises, not to dispute the validity of the underlying debt, but rather "to meet ... the new defense of bankruptcy which [the debtor] has interposed between [the creditor] and the sum determined to be due him.” Id. at 133, 99 S.Ct. 2205. According to the Court, in asserting dischargeability, the debtor
has upset the repose that would justify treating the prior state judgment as final, and it would hardly promote confidence in judgments to prevent [the creditor-plaintiff] from meeting the debtor-defendant’s new initiative. Accordingly, the Court established the principle that “a bankruptcy court is not confined to a review of the judgment and record in the prior state-court proceedings when considering the dischargeability of debt."
Id. at 138-39, 99 S.Ct. 2205 (1979).
Claims relating to dischargeability only arise in the context of a bankruptcy proceeding. Thus, claims with respect to discharge-ability of a debt are unique to bankruptcy and are raised for the first time in response to a debtor's attempt to discharge debts-— which happens for the first time in bankruptcy. In the absence of a bankruptcy proceeding, the creditor would never have had any reason to establish the elements required to defeat discharge. Consequently, claim preclusion cannot bar relitigation from a state court disposition of a matter in the context of the discharge of obligations brought forth only by the existence of a bankruptcy proceeding.
. Sunny Acres Villa, Inc. v. Cooper, 25 P.3d 44, 47 (Colo.2001) (citations omitted); see also, 4 Collier on Bankruptcy ¶ 523.06, at 523-22 (Alan N. Resnick and Henry J. Sommer ed., 16th ed. Rev. 2009).
. Grogan v. Garner, 498 U.S. 279, 284, 111 S.Ct. 654, 658, 112 L.Ed.2d 755 (1991).
. Sunny Acres, 25 P.3d at 47 (citations omitted).
. Sumler v. District Court, City and County of Denver, 889 P.2d 50, 55 (Colo. 1995) (en banc).
. Kempter v. Hurd, 713 P.2d 1274 (Colo. 1986) (en banc).
. Emphasis in original.
. In re Kukuk, 225 B.R. 778, 784 (10th Cir.BAP 1998); Wolf v. McGuire (In re McGuire), 284 B.R. 481 (Bankr.D.Colo.2002).
. First Amended Complaint and Jury Demand attached as Exhibit B to the Plaintiffs Motion for Summary Judgment, p. 6, ¶ 30.
. First Amended Complaint and Jury Demand attached as Exhibit B to the Plaintiff’s Motion for Summary Judgment, p. 6, ¶ 31.
. First Amended Complaint and Jury Demand attached as Exhibit B to the Plaintiffs Motion for Summary Judgment, p. 6, ¶ 32.
. First Amended Complaint and Jury Demand attached as Exhibit B to the Plaintiffs Motion for Summary Judgment, p. 6, ¶ 33.
. First Amended Complaint and Jury Demand attached as Exhibit B to the Plaintiffs Motion for Summary Judgment, p. 6, ¶ 34.
. First Amended Complaint and Jury Demand attached as Exhibit B to the Plaintiffs Motion for Summary Judgment, p. 7, ¶¶ 40-42.
. Klemens v. Wallace (In re Wallace), 840 F.2d 762, 765 (10th Cir.1988).
. 4 Collier on Bankruptcy ¶523.10[2], at 523-76-523-77 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed. rev. 2009).
. Colo.Rev.Stat. § 18-4-403.
. Hucal v. People, 176 Colo. 529, 535, 493 P.2d 23, 27 (Colo.1971).
. Nichols v. Board of County Commissioners of the County of La Plata, Colorado, 506 F.3d 962 (10th Cir.2007).
. Id. at 967 (citations omitted)(emphasis in the original).
. Id. at 968.
. Id.
. Id. at 967 (citing Bebo Constr. Co. v. Mattox & O'Brien, P.C., 990 P.2d 78, 85-86 & n. 3 (Colo.1999); Michaelson v. Michaelson, 884 P.2d 695, 701 & n. 7 (Colo.1994); Bennett College v. United Bank of Denver, Nat. Ass’n, 799 P.2d 364, 368 (Colo.1990)).
. Restatement (Second) of Judgments § 27.
. Restatement (Second) of Judgments § 27 comment, (e).
. "[A] judgment by consent is based upon a settlement between the parties of the terms, amount, or conditions of the judgment to be entered, and requires a mutual understanding of and concerted action by the parties. A judgment entered upon the stipulation of the parties is a judgment by consent.” Right to appellate review of consent judgments, American Law Reports, 69 A.L.R.2d 755 (1960).
. Restatement (Second) of Judgments § 27 comment, (e).
. La Preferida, Inc. v. Cerveceria Modelo, S.A. de C. V., 914 F.2d 900, 906 (7th Cir.1990) (citing Montana v. United States, 440 U.S. 147, 153, 99 S.Ct. 970, 59 L.Ed.2d 210 (1979)).
. Arizona v. California, 530 U.S. 392, 414, 120 S.Ct. 2304, 147 L.Ed.2d 374 (2000)(this case originated under federal law and the effect of issue preclusion was determined applying federal common law). See, e.g., 4 Collier on Bankruptcy ¶ 523.06, at 523-22 (Alan N. Resnick & Henry J. Sommer, eds., 16th ed. rev. 2011).
. Judge Nelson of the Supreme Court of Minnesota made this observation with respect to consent judgments, which is insightful, but not controlling on this Court:
A consent judgment is based wholly on the consent of the parties and there is no judicial inquiry into the facts or the law applicable to the controversy. Moreover, in a consent judgment it is the duty of the court to enter judgment in accordance with the agreement of the parties and the court’s *168authority is limited by the consent or stipulation ... Such a judgment is therefore not a judicial determination of the rights of the parties and does not purport to represent the judgment of the court, but merely records the preexisting agreement of the parties ...
Hentschel v. Smith, 278 Minn. 86, 86-87, 153 N.W.2d 199, 201 (Minn. 1967). Further, “parties to a consent judgment” generally intend merely to put an end to the litigation at hand, but do not intend the judgment to have binding effect as to the issues raised in collateral, perhaps unforeseen, litigation which may arise in the future ... [but] “a contrary result is appropriate in those exceptional situations in which the parties have manifested their intention that the consent judgment is to have collateral estoppel effect.” Id. (Emphasis added).
. In re Miller, 307 Fed.Appx. 785 (5th Cir. 2008) (holding intent to preclude can be found by language contained with the stipulated judgment indicating the debt is nondis-chargeable in bankruptcy); In re Vollbracht, 276 Fed.Appx. 360 (5th Cir.2007) (holding a bankruptcy court may adopt state holdings where the state court consent judgments were "detailed recitations of the findings upon which they were based.”); La Preferida, Inc. v. Cerveceria Modelo, S.A. de C. v., 914 F.2d 900 (7th Cir. 1990) (recognizing the general rule forbidding the application of collateral estoppel to consent judgments especially when the judgment lacks clarity); Hughes v. Santa Fe Int'l Corp., 847 F.2d 239 (5th Cir.1988) (holding that settlement agreements, like consent judgments, are not given preclu-sive effect unless the parties manifest their intent to give them such effect); Levinson v. U.S., 969 F.2d 260, 264 (7th Cir. 1992) (holding the court cannot find intent where the consent judgment fails to mention the cause of action); In re Halpern, 810 F.2d 1061, 1064 (11th Cir. 1987) (holding the intent of parties can be inferred from sufficient details contained within the consent judgment indicating the parties understood the consent judgment operated as a final adjudication of the factual issues).
. Meyer v. Rigdon, 36 F.3d 1375, 1379 (7th Cir.1994) (citing Klingman v. Levinson, 831 F.2d 1292, 1296 (7th Cir.1987)).
. Bennett Coll. v. United Bank of Denver, 799 P.2d 364, 368 (Colo.1990) ("Under certain circumstances a stipulation between parties to central questions of fact and law or a stipulation to questions of fact may render a judgment not ‘final’ as to those questions, and in a subsequent proceeding collateral estoppel should not prevent the litigation of those questions unless the parties in the original lawsuit intended the questions to be settled as to future actions.”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494623/ | KORNREICH, Bankruptcy Judge.
Inofin Incorporated (“Inofin”) is the debtor in this chapter 7 case. Raymond C. Green, Inc. (“RCG”), a creditor, appeals from the bankruptcy court order denying its motion for relief from the automatic stay. Mark G. DeGiacomo is the chapter 7 trustee. For the reasons set forth below, we conclude that the order is not final. Accordingly, this appeal is DISMISSED for lack of jurisdiction.
BACKGROUND
The facts are largely undisputed and are set forth in great detail in the extensive and well-crafted memorandum of findings and conclusions accompanying the bankruptcy judge’s order. See In re Inofin, Incorporated, 455 B.R. 19 (Bankr.D.Mass. 2011). We provide this summary as a prelude to our discussion of jurisdiction.
For many years before the commencement of this involuntary case, Inofin was engaged in financing the sales of used automobiles for retail dealers. Upon the sale of an automobile to be financed by Inofin, the dealer would assign the retail installment contract to Inofin in exchange for payment of the balance due on the purchase price. Inofin would service the loan and receive the term payments from the retail customer. To finance these transactions, Inofin borrowed money from many lenders. These lenders received assignments of the retail installment con*172tracts generated by Inofín as collateral for their advances. In good times, Inofín repaid its lenders from the payments it received from the retail customers.
RCG was one of Inofin’s lenders. According to a security agreement dated April 17, 1996, Inofín gave RCG a security interest in those retail installment contracts that were produced with funding from RCG. However, in actual practice over the years, Inofín assigned random batches of retail installment contracts to RCG, including contracts that did not arise from RCG’s advances. Thus, in the end, when Inofín owed RCG in excess of $8,000,000, RCG’s portfolio of retail installment contracts contained contracts that were not traceable to funding from RCG.
Months before the order for relief was entered in the involuntary bankruptcy case, RCG purportedly acquired its portfolio of retail installment contracts at its own secured party sale. That sale did not dissuade the chapter 7 trustee from collecting payments on the retail installment contracts held by RCG. This prompted RCG to file a motion for relief from stay under § 362(d) of the Bankruptcy Code.1
RCG asserted under § 362(d)(1) that the estate had no interest in its portfolio of Inofin’s retail installment contracts because RCG had acquired them at its secured party sale and, should it be determined that RCG had not lawfully acquired es collateral at the secured party sale, the trustee would be unable to provide RCG with adequate protection. RCG also asserted that it was entitled to relief under § 362(d)(2) because there could be no effective reorganization in a chapter 7 case.
The trustee objected to RCG’s motion, arguing that: (a) RCG lacked a valid security interest in the purported collateral because, contrary to the security agreement dated April 17, 1996, RCG could not trace the retail installment contracts in its portfolio to its own advances to Inofín; (b) because RCG could not tie the contracts to its advances, no security interest had attached to the retail installment contracts held by RCG; (c) RCG could not have acquired collateral in which it had no security interest at its secured party sale; and, (d) even if RCG had possessed a valid security interest, its acquisition of the retail installment contracts at the secured party sale was voidable because of the unlawful manner in which the sale had been conducted. The trustee requested an evidentiary hearing on those issues and on whether RCG’s claim should be equitably subordinated to the claims of general unsecured creditors.
After an evidentiary hearing, the bankruptcy court denied RCG’s motion for relief from stay. In support of its very succinct order, the bankruptcy court supplied a memorandum of its findings and *173conclusions.2 At the outset of the memorandum, the bankruptcy court noted that RCG had, in effect, sought a determination of the validity and extent of its lien in its motion for relief from stay, a determination that should have been sought in an adversary proceeding. Yet, with the apparent consent of the parties, the bankruptcy court concluded that it would determine the validity and extent of RCG’s lien in the context of RCG’s motion. The appropriateness of that conclusion is not in contention. However, the record reflects that soon after RCG brought its motion for relief, the trustee commenced a multi-count adversary proceeding against RCG seeking: a determination of the validity of RCG’s lien, the subordination of RCG’s claim, a declaratory judgment,3 the avoidance of fraudulent transfers under § 548, and the avoidance of preferential transfers under § 547. At oral argument, the parties acknowledged that this adversary proceeding is pending.
On detailed findings that we have no need to recount at this time, the bankruptcy court concluded that “RCG failed to establish a colorable claim to secured status and concomitantly failed to establish entitlement to relief from the automatic stay.” The court reasoned that “[b]ecause the loan proceeds advanced by RCG [could] not be traced to its purported collateral ... its security interest did not attach and [was] not enforceable as to that collateral....” Ultimately, the bankruptcy court concluded that RCG was not entitled to relief from the automatic stay “for cause” under § 362(d)(1) because it did not hold a security interest in Inofln’s retail installment contracts. There appears to be no conclusion with respect to § 362(d)(2).
On appeal, RCG seeks a review of the bankruptcy court’s preludial findings and conclusions on the validity of RCG’s security interest and the lawfulness of its secured party sale. Neither RCG nor the trustee has challenged our jurisdiction to review those findings and conclusions.
DISCUSSION
We assess our appellate jurisdiction even when it goes unchallenged. See Boylan v. George E. Bumpus, Jr. Constr. Co. (In re George E. Bumpus, Jr. Constr. Co.), 226 B.R. 724 (1st Cir. BAP 1998). Because our jurisdiction is limited to appeals from final judgments, orders and decrees, see Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (1st Cir. BAP 1998), and because our understanding of the law in this Circuit is that an order denying relief from stay is not presumptively final, we must first determine if the order denying relief from stay in this case is a final order.4
A decision is considered “final if it ‘ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.’ ” In re Bank of New England, 218 B.R. at 646 (quoting Catlin v. United States, 324 U.S. 229, 233, 65 S.Ct. 631, 89 L.Ed. 911 (1945)). “Ordinarily, a judgment is final ... only if it conclusively determines all claims of all *174parties to the action.” Nichols v. Cadle Co., 101 F.3d 1448, 1449 n. 1 (1st Cir.1996) (citation omitted). An interlocutory order ‘“only decides some intervening matter pertaining to the cause, and ... requires further steps to be taken in order to enable the court to adjudicate the cause on the merits.’ ” In re Bank of New England, 218 B.R. at 645 (quoting In re Am. Colonial Broad. Corp., 758 F.2d 794, 801 (1st Cir.1985)).
“[I]n contrast to most other civil litigation, finality in bankruptcy is a more elusive concept.” Iannochino v. Rodolakis (In re Iannochino), 242 F.3d 36, 43 (1st Cir.2001) (citing In re Am. Colonial Broad. Corp., 758 F.2d at 801). “ ‘[Considerations unique to bankruptcy proceedings require courts to adopt a pragmatic approach in determining the finality of bankruptcy orders.’ ” In re Bank of New England, 218 B.R. at 647 (quoting Official Bondholders Comm. v. Chase Manhattan Bank (In re Marvel Entertainment Group, Inc.), 209 B.R. 832, 835-36 (Bankr.D.Del.1997)). Indeed, “‘no uniform and well-developed set of rules exists and on many points there is a good deal of uncertainty.’ ” Caterpillar Fin. Serv. Corp. v. Braunstein (In re Henriquez), 261 B.R. 67, 69 (1st Cir. BAP 2001) (quoting Brandt v. Wand Partners, 242 F.3d 6, 13 (1st Cir.2001)). This is clearly so when the order is one denying relief from stay. While “all seem to agree that orders lifting the automatic stay are final,” this “is not always the case ... when, as in the matter before us, the bankruptcy court denies the moving party relief from the automatic stay.” Id. at 70 (citations and quotations omitted).
Ordinarily, “the hearing on a motion for relief from stay is meant to be a summary proceeding,” Grella v. Salem Five Cent Savings Bank, 42 F.3d 26, 31 (1st Cir.1994), because “such hearings do not involve a full adjudication on the merits of claims, defenses, or counterclaims, but simply a determination as to whether a creditor has a colorable claim to property of the estate.” Id. at 32. Thus, it follows that when relief from stay is denied because a moving party has failed to make the necessary showing of a colorable claim in a non-evidentiary hearing, the order denying relief would not be a final order. See Henriquez, 261 B.R. at 71. This is particularly so when, as in Henriquez, there is a pending adversary proceeding encompassing the same issues. Then, “such a determination must necessarily await the resolution of the trustee’s adversary proceeding.” Id. However, absent a pending adversary proceeding, when a bankruptcy court considers “any defenses or counterclaims that bear on whether a colorable claim exists” as a prelude to the denial of relief from stay, the order denying relief may be ripe for appellate review. United States v. Fleet Bank of Mass. (In re Calore Exp. Co., Inc.), 288 F.3d 22, 35 (1st Cir.2002).
All of this suggests a fact specific, case-by-case inquiry on the question of finality. The hearing below was plenary and the bankruptcy court rendered comprehensive findings and conclusions with the consent of the parties. Those findings and conclusions appear to support the entry of a partial judgment on one or more of the counts in the pending adversary proceeding. And therein lies the rub. “The finality requirement represents an attempt to avoid duplicative or piecemeal appeals.” McGowan v. Global Indus., Inc. (In re Nat’l Office Prods., Inc.), 116 B.R. 19, 20 (D.R.I.1990).
On this record, we cannot say that there is nothing more for the court to do but execute the judgment. Because the *175bankruptcy court’s determination on the motion for relief is inextricably intertwined with the unresolved issues in the adversary proceeding, entertaining an appeal at this time would set “the stage for the fragmentation of appellate review.” See Nichols v. Cadle Co., 101 F.3d at 1449. “ “Were appellate review available on demand whenever a district court definitely resolved a contested legal issue ..., the ‘finality rule’ would be eviscerated.’ ” In re Bank of New England, 218 B.R. at 646 (citation omitted) (emphasis in original); see also Firestone Tire & Rubber Co. v. Risjord, 449 U.S. 368, 374, 101 S.Ct. 669, 66 L.Ed.2d 571 (1981) (citing reasons for final judgment rule as including deference to trial judge, potential that piecemeal litigation will undermine role of trial judge, efficient judicial administration, and avoidance of harassment and cost of successive appeals from intermediate rulings). As stated by the Supreme Court, “[s]o long as the matter remains open, unfinished or inconclusive, there may be no intrusion by appeal.” Cohen v. Beneficial Indus. Loan Corp., 337 U.S. 541, 546, 69 S.Ct. 1221, 93 L.Ed. 1528 (1949).
CONCLUSION
This appeal is DISMISSED for lack of jurisdiction because the order denying relief from stay is not a final order.
. Unless otherwise indicated, the terms "Bankruptcy Code,” "section” and "§ ” refer to Title 11 of the United States Code, 11 U.S.C. § 101, et seq., as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub. L. No. 109-8, 119 Stat. 37.
Section 362(d) provides for the lifting of the automatic stay as follows:
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—
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization....
11 U.S.C. § 362(d).
. The order stated: "In accordance with the Memorandum dated July 27, 2011, the Court denies the Motion of [RCG] for Relief from the Automatic Stay for Related Relief.”
. We cannot ascertain the precise nature of declaration sought, but we presume it relates to the avoidance of the secured party sale.
.We may also hear appeals from certain interlocutory orders. Here, we decline to exercise our discretion to do so because there has been no request for interlocutory review and because there is no apparent, compelling reason for us to undertake interlocutory review under the circumstances of this case. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494624/ | MEMORANDUM OPINION
BERNARD MARKOVITZ, Bankruptcy Judge.
This adversary proceeding and related matters in several other bankruptcy eases have been brought against some of the most talented attorneys practicing within the Commonwealth of Pennsylvania. The genesis for such actions is the breach of a lease agreement by such attorneys prior to the dissolution of their law firm (Titus & McConomy). Such actions are brought pursuant to the “fraudulent transfer statutes” that have been promulgated in Pennsylvania.
Although the term “fraud” has been utilized throughout the litigation involving each of the attorneys, this Court concludes, without equivocation, that no basis exists to make any finding against any of them regarding actual fraud. To the contrary, the Court found there to be no question of credibility on their part in any of the adversary proceedings. Therefore, the decision that follows, as well as those that will follow, is directed primarily to the issue of constructive fraud without any implication of moral turpitude on the part of the attorneys.
INTRODUCTION
Natalie Lutz Cardiello, the Chapter 7 Trustee (hereafter “the Trustee”) for Thomas Dare Arbogast, the instant debtor (hereafter “the Debtor”), prosecutes the instant adversary proceeding (Adversary No. 10-2092-BM) so as to pursue a fraudulent transfer action against the Debtor and Mary Claire Arbogast, his non-debtor spouse (hereafter “Mrs. Arbogast”). The fraudulent transfer action includes three counts and is pursued pursuant to Pennsylvania state fraudulent transfer law via 11 U.S.C. § 544(b)(1).
The Trustee and Trizechahn Gateway, LLC (hereafter “Trizec”), who is a pre-petition creditor of the Debtor, also object to many of the bankruptcy exemptions that the Debtor has taken. Such objection to exemptions is filed at Document No. 20 in the main case docket (i.e., Bankruptcy No. 10-20237-BM).
Both of the instant matters were actually tried twice. The first trial was conducted on October 14 and 15, 2010, by the Honorable M. Bruce McCullough, to whom these matters were originally assigned. Before Judge McCullough could enter a final opinion and order disposing of the matters, he died. Subsequent to his death, the matters were reassigned to this Court. This Court concluded that, in order to satisfy the requirements of Fed.R.Civ.P. 63, which is made applicable to the instant matters by way of Fed.R.Bankr.P. 9028, it needed to retry the instant matters. Such retrial has since been held.
The instant opinion and accompanying order also dispose of a motion for sanctions that the Debtor and Mrs. Arbogast brought prior to the first trial for the apparent failure by the Trastee and Trizec to comply with a consent case management Order of Court that was entered on April 21, 2010.
*294For the reasons set forth below, the Court will grant judgment in favor of the Trustee, and against the Debtor and Mrs. Arbogast jointly and severally, on the Trustee’s fraudulent transfer action in the amount of $143,389.10. The Court will also overrule that exemption objection of the Trustee and Trizec that it adjudicates herein. Finally, the Court will deny the sanctions motion that has been brought by the Debtor and Mrs. Arbogast.
STATEMENT OF FACTS
The Debtor is an attorney who at one time was a partner at Titus and McCono-my (hereafter “T & M”), a now-disbanded law partnership. In July 2000 Trizec, who was the owner of the building in which T & M had rented space, filed a lawsuit against T & M in the Pennsylvania Court of Common Pleas for Allegheny County (hereafter “the Common Pleas Court”). Trizec filed such lawsuit on the basis that T & M had breached its lease agreement with Trizec (hereafter “the Lease Litigation”). Trizec named as defendants in the Lease Litigation approximately 20 individual partners of T & M including the Debtor.
On June 7, 2006, the Common Pleas Court entered judgment in the Lease Litigation in favor of Trizec, which judgment was jointly and severally entered against, inter alia, the Debtor. The amount of such judgment was for roughly $2.7 million, which amount is alleged to have subsequently grown to more than $3 million by virtue of interest and legal fees. In an attempt to collect on such judgment from the Debtor, Trizec commenced a fraudulent transfer action on April 23, 2007, against the Debtor and Mrs. Arbogast in the Common Pleas Court (hereafter “the Arbogast Fraudulent Transfer Action”).
The Lease Litigation judgment was subsequently appealed to the Pennsylvania Superior Court, which affirmed the Common Pleas Court’s decision on July 3, 2007, as to most of the named defendants. However, the Pennsylvania Superior Court reversed the Common Pleas Court’s decision as to the Debtor in particular. As a result of such decision, Trizec discontinued the Arbogast Fraudulent Transfer Action without prejudice on July 27, 2007.
Trizec then appealed the aforesaid Pennsylvania Superior Court decision as it impacted the Debtor’s personal liability only to the Pennsylvania Supreme Court. The Pennsylvania Supreme Court ultimately reversed the Pennsylvania Superior Court’s decision vis-a-vis the Debtor on July 23, 2009, thereby reimposing personal liability against the Debtor on the Lease Litigation judgment.
On February 3, 2010, Trizec obtained an order from the Common Pleas Court granting Trizec’s motion to strike the aforesaid discontinuance of the Arbogast Fraudulent Transfer Action (hereafter “the February 3, 2010 State Court Order”). Before obtaining such court order, Trizec, on January 20, 2010, sent a letter to the Common Pleas Court requesting that the aforesaid motion to strike discontinuance be granted (hereafter “the January 20, 2010 Letter”).
On January 15, 2010, or just several days before Trizec sent the January 20, 2010 Letter (and just weeks before Trizec obtained the February 3, 2010 State Court Order), the Debtor filed a voluntary Chapter 7 bankruptcy petition. Trizec neither moved for, nor thus obtained an order from a bankruptcy court that granted, relief from the automatic stay before it either sent the January 20, 2010 Letter or obtained the February 3, 2010 State Court Order.
On February 23, 2010, the Debtor removed the Arbogast Fraudulent Transfer Action to this Court. Such removal served *295to initiate the instant adversary proceeding. On June 10, 2010, this Court entered an order that substituted the Trustee for Trizec as the plaintiff in the instant adversary proceeding, thereby placing such action in its present context.
STATEMENT OF THE CASE
The complaint that sets forth the Arbo-gast Fraudulent Transfer Action contains three counts. The first count pleads an actual fraudulent transfer action under Pennsylvania’s version of the Uniform Fraudulent Transfer Act (i.e., 12 Pa.C.S.A. § 5104(a)(1)), and the latter two counts plead constructive fraudulent transfer actions under such statute (i.e., 12 Pa.C.S.A. §§ 5104(a)(2)(ii) and 5105).
12 Pa.C.S.A. § 5104(a)(1) & (2)(ii) provides, in pertinent part, that:
A transfer made or obligation incurred by a debtor is fraudulent as to a creditor, whether the creditor’s claim arose before or after the transfer was made or the obligation was incurred, if the debtor made the transfer or incurred the obligation:
(1) with actual intent to hinder, delay or defraud any creditor of the debtor; or
(2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor:
(ii) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor’s ability to pay as they became due.
12 Pa.C.S.A. § 5104(a)(1) & (2)(ii) (Pur-don’s 2011). 12 Pa.C.S.A. § 5105 provides that:
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.
12 Pa.C.S.A. § 5105 (Purdon’s 2011).
The Trustee pursues the Arbogast Fraudulent Transfer Action pursuant to 11 U.S.C. § 544(b)(1). 11 U.S.C. § 544(b)(1) allows a bankruptcy trustee to “avoid any transfer of an interest of the debtor in property ... that is voidable under applicable [nonbankruptcy] law by a creditor holding an unsecured claim [against said debtor’s bankruptcy estate].” 11 U.S.C.A. § 544(b)(1) (West 2011).
The gravamen of the Arbogast Fraudulent Transfer Action is that the Debtor engaged in fraudulent transfers when, subsequent to July 2000, he directed Schnader Harrison Segal & Lewis, LLP (hereafter “the Schnader Law Firm”), the law firm that the Debtor worked for subsequent to the dissolution of T & M, to directly deposit his individual compensation that he solely earned therefrom into a checking account that he jointly owned with Mrs. Arbogast as tenants by the entirety (hereafter “the Entireties Checking Account”). The basis for such charge is (a) that, by virtue of the aforesaid direction regarding such deposits, the Debtor thereby transferred such compensation, and (b) that such transfers by the Debtor were fraudulent, either actually or constructively so, because they had the effect of shielding the Debtor’s individual compensation from the reach of his creditors such as Trizec.
The Trustee pursues such alleged fraudulent transfers under 12 Pa.C.S.A. § 5104(a)(1) on the ground that the Debt- or engaged in such transfers with actual intent to hinder, delay, or defraud his *296creditors, including Trizec. The Trustee pursues such alleged fraudulent transfers under 12 Pa.C.S.A. § 5104(a)(2)(ii) and 12 Pa.C.S.A. § 5105 on the ground that (a) the Debtor made such transfers without receiving reasonably equivalent value in return, and (b) he was either insolvent at the time of, or was rendered insolvent by, such transfers.1
As relief via the Arbogast Fraudulent Transfer Action, the Trustee seeks, pursuant to 11 U.S.C. § 550(a)(1), a judgment against both the Debtor and Mrs. Arbo-gast for the amount of the transfers to be avoided as fraudulent. 11 U.S.C. § 550(a)(1) provides, in pertinent part, that “to the extent that a transfer is avoided under section 544, ... the trustee may recover, for the benefit of the estate, the property transferred, or ... the value of such property, from ... the initial transferee of such transfer or the entity for whose benefit such transfer was made.” 11 U.S.C.A. § 550(a)(1) (West 2011). The theory for such requested relief is that, because the Debtor transferred his individual compensation into the Entireties Checking Account, and since both the Debtor and Mrs. Arbogast jointly owned such account, the Debtor and Mrs. Arbo-gast both constitute initial transferees of such transfers (and thus the entities for whose benefit such transfers were made as well).
The Trustee relies on the decision in In re Meinen, 232 B.R. 827, 840-43 (Bankr. W.D.Pa.1999), and the cases cited therein for her position that the Debtor’s periodic transfers of his solely-earned individual compensation into the Entireties Checking Account constitute constructive fraudulent transfers. The Meinen decision and the cases cited therein do indeed support the Trustee’s position, provided that such deposited compensation, after its deposit into the Entireties Checking Account, was not utilized to satisfy reasonable and necessary household expenses for the maintenance of the Debtor’s family. See Id. To the extent that such deposits were used to satisfy reasonable and necessary expenses for the maintenance of the Debtor’s family, Meinen, with but one exception, would dictate a holding that such deposits do not constitute constructive fraudulent transfers. See Id. at 842-43. The exception just referred to is “those deposits in question which were then used by ... [the Debtor and Mrs. Arbogast] to purchase other assets which are presently held as entireties property by” them, Id. at 843; these latter deposits, under Meinen, would constitute constructive fraudulent transfers regardless of their necessity to the Debtor and Mrs. Arbogast, see Id.
Both before and at trial, by way of what was labelled at trial as Defendants’ Exhibit O, the Trustee and Trizec have identified what they contend are four, or perhaps five, groups of disbursements that were made from the Entireties Checking Account. The Trustee and Trizec contend that (a) the direct deposits of the Debtor’s individual compensation into the Entireties Checking Account were utilized to fund, inter alia, the foregoing four or five groups of disbursements, and (b) such direct deposits, to the extent that they were utilized to make such disbursements, constitute not only fraudulent transfers but also the universe of the fraudulent trans*297fers that are sought to be avoided by way of the Arbogast Fraudulent Transfer Action.
The aforesaid five groups of alleged disbursements are:
(a) $338,375.31 of disbursements that were allegedly made to a checking account that was owned solely by Mrs. Arbogast (hereafter “Mrs. Ar-bogast’s Sole Account”), from which she then drew checks in an equal sum — the position of the Trustee and Trizec is that $338,375.31 worth of the direct deposits that the Schnader Law Firm made into the Entireties Checking Account were then transferred out into Mrs. Arbo-gast’s Sole Account, from which such funds were then utilized by her to make purchases of things other than necessities;
(b) a collection of alleged disbursements made with respect to a residence in Florida that the Debtor and Mrs. Arbogast purchased in June 2004, which residence was, and is, not their primary residence (hereafter “the Florida Residence”) — the amounts in question are (i) $70,000 for a down payment on the Florida Residence, (ii) mortgage payments (both principal and interest) on the loan obtained to purchase the Florida Residence, coupled with interest on the loan allegedly obtained to make the aforesaid down payment, all equalling $103,806.60, and (iii) $96,605.30 worth of expenditures that were made for upkeep on the Florida Residence;
(c) alleged disbursements that were made to maintain memberships in three different country clubs, namely (i) $26,132.51 for membership in the Duquesne Club, (ii) 60,647.28 for membership in the Long Vue Club, and (iii) $42,444.46 for membership in the Marsh Landing Country Club;
(d) $86,000 worth of contributions that were made into several of the Debt- or’s retirement accounts in 2003 and 2004 (hereafter “the Retirement Account Contributions”), some of which contributions were made by the Debtor into his 401 (k) account and some of which were made by the Schnader Law Firm on behalf of the Debtor into another retirement account; and
(e) $75,842.42 worth of alleged disbursements made to fund premium payments made by the Debtor for various life insurance policies that primarily benefitted Mrs. Arbogast.
The five groups of alleged disbursements were made at various times throughout a period that began on April 23, 2003, and ended on January 15, 2010, which is when the Debtor filed for bankruptcy.
In response to the Arbogast Fraudulent Transfer Action, the Court understands the Debtor and Mrs. Arbogast to essentially contend that none of the direct deposits by the Schnader Law Firm into the En-tireties Checking Account constitute fraudulent transfers pursuant to either § 5104(a)(1), § 5104(a)(2)(h), or § 5105, and that even if they do, they are not recoverable from Mrs. Arbogast pursuant to § 550(a)(1). The Debtor and Mrs. Ar-bogast so contend because they argue (a) that, as a matter of law, what may be recovered from Mrs. Arbogast via § 550(a)(1) are such direct deposits which she utilized for luxury items above basic living expenses that directly benefitted her, and (b) that Mrs. Arbogast did not utilize any of such direct deposits to purchase luxury items above basic living expenses that directly benefitted her.
*298The genesis for such defense by the Debtor and Mrs. Arbogast is language contained in an April 2, 2009 Memorandum and Order of Court that was entered by the Common Pleas Court in a separate fraudulent transfer action between Trizec, on the one hand, and Paul and Bonnie Titus, another of the former T & M partners and his spouse, on the other hand (hereafter “the Titus Action”). In the Titus Action at that time Trizec sought the avoidance of alleged fraudulent transfers by Paul Titus that are identical in nature to those sought to be avoided in the Arbo-gast Fraudulent Transfer Action. The Common Pleas Court, in such April 2, 2009 Memorandum and Order of Court, held that Trizec may recover from Bonnie Titus “only money defendant-wife [ (i.e., Bonnie Titus) ] used from the jointly held account into which the employer deposited defendant-husband’s [ (i.e., Paul Titus’) ] wages for luxury items above basic living expenses which directly benefitted her.” It is this holding upon which the Debtor and Mrs. Arbogast rely for their defense in the instant matter.
The Common Pleas Court decision of April 2, 2009, in the Titus Action was preceded by another related decision by such court in the same action on May 29, 2008 (hereafter collectively “the Titus Decisions”). This Court understands the Common Pleas Court in the Titus Decisions to have held that (a) the direct deposits of Paul Titus’ individual compensation into the Tituses’ entireties checking account only constitute fraudulent transfers to the extent that they were spent on luxuries, and (b) even to the extent that such deposits were spent on luxuries, thereby making them fraudulent transfers, they can only be recovered from Bonnie Titus if (i) she is the one who actually spent such deposits, and (ii) the luxury purchases actually benefitted her. By virtue of the latter of the two preceding holdings, the Common Pleas Court necessarily held that Bonnie Titus could not have been a transferee of deposits that constituted fraudulent transfers unless (a) she is the one who actually spent such deposits, and (b) the luxuries purchased with such deposits actually benefitted her.
In addition to the Arbogast Fraudulent Transfer Action, the Trustee and Trizec both object to certain of the bankruptcy exemptions that the Debtor has taken. The parties entered into a stipulation dated October 15, 2010, that resolves most of such exemption objections. The gist of such resolution is that, with two exceptions, such exemption objections will continue to be pursued but only to the extent that the assets sought to be exempted by the Debtor were purchased with funds that this Court determines, by resolution of the Arbogast Fraudulent Transfer Action, were fraudulently transferred by the Debt- or. The effect of such stipulation, disregarding the two aforesaid exceptions, is that (a) the amount to be recovered via such exemption objections will equal that amount that is to be recovered via the Arbogast Fraudulent Transfer Action, and (b) such exemption objections thus effectively need not be considered further.
The two exceptions are exemption objections regarding certain retirement assets that are solely owned by the Debtor. The parties have agreed that an exemption objection regarding one particular retirement asset of the Debtor is withdrawn except to the extent that it is preserved in a state court action that is pending against the Schnader Law Firm. Because such exemption objection is withdrawn but then preserved to be effectively dealt with in another court, such exemption objection will not be dealt with any further by this Court.
*299The parties have also agreed that the Trustee and Trizee will continue to pursue at this time an exemption objection with respect to the Retirement Account Contributions that, as set forth above, are perhaps also sought to be recovered as fraudulent transfers via the Arbogast Fraudulent Transfer Action (i.e., the $86,000 worth of contributions that were made into several of the Debtor’s retirement accounts in 2003 and 2004). The one caveat to the exemption objection regarding the Retirement Account Contributions is that the Trustee and Trizee thereby object to more than just the $86,000 worth of contributions that were made into several of the Debtor’s retirement accounts in 2003 and 2004. In particular, because the Debtor admitted at trial that contributions were made into such retirement accounts from 2006 through 2010 as well, the Trustee and Trizee contend that they may also object to the Debtor’s exemption of such additional contributions notwithstanding that they failed to apprise the Debtor of their intention to so object prior to trial.
DISCUSSION
As an initial matter, the Court immediately holds that the Trustee — to the extent that she seeks to do so — cannot successfully pursue the Retirement Account Contributions, be they for just 2003 and 2004 or for 2005 through 2010 as well, as fraudulent transfers via the Arbogast Fraudulent Transfer Action. The Court so holds because (a) the Trustee pursues as fraudulent transfers via the Arbogast Fraudulent Transfer Action only deposits that the Schnader Law Firm made of the Debtor’s compensation directly into the Entireties Checking Account, and (b) the Court finds that none of the Retirement Account Contributions were made into the Entireties Checking Account before they passed into retirement accounts of the Debtor. The Court finds as it does because it also finds that all of the Retirement Account Contributions were made directly by the Schnader Law Firm into retirement accounts of the Debtor (some such deposits at the Debtor’s insistence and others supposedly not pursuant to his direction).
Such holding by the Court, however, does not mean that the Trustee and Trizee cannot pursue recovery of the Retirement Account Contributions via their objection to the Debtor’s exemption of the Retirement Account Contributions. As set forth below, the Trustee and Trizee base such exemption objection, in part, upon then-position that the Retirement Account Contributions constitute fraudulent transfers, even if such transfers did not pass through the Entireties Checking Account. Therefore, that the Retirement Account Contributions did not pass through the Entireties Checking Account, and thus cannot be pursued via the Arbogast Fraudulent Transfer Action, does not serve to negate the exemption objection that has been lodged against them.
I. The Arbogast Fraudulent Transfer Action.
Numerous legal issues abound with respect to the Arbogast Fraudulent Transfer Action, including (a) whether the Trustee can pursue such action via § 544(b)(1), (b) the appropriate “lookback period” for such action, (c) what law should (or must) be applied to determine whether, and to what extent, the direct deposits of the Debtor’s individual compensation into the Entireties Checking Account constitute fraudulent transfers, (d) whether the direct deposits of the Debtor’s individual compensation into the Entireties Checking Account constitute transfers by the Debtor in the first instance, (e) whether Mrs. Arbogast constitutes an initial transferee of those deposits that are determined to constitute *300fraudulent transfers even if she did not spend such deposits and/or the deposits were not spent so as to benefit her, and (f) whether the Debtor was insolvent at the time of, or was rendered insolvent by, such direct deposits.
A. The lookback period for the Arbo-gast Fraudulent Transfer Action and whether the Trustee can pursue such action.
Fraudulent transfer actions under Pennsylvania’s version of the Uniform Fraudulent Transfer Act generally have a four-year statute of limitations as measured from the date that a transfer sought to be avoided was made. See 12 Pa.C.S.A. § 5109 (Purdon’s 2011). Because Trizec commenced the Arbogast Fraudulent Transfer Action on April 23, 2007, Trizec appropriately thereby sought to avoid as being fraudulent those transfers that were made by the Debtor between April 23, 2003, and April 23, 2007.
Provided that Trizec held an unsecured claim against the Debtor on January 15, 2010 (i.e., the date when the Debtor filed for bankruptcy), the Trustee may, pursuant to § 544(b)(1), pursue any fraudulent transfer action that Trizec could have pursued on that date, such as — one would think — the Arbogast Fraudulent Transfer Action inclusive of such action’s 4-year lookback period between April 23, 2003, and April 23, 2007. See In re Andersen, 166 B.R. 516, 523 (Bankr.D.Conn.1994) (“if a creditor has a cause of action which is not time barred, the trustee’s derivative action under § 544(b) is likewise not time barred”); In re Hill, 332 B.R. 835, 839 n. 3 (Bankr.M.D.Fla.2005) (same); In re Moore, 608 F.3d 253, 260-61 (5th Cir.2010) (same). Trizec indisputably held an outstanding unsecured claim against the Debtor on January 15, 2010, namely the joint and several judgment that emanates from the Lease Litigation which now approximates $3 million. Therefore, without more, the Court is compelled to hold that the Trustee may properly pursue the Ar-bogast Fraudulent Transfer Action inclusive of such action’s 4-year lookback period between April 23, 2003, and April 23, 2007.
The Debtor and Mrs. Arbogast disagree that the Trustee may pursue a fraudulent transfer action against them that includes a 4-year lookback period from April 23, 2003, until April 23, 2007. Although they concede that the Trustee may bring a fraudulent transfer action against them, they argue that the applicable lookback period should be for the four-year period that ends on January 15, 2010. The basis for such dispute by the Debtor and Mrs. Arbogast rests upon their position that, as of January 15, 2010, Trizec did not have the right to pursue the Arbogast Fraudulent Transfer Action inclusive of such action’s 4-year lookback period between April 23, 2003, and April 23, 2007. The Debtor and Mrs. Arbogast take such position (a) because, as of January 15, 2010, the Arbogast Fraudulent Transfer Action had been discontinued in the Common Pleas Court, and (b) because such action could not be pursued further until such court struck such discontinuance, thereby reinstating such action.
The Court rejects the foregoing position of the Debtor and Mrs. Arbogast for several reasons. First, even though, as of January 15, 2010, the Common Pleas Court had not yet reinstated the Arbogast Fraudulent Transfer Action by striking the aforesaid discontinuance, that does not mean that Trizec, as of such date, did not have the right to seek such reinstatement of, and then the right to pursue, such action. Trizec, in fact, had such rights as of January 15, 2010, which means that the Trustee is free to take advantage of the *301same rights pursuant to § 544(b)(1). Second, that the Trustee could take advantage of the foregoing rights of Trizec by virtue of § 544(b)(1) is not changed by the fact that Trizec, without relief from, and thus in clear violation of, the automatic stay, sought the post-petition entry of the February 3, 2010 State Court Order by the Common Pleas Court, by which order such court granted Trizec’s motion to strike the aforesaid discontinuance. The Court so holds because (a) a creditor, as of the commencement of a Chapter 7 bankruptcy case, is dispossessed of standing to further pursue a fraudulent conveyance avoidance action, see Sears Petroleum & Transport Corp., 417 F.Supp.2d 212, 221-22 (D.Mass.2006); In re Forbes, 372 B.R. 321, 336 (6th Cir. BAP 2007); In re Tessmer, 329 B.R. 776, 779 (Bankr.M.D.Ga.2005), (b) Trizec consequently lacked standing on February 3, 2010, to obtain any order from any court that pertained to the Arbogast Fraudulent Transfer Action, and (c) it will not attribute to the Trustee, who is the party who had standing to pursue such action post-bankruptcy petition, any potentially sanc-tionable conduct of Trizec, who lacked such standing.
The Court also rejects the foregoing position of the Debtor and Mrs. Ar-bogast notwithstanding that the February 3, 2010 State Court Order was entered subsequent to January 15, 2010, that is in violation of the automatic stay that arose on such date when the instant bankruptcy case was commenced.2 The Debtor and Mrs. Arbogast correctly contend that, because such order was entered in violation of the automatic stay, such order, pursuant to automatic stay principles, would generally be void. See In re Askew, 312 B.R. 274, 281 (Bankr.D.N.J.2004) (citing In re Siciliano, 13 F.3d 748, 750 (3rd Cir.1994)). They also correctly contend that, if such order is void, then (a) the Arbogast Fraudulent Transfer Action has not yet actually been reinstated by the Common Pleas Court, and (b) such action cannot presently be pursued by the Trustee prior to such reinstatement. However, as also set forth above, the Trustee has the right to seek such reinstatement of such action. Furthermore, it makes little, indeed no, sense to now force the Trustee to seek an order from the Common Pleas Court reinstating the Arbogast Fraudulent Transfer Action after such an order was already entered by such court on February 3, 2010, albeit apparently unknowingly entered by such court in violation of the automatic stay. Therefore, may this Court, under such circumstances, presently validate the February 3, 2010 State Court Order, thereby allowing the Trustee to pursue the Arbo-gast Fraudulent Transfer Action free from any obstacles that arise from the foregoing automatic stay violations? The Court concludes that it may do so. See Askew, 312 B.R. at 281-82 (citing Siciliano, 13 F.3d at 751, to the effect that “§ 362(d) of the Code affords courts an opportunity to cure [or validate] acts that are otherwise void under the automatic stay” in the interests of “equity and judicial economy”); Maertin v. Armstrong World Industries, Inc., 241 F.Supp.2d 434, 449 (D.N.J.2002) (same, citing Siciliano).
The Court also rejects the foregoing position of the Debtor and Mrs. Arbogast because, as set forth below, when the *302Court analyzes the Arbogast Fraudulent Transfer Action utilizing both of the look-back periods that are advanced by the parties (i.e., from April 23, 2003, until April 23, 2007, as advanced by the Trustee, or January 15, 2006, until January 15, 2010, as advanced by the Debtor and Mrs. Arbo-gast), the Court concludes that the Trustee is entitled to recover less utilizing the 4/23/03 — 4/23/07 lookback period that is advanced by her. Put differently, the Court concludes that the Debtor and Mrs. Arbogast do better with respect to the Arbogast Fraudulent Transfer Action if the Court, rather than utilizing the 1/15/06 — 1/15/10 lookback period that is advanced by them, utilizes the lookback period that is sought by the Trustee. Because of the foregoing point, the Court views the lookback period issue herein as being largely academic in nature, that is not particularly relevant from a practical standpoint. Therefore, the Court sees no point in dwelling further on the issue.
In summary, the Trustee is authorized, pursuant to § 544(b)(1), to pursue the Ar-bogast Fraudulent Transfer Action inclusive of such action’s 4-year lookback period between April 23, 2003, and April 23, 2007.
As an aside, because Trizec, as set forth above, lacked standing after January 15, 2010, to take any action that could have negatively affected the Debtor and Mrs. Arbogast relative to the Arbogast Fraudulent Transfer Action, they could not conceivably have been harmed by Trizec’s automatic stay violation in the form of the action that Trizec took post-petition to obtain the Common Pleas Court’s entry of the February 3, 2010 State Court Order. That being the case, and because the Court does not find that Trizec took the action in question in knowing violation of the automatic stay, the Court will not impose any sanctions upon Trizec for such automatic stay violation.
B. What case authority should be used to resolve the instant matter: the Titus Decisions, the Meinen case, or something else?
(i) The propriety of the Titus Decisions.
As set forth above, the Debtor and Mrs. Arbogast maintain that the Titus Decisions should control the resolution of the Arbo-gast Fraudulent Transfer Action. They contend that applying such decisions to the instant matter compels the result that (a) the direct deposits of the Debtor’s individual compensation into the Entireties Checking Account will only constitute fraudulent transfers to the extent that they were spent on luxuries, and (b) even to the extent that such deposits were spent on luxuries, Mrs. Arbogast cannot be deemed to have been a transferee of such deposits from whom a recovery can be had unless (i) she is the one who actually spent such deposits, and (ii) the luxury purchases actually benefitted her. This Court agrees that, if the Titus Decisions control the resolution of the Arbogast Fraudulent Transfer Action, then the foregoing result advanced by the Debtor and Mrs. Arbo-gast is correct.
However, this Court respectfully disagrees with many of the basic rulings in the Titus Decisions. For instance, this Court does not agree, within the context of the instant matter, that the direct deposits of the Debtor’s individual compensation into the Entireties Checking Account will only constitute fraudulent transfers to the extent that they were spent on luxuries. The Court concludes instead that such direct deposits may constitute fraudulent transfers, at least constructive fraudulent transfers, unless they were spent on necessities; that is, provided that such deposits *303were not spent on necessities, they may constitute constructive fraudulent transfers even if they were also not spent on luxuries.
The preceding holding by this Court is consistent with that of the court in Meinen, see Meinen, 232 B.R. at 842-43, which latter ruling the Court finds to be far more persuasive than the corresponding holding in the Titus Decisions. The Meinen holding is more persuasive to this Court than are the Titus Decisions because the Meinen court relied exclusively on longstanding case authorities construing Pennsylvania law, see Id., whereas the Titus Decisions are not based on any case authority. The Court also so holds because it is simply not true, as the Common Pleas Court appeared to assume, that, if something is not a luxury, then it must be a necessity. Indeed, many items can fall in between the two categories. See In re Alexo, 436 B.R. 44, 49 (Bankr.N.D.Ohio 2010) (holding, within the context of 11 U.S.C. § 523(a)(2)(C), wherein a similar issue also arises, that “[a] medium between the two parameters [of necessities and luxuries] exists, where a transaction is neither fish nor fowl”); In re Blackburn, 68 B.R. 870, 874 (Bankr.N.D.Ind.1987) (“Certain goods may not qualify as necessities and [they] still [will] not be luxuries”); In re Shaw, 294 B.R. 652, 655 (Bankr.W.D.Pa.2003) (same, quoting Blackburn and citing In re Stewart, 91 B.R. 489, 497 (Bankr.S.D.Iowa 1988)). The only category that is relevant for fraudulent transfer purposes, consistent with Pennsylvania law, is that of necessities. See Meinen, 232 B.R. at 842-43. Therefore, whether something constitutes a luxury is irrelevant for fraudulent transfer purposes. Furthermore, if what a deposit is spent on falls in between the categories of necessities and luxuries, that is it is neither a necessity nor a luxury, then such deposit may constitute a constructive fraudulent transfer because it was not spent on a necessity.
This Court also does not agree, within the context of the instant matter, that, with respect to those deposits in question that are determined to constitute avoidable fraudulent transfers, Mrs. Arbo-gast cannot be deemed to have been a transferee of such deposits from which a recovery can be had unless (a) she is the one who actually spent such deposits, and (b) that which was purchased with such deposits actually benefitted her. The Court concludes instead that Mrs. Arbo-gast was a transferee, indeed an initial transferee along with the Debtor, of all of the direct deposits of the Debtor’s individual compensation into the Entireties Checking Account, regardless of whether (a) she is the one who later spent such deposits, and (b) that which was purchased with such deposits actually benefitted her.
The preceding holding by the Court is ultimately dictated by binding Pennsylvania precedent, whereas the corresponding holding in the Titus Decisions is not based on any existing authority. The binding Pennsylvania precedent to which this Court refers is the Pennsylvania Supreme Court decision in In re Estate of Holmes, 414 Pa. 403, 200 A.2d 745 (1964), wherein it was held, in pertinent part, that “[w]here ... an account is placed in the names of a husband and wife, a gift and the creation of an estate by the entireties is presumed even though the funds used ... to establish the account were exclusively those of the husband.” Id. at 747; see also Constitution Bank v. Olson, 423 Pa.Super. 134, 620 A.2d 1146, 1149-50 (1993) (relying heavily on Holmes); In re Nam, 257 B.R. 749, 761-62 (Bankr.E.D.Pa.2000) (relying on both Holmes and Constitution Bank, and holding that a joint bank account in the names of the debtor therein and his wife “is presumed to be owned by ... [them] as tenants by the entireties”). Because of such *304precedent as established in Holmes, money placed by one spouse in a joint bank account held in the names of both spouses is thereafter owned by each spouse as a tenant by the entirety, the statutory rule in 20 Pa.C.S.A. § 6303(a) notwithstanding. 20 Pa.C.S.A. § 6303(a) provides that “[a] joint account belongs, during the lifetime of all parties, to the parties in proportion to the net contributions by each to the sum on deposit, unless there is dear and convincing evidence of a different intent.” 20 Pa.C.S.A. § 6303(a) (Purdon’s 2011) (emphasis added). However, a spouse’s act of placing money in a joint bank account held in the names of both spouses “constitutes such clear and convincing evidence of a different intent: the intent to create estates by the entireties, which arises as a presumption at law.” In re Estate of Cambest, 756 A.2d 45, 53 (Pa.Su per.Ct.2000) (citing Constitution Bank). Because Mrs. Arbogast owned all of the direct deposits of the Debtor’s individual compensation that were made into the En-tireties Checking Account the moment such deposits occurred, she was a transferee along with the Debtor (both as entire-ties tenants) of all of such deposits. See In re Broadview Lumber Co., Inc., 168 B.R. 941, 962-63 (Bankr.W.D.Mo.1994);3 In re Computer Personalities Systems, Inc., 2002 WL 31988134 at *7 (Bankr. E.D.Pa.2002); In re Dawley, 2005 WL 2077074 at *15 (Bankr.E.D.Pa.2005).
(ii) Whether the Titus Decisions must be followed in the instant matter?
Although this Court, as just set forth, takes issue with many of the basic rulings in the Titus Decisions, is this Court nevertheless bound to adhere to such rulings when resolving the instant matter? The Court concludes that it is not so bound, and notwithstanding that Judge McCullough, the predecessor judge in the instant adversary proceeding, may perhaps have indicated his willingness to follow the Titus Decisions when resolving the instant matter via interlocutory rulings that were rendered prior to trial. The Court identifies several reasons why it is not bound to adhere to the rulings in the Titus Decisions when resolving the instant matter.
First, the Titus Decisions cannot be accorded preclusive effect, be it by virtue of the doctrines of res judicata, collateral estoppel, or Rooker-Feldman, and not even with respect to the named defendants therein, that is Paul and Bonnie Titus, because such decisions (a) were rendered at the pre-trial stage within the Titus Action, (b) did not completely resolve any, and most certainly did not completely resolve all, of Trizec’s claims that are presently being pursued in such action, and (c) are thus clearly not final in nature.
Second, even if the Titus Decisions could be accorded preclusive effect outside of bankruptcy by way of res judi-cata, collateral estoppel, or the Rooker-Feldman doctrine, and presuming arguen-do that, given the general relaxation of the requirement of mutuality of estoppel, such preclusive effect could then be raised by the Debtor and Mrs. Arbogast in the Ar-*305bogast Fraudulent Transfer Action outside of bankruptcy, such decisions nevertheless cannot operate to so preclude the Trustee from pursuing the Arbogast Fraudulent Transfer Action given that she was neither a party, nor in privity with a party, to the Titus Action when the Titus Decisions were rendered. See In re Cowden, 337 B.R. 512, 531 & 540-41 (Bankr.W.D.Pa. 2006) (citing In re Marlar, 252 B.R. 743, 757-58 (8th Cir. BAP 2000), and In re Shuman, 78 B.R. 254, 256 (9th Cir. BAP 1987), and holding that the Chapter 7 trustee therein was not precluded, either by way of res judicata, collateral estoppel, or the Rooker-Feldman doctrine, from prosecuting a fraudulent conveyance action that was originally commenced outside of bankruptcy by a creditor because such trustee lacked privity with such creditor). The Court holds that the Trustee was, and is, not in privity with Trizec, who is the entity that she succeeded as plaintiff in the instant matter and who was also the plaintiff in the Titus Action, because (a) the Trustee represents not only the interests of Trizec, as an unsecured creditor in the instant bankruptcy case, but also the interests of the rest of the Debtor’s creditor body,4 (b) the rest of such creditor body was not in privity with Trizec, and (c) Trizec thus represented neither such creditor body nor, therefore, the Trustee at any time while the Titus Decisions were being rendered in the Titus Action. See Id.
Third, the rulings in the Titus Decisions cannot constitute law of the case in the instant matter (a) because “[t]he doctrine [of law of the case] only applies within the same case — an identical issue decided in a separate action does not qualify as law of the case,” Farina v. Nokia, Inc., 625 F.3d 97, 117 n. 21 (3rd Cir.2010), and (b) since, as the Court understands it, such rulings were never extended, by any written order of the Common Pleas Court, to the Arbogast Fraudulent Transfer Action prior to its removal to this Court. In fact, because both of the Titus Decisions were rendered during the period when the Arbogast Fraudulent Transfer Action had been discontinued in the Common Pleas Court, and since such discontinuation, as set forth above, was never legally stricken before such action was removed to this Court, the Common Pleas Court literally never had an opportunity to formally extend such decisions to such action.
Fourth, and of course, the rulings in the Titus Decisions do not constitute law of the district or anything like that because, quite simply, there is no such thing, especially with respect to interlocutory rulings like those rendered in the Titus Decisions.
Fifth, even if the rulings in the Titus Decisions can somehow be considered to constitute law of the case in the instant matter, the law of the case doctrine contains exceptions, one of which most notably is to correct glaring errors in the law. See 18B Charles Alan Wright, Arthur R. Miller & Edward H. Cooper, Federal Practice and Procedure Jurisdiction § 4478.1 (2nd ed. 2011) (pointing out that the law of the case doctrine does not pre vent a trial court from reconsidering its own interlocutory rulings or the interlocutory rulings of a predecessor judge); Schultz v. Onan Corp., 737 F.2d 339, 345 (3rd Cir.1984) (noting that an exception to the law of the case doctrine applies if a prior decision is clearly erroneous and would work a manifest injustice, and hold*306ing that “[t]he doctrine is not a ‘barrier to correction of judicial error’ ”). This Court holds, for the reasons already expressed above, that (a) the rulings in the Titus Decisions are clearly erroneous, (b) such rulings would work a manifest injustice if they were to be applied in the instant matter, and (c) an application of the law of the case doctrine to the Titus Decisions thus does not dictate that this Court must adhere to such decisions when resolving the instant matter.
Sixth, any interlocutory ruling that Judge McCullough may have made during the pre-trial phase of the instant adversary proceeding whereby he indicated his willingness to follow the rulings in the Titus Decisions is also not entitled to preclusive effect in the instant matter — via any of the doctrines of res judicata, collateral estop-pel, or Rooker-Feldman — given that such rulings were necessarily interlocutory and, thus, not final in nature.
Seventh, even though any such interlocutory ruling by Judge McCullough, if one or more was made, can be considered to constitute law of the case, once again this Court need not follow such interlocutory ruling given, as set forth above, the exception to the law of the case doctrine to correct glaring errors.
(iii) The law to be followed in the instant adversary proceeding.
The Court now decrees that, with but one exception to be noted shortly, it adopts as the law that will control the resolution of the instant matter the detailed legal principles as set forth in Meinen regarding the intersection of fraudulent transfer law in Pennsylvania (and, in particular, such law as set forth in Pennsylvania’s version of the Uniform Fraudulent Transfer Act) and a debtor’s deposit of his or her own funds into a bank account that is owned jointly with his or her spouse as tenants by the entireties. Therefore, and for all of the foregoing reasons as just set forth herein in the immediately preceding parts (i) and (ii), the Court respectfully will not follow the Titus Decisions when resolving the instant matter, and notwithstanding that Judge McCullough may have indicated his willingness to follow them when resolving the instant matter via interlocutory rulings that were rendered prior to trial.
Consistent with Meinen, the Court holds that the direct deposits of the Debtor’s individual compensation into the Entireties Checking Account may constitute fraudulent transfers, at least constructive fraudulent transfers, unless they were spent on necessities. Therefore, it is irrelevant to the issue of whether such deposits constitute constructive fraudulent transfers that they were not spent on luxuries; that is, even if such deposits were not spent on luxuries, they may still constitute constructive fraudulent transfers if they were not spent on necessities. Consistent with Meinen, such direct deposits may also constitute constructive fraudulent transfers if they were used by the Debtor and Mrs. Arbogast to purchase other assets which are presently held as entireties property by them, regardless of their necessity to the Debtor and Mrs. Arbogast.
The Court also holds that Mrs. Arbogast was an initial transferee along with the Debtor of all of the direct deposits of the Debtor’s individual compensation into the Entireties Checking Account from the moment that such deposits occurred, regardless of whether (a) she is the one who later spent such deposits, and (b) that which was purchased with such deposits actually benefitted her. Therefore, to the extent that such deposits are determined to constitute fraudulent transfers, the Trustee, pursuant to § 550(a)(1), may recover the value of such transfers from either the *307Debtor or Mrs. Arbogast. What that means is that, by virtue of the Trustee’s entitlement under § 550(a)(1) to so recover such value, she may obtain a joint and several money judgment against both the Debtor and Mrs. Arbogast in the amount of such value. See Computer Personalities Systems, 2002 WL 31988134 at 7 (“Having found that each Defendant is liable for the full amount of the Transfers, it is appropriate that joint and several liability should attach for $155,000”); Dawley, 2005 WL 2077074 at 15 (imposing a judgment against Mrs. Dawley severally that will reach her individual assets to remedy a transfer of property that was made by Mr. Dawley to both of them as tenants by the entirety). Such money judgment, of course, may be satisfied either from (a) entireties property that the Debtor and Mrs. Arbogast own, (b) property that is individually owned by the Debtor, and/or (c) property that is individually owned by Mrs. Arbogast.
With respect to a recovery from the Debtor at this time, the Court is fully aware that the Debtor has already received his Chapter 7 discharge and that, by virtue of such discharge and 11 U.S.C. § 524, recovery may no longer be had against the Debtor on any pre-petition claim against him. However, because the Trustee is prosecuting the instant matter, that is the Arbogast Fraudulent Transfer Action, post-petition pursuant to § 544(b)(1), such lawsuit has, as of the commencement of the instant bankruptcy case, been transformed into a bankruptcy cause of action. Bankruptcy causes of action, because they can only be brought post-petition, are necessarily then not pre-petition claims. The relevance of these preceding points to the present discussion is that the Debtor’s Chapter 7 discharge will not operate to discharge him from any liability that might now be imposed upon him within the context of the Arbogast Fraudulent Transfer Action. Consequently, the Debtor’s Chapter 7 discharge and § 524 will not operate to bar the entry of a money judgment against the Debtor at this time via § 550(a)(1) within the context of the instant matter. See In re Loomer, 198 B.R. 755, 758 (Bankr.D.Neb.1996) (post-petition recovery can be had against debtors in bankruptcy on bankruptcy causes of action pursuant to § 550(a)(1)).
The Court notes that the foregoing statement of the law is consistent with what has been pled in the complaint that commenced the Arbogast Fraudulent Transfer Action. The Court also observes that such complaint was never amended, either in the Common Pleas Court prior to such action’s removal to this Court or in this Court subsequent to such removal.
(iv) Burden of proof.
As just set forth, this Court identifies one aspect of the Meinen decision that it cannot follow when resolving the instant matter. Such aspect regards the placement of the burden of proof with respect to whether a debtor’s deposits of his or her own funds into an entireties bank account were (a) used to satisfy necessities, and/or (b) spent on other assets that are presently owned as entireties property.
Meinen imposes on constructive fraudulent transfer action defendants the burden of proving that such bank deposits were used to satisfy necessities and were not spent on other assets that are presently held as entireties property, failing which such deposits may be classified as constructive fraudulent transfers. See Meinen, 232 B.R. at 843. Meinen imposes such burden of proof on constructive fraudulent transfer action defendants because the Meinen court operated under the presumption that such defendants’ use of such *308bank deposits to satisfy necessities constitutes an affirmative defense of such defendants. See Id. at 842.
After considering Committee Comment 6 to 12 Pa.C.S.A. § 5102 and case authority that discusses the import of such comment, this Court holds, albeit somewhat reluctantly, that Pennsylvania’s version of the Uniform Fraudulent Transfer Act imposes on a constructive fraudulent transfer action plaintiff the burden of proving — as part of its prima facie case that reasonably equivalent value was not returned — that relevant bank deposits either were not used to satisfy necessities or were spent on other assets that are presently held as entireties property. See 12 Pa.C.S.A. § 5102, Committee Cmt. 6 (1993); Fidelity Bond and Mortgage Co. v. Brand, 371 B.R. 708, 716-21 (E.D.Pa.2007); Castle Cheese, Inc. v. MS Produce, Inc., 2008 WL 4372856 at 22-24 (W.D.Pa.2008). Therefore, the Trustee, in order to prevail on her constructive fraudulent transfer counts in the instant matter, must preponderantly prove that the direct deposits of the Debt- or’s compensation into the Entireties Checking Account either (a) were not used to satisfy necessities, or (b) were spent on other assets that are presently held as entireties property.
That being said, the Court can and will impose on constructive fraudulent transfer defendants, herein the Debtor and Mrs. Arbogast, the burden of producing at least some useful evidence regarding what the funds deposited into an entireties bank account are ultimately spent on; the precision regarding such evidence will necessarily vary depending upon the circumstances. Shifting the burden of producing evidence is not the same thing as shifting the burden of persuasion (i.e., the ultimate burden of proof), thus does not run afoul in any way of the authorities just cited that discuss the aforesaid Committee Comment 6, and is appropriate given that constructive fraudulent transfer defendants will often possess complete control over information as to the ultimate use of bank deposits.
C. Other threshold issues to be resolved.
(i) What is a necessity?
Much contention between the parties has been generated by the issue of what constitutes a necessity or, put more accurately, a reasonable and necessary household expense of a debtor. The Debtor and Mrs. Arbogast maintain that, for fraudulent transfer law purposes in Pennsylvania, the term “necessities” and the phrase “reasonable and necessary household expenses of a debtor” are to be equated with the term “necessaries” as that term is used within both Pennsylvania’s common law doctrine of “necessaries” and 23 Pa.C.S.A. § 4102, which statutory provision essentially codifies the foregoing doctrine of' “necessaries.”
“The doctrine of necessaries is a judicially created doctrine that invokes liability on a spouse for the goods provided to the other spouse or the family despite the absence of any express written consent.” 21 Standard Pennsylvania Practice 2d § 116:16 (2011).
It is now provided by statute [ (i.e., § 4102)] that in all cases where debts are contracted for necessaries by either spouse for the support and maintenance of the family, it is lawful for the creditor to institute suit against the husband and wife for the price of such necessaries and, after obtaining a judgment, have an execution against the contracting spouse alone. If no property of that spouse is found, execution may be levied on and *309satisfied out of the separate property of the other spouse.
Id. It has been held that
[t]he scope of ‘necessaries’ for purposes of this provision [ (i.e., § 4102) ] is not restricted to what may be considered the bare essentials required to hold body and soul together. Things required for and suitable in light of the rank and position of the spouses to maintain their lifestyle are also included. The kind and amount of such necessaries is to be determined on a case-by-case basis by considering the means, ability, social position and circumstances of both spouses.
In re Olexa, 317 B.R. 290, 294 (Bankr. W.D.Pa.2004) (citing Gimbel Brothers, Inc. v. Pinto, 188 Pa.Super. 72, 145 A.2d 865, 869 (1958)).
The Debtor and Mrs. Arbogast contend, consistent with the foregoing law, that, for Pennsylvania fraudulent transfer law purposes, an expenditure constitutes a necessity if, in light of the rank and position of a judgment debtor and his or her spouse, such expenditure is necessary to maintain the lifestyle that they enjoyed prior to the emergence of a creditor claim (or, perhaps more appropriately, prior to the beginning of a fraudulent transfer lookback period). Put differently, according to the Debtor and Mrs. Arbogast, whether an expenditure constitutes a necessity or not, for fraudulent transfer law purposes, must be determined by comparing the lifestyle of a judgment debtor and his or her spouse prior to and after the beginning of a fraudulent transfer lookback period; only if such expenditure had the effect of improving such lifestyle would such expenditure not constitute a necessity. For several reasons, the Court rejects such position of the Debtor and Mrs. Arbogast.
First, the Olexa decision, and Gimbel Brothers upon which Olexa relies, are not fraudulent transfer cases. Therefore, they cannot properly be cited as supportive of the proposition that the Debtor and Mrs. Arbogast advance, namely that what constitutes a necessity for fraudulent transfer purposes is the same as what constitutes a necessary within the doctrine of necessaries. Second, the Court is unaware of the existence of any other Pennsylvania case authority — the Meinen decision and the cases cited therein included— that would support the position of the Debtor and Mrs. Arbogast.
Third, the Court is aware of cases in other jurisdictions that have dealt with precisely the issue just raised, and they all appear to reject the position of the Debtor and Mrs. Arbogast, that is they decline to hold that what constitutes a necessity for fraudulent transfer purposes is the same as what constitutes a necessary within the doctrine of necessaries. See Cruickshank-Wallace v. County Banking and Trust Co., 165 Md.App. 300, 885 A.2d 403, 424 (2005) (holding, even after the common law doctrine of necessaries had been abolished in Maryland, that the husband therein did not receive fair consideration from the wife therein for constructive fraudulent transfer purposes even if said wife used the money that said husband transferred into her bank account for necessaries), abrogated by Wal Mart Stores, Inc. v. Holmes, 416 Md. 346, 7 A.3d 13 (2010) (abrogating out of what appears to be an abundance of caution, see discussion at 31-32); United States v. Mazzeo, 306 F.Supp.2d 294, 309-10 (E.D.N.Y.2004) (same), vacated as moot, 2004 WL 3079366.
Fourth, the Court chooses to reject the position of the Debtor and Mrs. Arbogast regarding what constitutes a necessity because to do otherwise, that is to determine what is a necessity for fraudulent transfer purposes by using a sliding scale standard that is tailored to the preexisting lifestyle *310of a judgment debtor and his or her spouse, will allow such judgment debtor to avoid too easily the reach of, that is to essentially abuse, fraudulent transfer laws. Indeed, the Debtor and Mrs. Arbogast rely upon the Gimbel Brothers decision to support their position that a necessity is to be determined by resort to the caselaw regarding the doctrine of necessaries, yet in Gimbel Brothers it was determined that a mink coat constituted a necessary! Sanctioning the use of a standard that could compel a result similar to that which was reached in Gimbel Brothers within the context of fraudulent transfer law, this Court holds, is simply something that is too perverse to consider when undertaking to decide whether something constitutes a necessity.
Having decided that a necessity for fraudulent transfer purposes is not to be equated with what constitutes a necessary within the doctrine of necessaries, can the Court offer any guidance as to what is a necessity? The Court finds that little guidance really can be offered as to the meaning of such term. The Court will certainly apply the dictionary definition of the term “necessity.” As well, the Court repeats the point, already made earlier herein wherein the Court relied upon case authorities regarding § 523(a)(2)(C), that just because an expenditure does not constitute a luxury, that does not necessarily mean that such expenditure will constitute a necessity; put differently, many expenditures will fall between the extremes of necessity and luxury and, if such expenditures fall somewhere in between such extremes, they will not constitute a necessity. Finally, the Court, when endeavoring to ascertain whether an expenditure constitutes a necessity, believes that it is inappropriate to consider the rank and social position of a judgment debtor and his or her spouse — i.e., such decision should not be made by utilizing a sliding scale standard predicated on the preexisting lifestyle of such judgment debtor and his or her spouse. Instead, factors that are fair game for a court to consider when making a determination regarding whether something constitutes a necessity would include the number of people in such judgment debtor’s household, any adverse medical condition of a household member, and the cost of living in the general geographic area where such debtor resides.
(ii) Whether the direct deposits constitute transfers by the Debtor in the fírst instance?
12 Pa.C.S.A. §§ 5104(a) and 5105 both require, before a transfer can be avoided as fraudulent thereunder, that such transfer have been made by the debt- or. Therefore, another threshold issue that must be resolved in the instant matter is whether the direct deposits of the Debt- or’s individual compensation into the En-tireties Checking Account constitute transfers that were made by the Debtor. The Debtor and Mrs. Arbogast predictably argue that such direct deposits do not constitute transfers that were made by the Debtor, while the Trustee contends otherwise.
Pennsylvania’s version of the Uniform Fraudulent Transfer Act defines a “transfer,” in pertinent part, as “[e]very mode, direct or indirect, ... of disposing of or parting with an asset or an interest in an asset.” 12 Pa.C.S.A. § 5101(b) (Purdon’s 2011). Not included as an asset, however, is (a) “property to the extent [that] it is generally exempt under nonbankruptcy law,” and (b) entireties property “to the extent [that] it is not subject to process by a creditor holding a claim against only one tenant.” Id. 42 Pa.C.S.A. § 8127(a) provides generally that “[t]he wages, salaries and commissions of individuals shall while *311in the hands of the employer be exempt from any attachment, execution or other process.” 42 Pa.C.S.A. § 8127(a) (Pur-don’s 2011).
Because of the foregoing statutory provisions, and since the Schnader Law Firm deposited the Debtor’s salary5 directly into the Entireties Checking Account rather than physically place such salary into the Debtor’s hands so that he could then physically deposit the same into such bank account himself, the Debtor and Mrs. Ar-bogast make what the Court understands to be several discrete arguments. First, they argue that the Debtor’s wages were never transferred by anyone, let alone the Debtor, within the meaning of § 5101(b) and for purposes of §§ 5104(a) and 5105, because such wages were exempt in the hands of the Schnader Law Firm and, thus, such wages never constituted an asset of the Debtor. Second, they perhaps contend that, even if the Debtor’s wages were somehow so transferred, they were nevertheless transferred by the Schnader Law Firm rather than the Debtor since they were never physically placed into the Debtor’s hands.
The foregoing arguments, the Court concludes, fail (a) because, the Court holds in turn, the direct deposits constitute indirect transfers by the Debtor himself of his salary into the Entireties Checking Account, and (b) given the language of § 5101(b), which statutory provision expressly provides that indirect transfers, or indirect modes of disposing of or parting with an asset, constitute transfers for purposes of §§ 5104(a) and 5105, see In re Craig, 144 F.3d 587, 592 (8th Cir.1998) (applying North Dakota’s version of the Uniform Fraudulent Transfer Act, which does not differ in any relevant respect from Pennsylvania’s version, and holding that such act “defines transfer to include both ‘direct and indirect’ modes of parting with an asset or interest in an asset”); In re FBN Food Services, Inc., 185 B.R. 265, 272 (N.D.Ill.1995) (applying the Bankruptcy Code fraudulent transfer provisions at 11 U.S.C. §§ 548(a) and 101(54), which are both similarly worded to and similarly construed with the relevant UFTA provisions at issue herein, and holding that “ ‘a transfer does not have to be made directly by a debtor’ in order to fall within the ambit of the statute”); In re 1634 Associates, 157 B.R. 231, 234 (Bankr.S.D.N.Y.1993) (same, applying the Bankruptcy Code fraudulent transfer provisions at 11 U.S.C. §§ 548(b) and 101(54), and holding as well that “[h]istorically, the term ‘transfer’ has been granted a broad interpretation”).
Because the Debtor so indirectly transferred his wages, each such indirect transfer is properly viewed, that is it must be recast, as two discrete transfers, namely a transfer by the Schnader Law Firm of such wages physically into the Debtor’s hands, and then a transfer physically by the Debtor of such wages into the Entire-ties Checking Account. See Craig, 144 F.3d at 592 (quoting Merriam v. Venida Blouse Corp., 23 F.Supp. 659, 661 (S.D.N.Y.1938), which recast an indirect transfer by a debtor as two discrete transfers, the first of which was from a corporation to the debtor and the second of which was from the debtor to his wife and daughter; also quoting Merriam to the effect that “ ‘[a] person may not do by indirection what he is forbidden to do directly’ ”); see also 1634 Associates, 157 B.R. at 234 (holding that “the spirit of § 548(b) [would] be violated if a general partner was permitted to transfer indirectly what it could not *312transfer directly”). Since such direct deposit transactions, as so recast, have the effect of placing the Debtor’s wages physically into his hands,6 and given that such wages are not exempt while they rest in his hands, see 42 Pa.C.S.A. § 8127(a) (in Pennsylvania, wages are exempt only while they are in the hands of the employer); In re Bosack, 454 B.R. 625, 633 (Bankr. W.D.Pa.2011) (construing § 8127(a) similarly by virtue of such statutory provision’s express terms), such wages constitute an asset within the meaning of § 5101(b) that can then be the subject of a transfer by him, also within the meaning of § 5101(b) and for purposes of §§ 5104(a) and 5105.
Therefore, the direct deposits of the Debtor’s individual compensation into the Entireties Checking Account constitute transfers that the Debtor made himself for purposes of §§ 5104(a) and 5105, notwithstanding that the Debtor made such transfers indirectly.7
*313D. Actual fraudulent transfer action, § 5104(a)(1).
In order for the Trustee to prevail on her action under § 5104(a)(1), which action constitutes the first count in her complaint, she must preponderantly prove that the Debtor transferred his wages into the Entireties Checking Account — indirectly, as just set forth herein — with actual intent to hinder, delay, or defraud at least one of his creditors.
The Trustee contends that the creditor who the Debtor sought to so hinder, delay, or defraud was Trizec. The Trustee suggests as the motive for such bad action by the Debtor that he had a desire to avoid having to satisfy any part of the Lease Litigation judgment that Trizec ultimately obtained against him on June 7, 2006.
12 Pa.C.S.A. § 5104(b) provides a number of different factors for a court to consider when endeavoring to ascertain whether a debtor possessed actual bad intent in making a transfer. The Court finds that some of those factors are present, or are satisfied, with respect to the Debtor’s transfers of his salary into the Entireties Checking Account.
For instance, § 5104(b)(1) is satisfied because the direct deposits of the Debtor’s compensation were made into the Entire-ties Checking Account, which account was owned by the Debtor and Mrs. Arbogast, who would both certainly be insiders of the Debtor himself. Because such direct deposits were made into an entireties bank account, the Debtor obviously retained possession and/or control over them subsequent to such deposits, thereby satisfying § 5104(b)(2). Trizec commenced the Lease Litigation against, inter alia, the Debtor in July 2000. Such date precedes when all of the transfers occurred that, by virtue of the Arbogast Fraudulent Transfer Action, are sought to be avoided as fraudulent. . As a result thereof, § 5104(b)(4) is satisfied. As held elsewhere within the instant opinion, the factors described in § 5104(b)(8) — (10) are also met in the instant matter.
That many of the factors set forth in § 5104(b) are satisfied, however, does not satisfy the Court — i.e., does not operate so that the Trustee preponderantly proves— that the Debtor intended to hinder, delay, or defraud Trizec when he transferred his wages into the Entireties Checking Account. The Court cannot find that the Debtor had the requisite bad intent when he transferred his salary into the Entire-ties Checking Account because:
(a) the Debtor indisputably had been directly depositing his wages into an en-tireties bank account for a long period of time prior to July 2000, which date is when Trizec first began to pursue the Debtor via the Lease Litigation;
(b) there was not sufficient evidence produced at trial to establish that the Debtor continued to directly deposit his salary into the Entireties Checking Account after July 2000 so as to avoid Trizec’s reach; and
(c) no evidence was produced at trial to establish that, before Trizec commenced the Arbogast Fraudulent Transfer Action on April 23, 2007, the Debtor was even aware that his direct deposits of his wages into the Entire-ties Checking Account might conceivably constitute fraudulent transfers.
*314Therefore, the Court declines to find that the Debtor acted with actual intent to hinder, delay, or defraud Trizec when he directly deposited his salary into the En-tireties Checking Account. Consequently, judgment shall be rendered in favor of the Debtor and Mrs. Arbogast with respect to the Trustee’s actual fraudulent transfer action under § 5104(a)(1), that is the Trustee’s first count in her complaint.
E. Constructive fraudulent transfer actions, §§ 5104(a)(2)(H) and 5105.
In order for the Trustee to prevail on her actions under §§ 5104(a)(2)(h) and 5105, which actions constitute the second and third counts in her complaint, she must preponderantly prove that (a) the Debtor did not receive a reasonably equivalent value in exchange for the periodic transfers (i.e., the direct deposits) of his wages into the Entireties Checking Account, and (b) he was either insolvent at the time of, or was rendered insolvent by, such transfers.8
(i) Whether the Debtor received reasonably equivalent value?
As set forth earlier herein, the Court holds that the direct deposits of the Debt- or’s salary into the Entireties Checking Account may constitute constructive fraudulent transfers (a) unless they were spent on necessities, or (b) if they were used by the Debtor and Mrs. Arbogast to purchase other assets which are presently held as entireties property by them, regardless of their necessity to the Debtor and Mrs. Arbogast. A corollary of the preceding holding is that the Debtor did not receive reasonably equivalent value in return for such direct deposits (a) unless they were subsequently spent on necessities, or (b) if they were subsequently used by the Debt- or and Mrs. Arbogast to purchase other entireties property. See Meinen, 232 B.R. at 842-43.
As also set forth earlier herein, the Trustee bears the burden of proving that the Debtor did not receive reasonably equivalent value in return for such direct deposits. That means that the Trustee, in order to prevail on her constructive fraudulent conveyance counts, must preponderantly prove that such deposits either (a) were not spent on necessities, or (b) were spent on other entireties assets.
The Trustee, as set forth at the outset of the instant opinion, contends that (a) four or five groups of disbursements were made from the Entireties Checking Account, (b) the direct deposits of the Debtor’s wages were the source of the money in such account that funded such disbursements, and (c) such deposits constitute fraudulent transfers to the extent that they were utilized to fund such disbursements. Reconciling all of the foregoing, the Trustee, in order to prevail in the instant matter, must preponderantly prove (a) that such disbursements were actually made out of the Entireties Checking Account, (b) that such direct deposits funded such disbursements, and (c) that, even if such disbursements were actually made and so funded, they were also utilized either on things that did not constitute necessities or on other assets that the Debtor and Mrs. Arbogast hold as entireties assets.
(a) $338,375.31 in checks drawn on Mrs. Arbogast’s Sole Account.
The first group of disbursements at issue are the $338,375.31 of disbursements *315that are alleged to have been made from the Entireties Checking Account and placed into Mrs. Arbogast’s Sole Account, from which sole account Mrs. Arbogast is then alleged to have purchased things other than necessities. The Debtor and Mrs. Arbogast concede that Mrs. Arbogast wrote $388,375.31 worth of checks drawn on her Sole Account. However, they dispute that the source of the funds in her Sole Account that served to cover such checks came from the Entireties Checking Account.
The Court finds that it is as likely as not that the money that Mrs. Arbogast spent out of her Sole Account came from sources other than the Entireties Checking Account, such as her own money. Therefore, the Trustee has not preponderantly proven that any of the direct deposits of the Debt- or’s wages into the Entireties Checking Account were ultimately transferred into Mrs. Arbogast’s Sole Account and then used to cover the $338,375.31 worth of checks that she wrote upon such account. Accordingly, the Trustee cannot obtain a recovery against the Debtor and/or Mrs. Arbogast for said $338,375.31.
(b) Alleged disbursements re: Florida Residence.
The second group of disbursements at issue are those that were allegedly made with respect to the Florida Residence. Dealing first with the $70,000 down payment that was made on the Florida Residence, the Court finds that all of such $70,000 was paid out of the Entireties Checking Account. However, the Trustee has not preponderantly proven that $65,000 of such $70,000 was placed into the Entireties Checking Account as a result of direct deposits of the Debtor’s salary. Instead, it appears that such $65,000 emanated from other exempt or entireties assets, and that it was then placed into the En-tireties Checking Account. Therefore, such $65,000 is not recoverable as a fraudulent transfer.
The Trustee has preponderantly proven that the other $5,000 portion of such down payment was funded by direct deposits of the Debtor’s salary. The Court also holds that such $5,000 is potentially recoverable as a fraudulent transfer, that is the Debtor did not receive reasonably equivalent value for such $5,000. The Court so holds because such amount was applied toward the purchase of an asset that the Debtor and Mrs. Arbogast concede they presently own as tenants by the entirety. The Court also holds that the Florida Residence does not constitute a necessity because it is a second home for the Debtor and Mrs. Arbo-gast rather than their primary residence; this point also dictates that the Debtor did not receive reasonably equivalent value for said $5,000.
Regarding the holding that the Florida Residence is not a necessity, the Debtor and Mrs. Arbogast maintain that the Florida Residence does not constitute a luxury because its purchase did no more than allow them to maintain the lifestyle that they had enjoyed prior to April 23, 2003 (i.e., the beginning of the lookback period), or even prior to July 2000 (i.e., when Trizec first sued them). As explained earlier herein, that something does not constitute a luxury is irrelevant to the issue that must be resolved, that is whether something constitutes a necessity. Therefore, the Court can even accept arguendo that the Florida Residence does not constitute a luxury, but the Court still holds that it also does not constitute a necessity. To the extent that the Debtor and Mrs. Arbo-gast argue that the Florida Residence constitutes a necessity, the Court simply rejects such argument outright.
The Court deals next with alleged disbursements equalling $103,806.60, which *316alleged disbursements were used to (a) make mortgage payments (both principal and interest) on the loan that was obtained to purchase the Florida Residence, and (b) pay interest on the loan that was allegedly obtained to make the $70,000 down payment. As an initial matter, the Trustee has not preponderantly proven that a loan actually was obtained to make the $70,000 down payment. The Trustee alleged that such a loan was obtained, and based such allegation upon information obtained during discovery. However, at trial the Debt- or satisfied the Court that no such loan was obtained to make such down payment, which means that interest — apparently in the approximate amount of $243.47 per month — could not have been paid on such loan.
As for the mortgage payments, the Trustee has preponderantly proven that (a) they were made from the Entireties Checking Account, and (b) the amounts from such account that were used to make such payments derived from the direct deposits of the Debtor’s wages. However, the Trustee attempts to recover as fraudulent transfers 62 months worth of mortgage payments, which number of payments is baseless, the Court concludes, for several reasons. First, as the Court has already determined, the relevant lookback period for the Arbogast Fraudulent Transfer Action is the 48-month period from April 23, 2003, to April 23, 2007. Because the Trustee has not preponderantly proven that the Debtor and Mrs. Arbogast made more than 48 monthly mortgage payments during such period, the Trustee has no basis for being able to recover more than 48 months worth of mortgage payments. Second, the Florida Residence was not even purchased until June 2004, which date is part of the way through the aforesaid lookback period. Not surprisingly, the Trustee has not preponderantly proven that mortgage payments were made between April 23, 2003, and June 2004. Therefore, the Trustee can only potentially recover as being fraudulent transfers those mortgage payments that were made between July 2004 and April 2007, or 34 mortgage payments.
The Trustee assigns a value of $1,430.83 to each mortgage payment, which value the Court accepts since the parties did not quarrel at trial as to such amount. The $1,430.83 mortgage payment is split up with $1,075.94 attributed to interest and $354.89 attributed to principal. The Court holds that the 34 mortgage principal payments that were made between July 2004 and April 2007 are potentially recoverable as fraudulent transfers because they represent payments made toward the purchase of entireties property. The 34 mortgage interest payments, on the other hand, do not represent payments made toward the purchase of entireties property. See Id. at 843. Such interest payments nevertheless are potentially recoverable as fraudulent transfers because they are attributable to the purchase of an asset that, as set forth above, does not constitute a necessity. The total value of the 34 mortgage payments, for which the Debtor did not receive reasonably equivalent value, equals $48,648.22 (i.e., 34 x $1,430.83).
The Court undertakes an analysis regarding the $96,605.30 worth of expenditures that were made for upkeep on the Florida Residence similar in nature to that which was just done with respect to the mortgage payments that pertain to such realty. The Trustee has preponderantly proven that (a) such maintenance expenditures were made from the Entireties Checking Account, and (b) the amounts from such account that were used to fund such maintenance expenditures derived from the direct deposits of the Debtor’s wages. However, the Trustee once again baselessly attempts to recover as fraudu*317lent transfers 62 months worth of maintenance expenditures. The Court concludes once again that the proper number of months worth of maintenance expenditures that are potentially recoverable as fraudulent transfers equals 34. The monthly figure that the Trustee arrived at for such maintenance expenditures is $1,558.15, and the Court will accept such value as correct given that the parties did not quarrel at trial as to such amount. Such interest payments are potentially recoverable as fraudulent transfers because they are attributable to the purchase of an asset that, as set forth above, does not constitute a necessity. The total value of the 34 maintenance expenditure payments, for which the Debtor did not receive reasonably equivalent value, equals $52,977.10 (i.e., 34 x $1,558.15).
Finally, the Debtor and Mrs. Arbogast proved through credible testimony at trial that (a) they rented out the Florida Residence during the years from 2004 through 2006, (b) they received rental income during such period equal to $34,753, and (c) such rental income was deposited into the Entireties Checking Account. Because such rental income was deposited into the Entireties Checking Account, it served to replace some of the disbursements that were made therefrom which, as set forth above, are potentially recoverable as fraudulent transfers. Therefore, the Court will subtract such $34,753 amount from such amounts that are potentially recoverable as fraudulent transfers.
Based upon the foregoing analysis respecting the Florida Residence, the Trustee has preponderantly proven that the Debtor did not receive reasonably equivalent value in return for $71,872.32 worth of his wages that were directly deposited into the Entireties Checking Account (i.e., $5,000 + $48,648.22 + $52,977.10 - $34,753).9
(c) Alleged disbursements for country club memberships.
The next group of disbursements at issue are those that were allegedly made out of the Entireties Checking Account to maintain memberships in three different country clubs, namely (a) $26,132.51 for membership in the Du-quesne Club, (b) 60,647.28 for membership in the Long Vue Club, and (c) $42,444.46 for membership in the Marsh Landing Country Club. At the outset, the Court holds that none of the foregoing expenditures regarding country club memberships constitute necessities. The Court so holds even if, accepting for the sake of argument, such country club memberships also do not constitute luxuries.
*318However, the Trustee attempts to recover an amount that is equal to all of the disbursements that were made out of the Entireties Checking Account related to such country club memberships for the period from April 23, 2003, until July 6, 2010. The Trustee’s Trial Exhibits 54 — 56 purport to list all of such disbursements that occurred between April 23, 2003, and July 6, 2010. With but one exception, the Court accepts that such disbursements were actually made out of the Entireties Checking Account. Nevertheless, that the Trustee can recover as she seeks to do appears, at least on the surface, to be baseless with respect to those disbursements that occurred subsequent to April 23, 2007, given that the lookback period for the Arbogast Fraudulent Transfer Action ends on April 23, 2007.
The Court suspects — although the Trustee has never formally argued as much — that the position of the Trustee is that:
(a) some, if not many, of the disbursements that occurred subsequent to April 23, 2007, were actually funded with direct deposits of the Debtor’s wages into the Entireties Checking Account that occurred before the end of the lookback period (i.e., prior to April 23, 2007),
(b) such deposits are avoidable as fraudulent to the extent that they funded disbursements for non-necessities post-April 23, 2007, and
(c) the Debtor and Mrs. Arbogast bear the burden of proving that post-April 23, 2007 disbursements were not funded with pre-April 23, 2007 direct deposits.
If the foregoing analysis is the position that is taken by the Trustee, then the Court absolutely agrees with it to the extent of the first two prongs of such analysis. Unfortunately for the Trustee, the Court holds, consistent with its prior rulings regarding the assignment of the burden of proof in the instant matter, that the Trustee bears the burden of preponderantly proving that post-April 23, 2007 disbursements were funded with pre-April 23, 2007 direct deposits. The Court concludes that the Trustee has not preponderantly proven as much. Consequently, the Court would be inclined to rule, without more, that the Trustee cannot potentially recover at all for any of those disbursements that were made out of the Entireties Checking Account related to such country club memberships that occurred subsequent to April 23, 2007.
A related issue arises with respect to those disbursements related to such country club memberships that occurred immediately subsequent to April 23, 2003 (i.e., the beginning of the lookback period). In particular, some of such disbursements were undoubtedly funded with direct deposits into the Entireties Checking Account that preceded April 23, 2003. Because it is actually the direct deposits themselves, rather than the disbursements that were funded thereby, that can constitute an avoidable fraudulent transfer, the Trustee arguably has also not preponderantly carried her burden of proof with respect to those disbursements related to such country club memberships that occurred immediately subsequent to April 23, 2003.
That being said, the Court finds, after examining the Trustee’s Trial Exhibits 54-56, that, at most, a few thousand dollars worth of such disbursements occurred within the first few months subsequent to both April 23, 2003, and April 23, 2007. That being the ease, it is more likely than not that at least an equal amount of pre-April 23, 2007 direct deposits funded post-April 23, 2007 disbursements as pre-April 23, 2003 direct deposits funded post-April 23, 2003 disbursements. Therefore, the *319Court holds that the Trustee has preponderantly proven that those disbursements that were made out of the Entireties Cheeking Account between April 23, 2003, and April 23, 2007, that relate to such country club memberships derived from the direct deposits of the Debtor’s wages.
In light of the foregoing, the Trustee may potentially recover as fraudulent transfers all of those disbursements that are listed in her Trial Exhibits 54-56 for the period between April 23, 2003, and April 23, 2007, with but one exception, namely a $13,250 disbursement listed in Trial Exhibit 56 that pertains to the Marsh Landing Country Club membership and is dated November 21, 2006. The Trustee cannot recover as a fraudulent transfer such disbursement because the Debtor and Mrs. Arbogast have proven that such disbursement came not from the Entireties Checking Account but rather from Mrs. Arbogast’s Sole Account; since such disbursement did not come from the Entire-ties Checking Account, the Trustee has not preponderantly proven that direct deposits of the Debtor’s wages served to fund such expenditure. The evidence upon which the Court bases its finding is not only credible trial testimony of the Debtor but also the Trustee’s own Trial Exhibit 51.
The Trustee’s Trial Exhibits 54-56 reveal that, between April 23, 2003, and April 23, 2007,
(a) $22,192.12 worth of disbursements were made that pertain to the Du-quesne Club;
(b) $45,252.07 worth of disbursements were made that pertain to the Long Vue Club; and
(c) $4,072.59 worth of disbursements were made that pertain to the Marsh Landing Country Club (after subtracting out the aforesaid $13,250 expenditure).
The total of such disbursements equals $71,516.78.
Based upon the foregoing analysis respecting the country club membership expenditures, the Trustee has preponderantly proven that the Debtor did not receive reasonably equivalent value in return for $71,516.78 worth of his wages that were directly deposited into the Entireties Checking Account.10
(d)Alleged disbursements made for life insurance policies.
The last group of disbursements to consider within the context of the Arbo-gast Fraudulent Transfer Action11 are the $75,842.42 worth of alleged disbursements made to fund premium payments made by the Debtor for various life insurance poli*320cies that primarily benefited Mrs. Arbo-gast.
At the outset, the Court holds that the purchase of life insurance to benefit a spouse constitutes a necessity, and so rules that the Debtor received reasonably equivalent value in return for any of the direct deposits of his salary that may have been utilized to fund such purchase. Because the Court so rules, the Court need not make a determination as to whether all, or any portion, of the $75,842.42 in insurance premium payments were actually funded with the direct deposits of the Debtor’s salary that were made into the Entireties Checking Account.
(e) Summary of the Reasonably Equivalent Value analysis.
For all of the foregoing reasons, the total extent to which the Debtor failed to receive reasonably equivalent value in return for the direct deposits of his salary into the Entireties Checking Account equals $143,389.10 (i.e., $71,872.32 + $71,516.78).12
(ii) Whether the Debtor was insolvent?
The $143,389.10 worth of direct deposits of the Debtor’s wages for which he did not receive reasonably equivalent value in return do not automatically constitute constructive fraudulent transfers under § 5104(a)(2)(h) and/or § 5105. Such direct deposits constitute constructive fraudulent transfers under § 5104(a)(2)(h) only if, while they were being made, the Debtor “intended to incur, or believed or reasonably should have believed that ... [he] would incur, debts beyond ... [his] ability to pay as they became due.” 12 Pa.C.S.A. § 5104(a)(2)(h). Such direct deposits constitute constructive fraudulent transfers under § 5105 only if “the [D]ebtor was insolvent at th[e] time [of the direct deposits in question] or the [D]ebtor became insolvent as a result of [such direct deposits].” 12 Pa.C.S.A. § 5105.
“A debtor is insolvent if, at fair valuations, the sum of the debtor’s debts is greater than all of the debtor’s assets.” 12 Pa.C.S.A. § 5102(a) (Purdon’s 2012). “Assets under this section do not include property ... that has been transferred in a manner making the transfer fraudulent under this chapter.” 12 Pa.C.S.A. § 5102(d) (Purdon’s 2012). Therefore, “exelud[ed] from the computation of the value of the debtor’s assets [is] any value that can be realized only by avoiding a transfer of an interest formerly held by the debtor.” 12 Pa.C.S.A. § 5102, Committee Cmt. 4 (1993). Also excluded from the computation of the value of a debtor’s assets are exempt property and property held as tenants by the entirety to the extent that such tenancy cannot be severed by a creditor of only one tenant. 12 Pa.C.S.A. § 5102, Committee Cmt. 1 (1993).
The Court finds that, as was the case for the Debtor when he filed for bankruptcy, he practically did not possess any assets for purposes of § 5102(a) during any portion of the lookback period for the Arbo-gast Fraudulent Transfer Action (i.e., between 4/23/03 and 4/23/07). The Court finds as it does because all of the Debtor’s assets during such period were either en-tireties assets or exempt retirement assets. Relevant to such finding, the Court *321holds that the value of the direct deposits of the Debtor’s wages into the Entireties Checking Account cannot be counted as an asset for purposes of insolvency testing under § 5102(a). The Court so holds because such direct deposits were instantly transferred into such bank account, which bank account, because it is an entireties asset, cannot itself be considered when assessing the value of the Debtor’s assets for purposes of § 5102(a). Some portion of the direct deposits also cannot be counted as an asset for purposes of § 5102(a) by virtue of the application of § 5102(d) to the instant matter.
The Debtor and Mrs. Arbogast contend that the fact that the Debtor had no assets during the applicable lookback period should not be fatal to their defense. They so argue because they contend that, during such lookback period, the Debtor also essentially had no debt. The Debtor and Mrs. Arbogast argue that the Debtor had no debt during the applicable lookback period because, they maintain, the Debt- or’s liability for Trizec’s claim (i.e., the claim that has now been reduced to the Lease Litigation judgment) cannot be counted as debt during such period for purposes of § 5102(a).
The Court understands the Debt- or and Mrs. Arbogast to advance several reasons for their position that the Debtor’s liability for Trizec’s claim cannot be so counted, namely (a) that Trizec’s claim was not reduced to judgment until June 7, 2006, (b) that such claim was consequently not liquidated until more than three years of the applicable lookback period had already passed, and (c) that such claim of Trizec was still subject to genuine dispute by virtue of appeals that did not conclude until 2009, or well after the end of the applicable lookback period. The Court rejects such arguments for several reasons, and thus disagrees that the Debtor’s liability for Trizec’s claim cannot be counted for purposes of insolvency testing under § 5102(a).
First, several of the definitions in § 5101(b) dictate that the Debtor’s liability for Trizec’s claim be so counted. In particular, “debt” is defined as “[[liability on a claim.” 12 Pa.C.S.A. § 5101(b). “Claim” is defined as “[a] right to payment, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured.” Id. (emphasis added). Given the foregoing definitions, it matters not, when determining whether a debt counts for purposes of insolvency testing under § 5102(a), that such debt (a) has not yet been reduced to judgment, (b) is still unliquidated, or (c) is subject to a genuine dispute.
Second, and perhaps more importantly, the foregoing holding and definitional analysis by the Court is supported by case authority that, because it construes very similar, if not relevantly identical, definitional language in the earlier, since replaced, Uniform Fraudulent Conveyance Act, still arguably constitutes binding case precedent with respect to the instant matter. See United States v. Green, 201 F.3d 251, 257 (3rd Cir.2000) (citing Baker v. Geist, 457 Pa. 73, 321 A.2d 634, 636-37 (1974)); Norfolk & Western Railroad Co. v. Wasserstrom, 1991 WL 183385 at *2 (E.D.Pa.1991); Keeney v. Stremmel, 1991 WL 341742 at 1 (Pa.Com.Pl.1991). Such case authority stands for the proposition, in particular, that, for purposes of determining a debtor’s insolvency status within the context of a constructive fraudulent conveyance action, a disputed, unliquidated claim that has yet to be reduced to judgment nevertheless must be counted as debt, and it must be counted as debt for a period even prior to the filing of a lawsuit against such debtor. See Green, 201 F.3d *322at 257 (citing Geist for the proposition that “the Pennsylvania Supreme Court has found that awareness of a probable legal action against a debtor amounts to a debt for purposes of determining solvency”); Geist, 321 A.2d at 635-37 (appellee’s debt to appellant existed, thereby making ap-pellee insolvent, prior to October 24, 1969, which date preceded (a) the filing of the tort action against appellee, (b) the verdict that resulted in judgment against appellee, and (c) the conveyance engaged in by ap-pellee that was ultimately determined to be fraudulent); Wasserstrom, 1991 WL 183385 at 2 (same); Keeney, 1991 WL 341742 at *1 (same); Kit Weitnauer, Anatomy of a Fraudulent Transfer Case: Hidden Complications, 2008 Ann. Surv. of Bankr.Law Part I § 10 (Norton 2008) (“the determination of the amount of the disputed claim ‘relates back’ to the time of the asset transfer for the purposes of determining insolvency”).
Third, no case authority exists for the proposition that, just because “[a] presumption of insolvency [under § 5102(b) ] does not arise from nonpayment of a debt as to which there is a genuine bona fide dispute,” 12 Pa.C.S.A. § 5102, Committee Cmt. 2 (1993), a disputed debt must also not be counted when conducting the balance sheet test for insolvency under § 5102(a).
Therefore, this Court holds:
(a) that Trizec’s claim against the Debtor counts as indebtedness of the Debtor, for purposes of determining the Debt- or’s insolvency under § 5102(a), going all the way back to at least July 2000, which is when Trizec brought its action in the Common Pleas Court against, inter alia, the Debtor;
(b) that the liquidation of such claim of Trizec, which claim has now been reduced to the Lease Litigation judgment, relates back to at least the beginning of the applicable lookback period on April 23, 2003, for purposes of determining the Debtor’s insolvency under § 5102(a); and
(c)that, by virtue of the existence of such indebtedness throughout the applicable lookback period, the Debtor was insolvent for purposes of § 5102(a) throughout such lookback period.
Finally, this Court’s determination that the Debtor was insolvent for purposes of § 5102(a) throughout the applicable lookback period is not affected by the fact that the incurrence by the Debtor of his indebtedness to Trizec may have perhaps created in the Debtor’s favor a corresponding asset in the form of a right against all of the other former T & M partners for contribution. The Court so holds because, even accepting arguendo that Trizec’s claim may have created such a contribution right in the Debtor’s favor, an argument that the existence of such contribution right should operate, for purposes of an insolvency determination, to completely counterbalance the weight of Trizec’s claim is flawed, and such flaw should be readily apparent. The flaw in such an argument is that the value of such contribution right in the Debtor’s favor could be worth as much as the entire amount of the Debtor’s joint and several liability on the indebtedness that he owes to Trizec. Indeed, if such contribution right were worth as much as the amount of such indebtedness owed to Trizec, then the Debtor would ultimately not be liable for even a very small percentage of such debt as between himself and his former T & M partners, which is certainly not the case.
Therefore, the Debtor was insolvent throughout the entirety of the applicable lookback period (i.e., from 4/23/03 to 4/23/07).
*323(iii) Resolution of actions under §§ 5104(a)(2)(H) and 5105.
As a consequence of all of the foregoing analysis, the Trustee has proven her case under § 5105, and is thus entitled to a judgment in her favor regarding her action brought thereunder in the amount of $143,389.10. Briefly, the Trustee has preponderantly proven that (a) Trizee’s claim arose well before all of the direct deposits that were made between April 23, 2003, and April 23, 2007, (b) the Debtor did not receive reasonably equivalent value in return for such direct deposits to the extent of $143,389.10, and (c) the Debtor was insolvent at all times between April 23, 2003, and April 23, 2007.
The Court concludes that the Trustee is not potentially entitled to a judgment under § 5104(a)(2)(ii) for an amount in excess of $143,389.10. Therefore, and because she is entitled to a judgment for such amount via her action under § 5105, it really matters not whether the Trustee (a) has also preponderantly proven that the Debtor, while such direct deposits were being made, intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due, and (b) could thus also prevail under § 5104(a)(2)(ii). The Court holds summarily, however, that, in light of all of the foregoing analysis, the Trustee could prevail under § 5104(a)(2)(h) as well in the amount of $143,389.10.
Pursuant to § 550(a)(1), the Court will impose the foregoing judgment for $143,389.10 upon, that is against, the Debt- or and Mrs. Arbogast jointly and severally.
II. Objection to exemption of the Retirement Account Contributions.
As set forth earlier herein, the Trustee cannot successfully pursue any of the Retirement Account Contributions as fraudulent transfers via the Arbogast Fraudulent Transfer Action. However, the Trustee and Trizec are free to pursue a recovery of the Retirement Account Contributions via the exemption objection that they have filed respecting such contributions.
The Retirement Account Contributions, which were made during 2003 and 2004, are valued by the Trustee at $86,000. The Schnader Law Firm directly deposited all of such $86,000 into two separate retirement accounts of the Debtor. The Schnader Law Firm deposited $30,000 of such contributions into the Debtor’s 401(k) account upon direction of the Debtor. The Schnader Law Firm deposited the other $56,000 on the Debtor’s behalf into what the Debtor testified was a mandatory retirement account (hereafter “the Mandatory Retirement Account”). The Court finds that the Debtor had no control over the $56,000 worth of deposits that were made into the Mandatory Retirement Account, and that he did not have the option of being paid such $56,000 currently rather than having the same be deposited into such retirement account.
As also set forth earlier herein, the Trustee and Trizec now object to the Debt- or’s exemption of additional contributions that the Debtor at trial admitted were made into both his 401(k) account and the Mandatory Retirement Account (hereafter “the Retirement Accounts”) between 2005 and 2010. The Trustee and Trizec contend that they may so object to the Debtor’s exemption of such additional contributions even though they failed to apprise the Debtor of their intention to so object prior to trial. The additional contributions that were made into the Mandatory Retirement Account between 2005 and 2010 total $78,741. $18,000 of additional contributions were made into the Debtor’s 401(k) account in 2005, with another $6,353 of additional contributions being deposited into *324such account between 2006 and 2010. Such additional contributions, along with the Retirement Account Contributions that were made in 2008 and 2004, shall henceforth be collectively referred to herein as “the Retirement Account Contributions.”
In his Bankruptcy Schedule C the Debt- or has elected to claim the exemptions afforded to him under 11 U.S.C. § 522(b)(3), that is those exemptions provided by federal nonbankruptcy, state and local law, as well as the exemption generally of property held as a tenant by the entirety. Thus, the Debtor has elected not to take those exemptions afforded to him under 11 U.S.C. § 522(b)(2), that is the federal exemptions provided under 11 U.S.C. § 522(d). Paragraph (C) of § 522(b)(3) allows a debtor to exempt, in full, “retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986.” 11 U.S.C.A. § 522(b)(3)(C) (West 2012). An examination of the Debtor’s Schedule C reveals that the Debtor has exempted the entire balances in the Retirement Accounts, in particular, pursuant to § 522(b)(3)(C). Such exemption, the Court concludes, is entirely appropriate.
The Trustee and Trizec, however, object to the Debtor’s exemption of the Retirement Account Contributions that have been made into the Retirement Accounts despite the Debtor’s exemption of such accounts in their entirety pursuant to § 522(b)(3)(C). The Court understands the basis for such objection by the Trustee and Trizec to be that (a) the Retirement Account Contributions themselves constitute fraudulent transfers, and (b) the Retirement Accounts cannot, as a matter of law, be exempted pursuant to 42 Pa.C.S.A. § 8124(b)(l)(ix) to the extent that contributions that have been made into such accounts themselves constitute fraudulent transfers.
42 Pa.C.S.A. § 8124(b)(l)(ix)(C) does indeed provide, as the Trustee and Trizec contend, that retirement accounts generally cannot be exempted pursuant to § 8124(b)(l)(ix) to the extent that contributions made into such accounts are determined to be fraudulent conveyances. However, fatal to the position of the Trustee and Trizec is the presumption that they have made, for whatever reason, that the Debtor seeks to exempt the Retirement Accounts pursuant to § 8124(b)(l)(ix). As set forth above, the Debtor exempts such accounts pursuant to § 522(b)(3)(C), which statutory exemption provision does not contain any limitation such as the one for “fraudulent conveyances” that is found at § 8124(b)(l)(ix)(C).
The Court notes that § 522(b)(3)(C) is a relatively new provision within the Bankruptcy Code, only having been added by amendment thereto to be effective for cases that are commenced on or after October 17, 2005. However, such statutory provision clearly applies to the instant bankruptcy case given that it was commenced on January 15, 2010.
Also serving to confuse the instant matter to the point where perhaps the Trustee and Trizec lost sight of the Debtor’s statutory basis for his exemption of the Retirement Accounts is the fact that counsel for the Debtor appeared to proceed before, during, and after the instant litigation as if the Debtor were utilizing § 8124(b)(l)(ix) rather than § 522(b)(3)(C) to exempt such retirement accounts. Fortunately for the Debtor, that his counsel has so proceeded throughout the instant litigation does not operate to somehow override the fact that he has formally exempted the Retirement Accounts in his Schedule C pursuant to § 522(b)(3)(C).
*325Therefore, it matters not, when resolving the instant exemption objection of the Trustee and Trizee, that some of the Retirement Account Contributions themselves may constitute fraudulent transfers. The Court repeats that the Debtor’s exemption, pursuant to § 522(b)(3)(C), of the Retirement Accounts, including the Retirement Account Contributions that were made into such accounts, is entirely appropriate. Consequently, the objection of the Trustee and Trizee to the Debtor’s exemption of such retirement accounts and contributions is overruled.
Finally, the Court wishes to note briefly that, even if the Debtor could only have exempted the Retirement Accounts pursuant to § 8124(b)(l)(ix) (i.e., by way of § 522(b)(3)(A)), very little, if any, of the instant exemption objection of the Trustee and Trizee could have been sustained. The Court so rules for several reasons. First, none of the Retirement Account Contributions that were made into the Mandatory Retirement Account constitute fraudulent transfers. That is because none of such contributions constitute transfers, even indirectly, that were made by the Debtor in the first instance. None of such contributions constitute indirect transfers by the Debtor because he lacked control over such contributions, that is he did not have the power to choose between deferring such compensation or instead receiving the same as a present paycheck. Second, the lookback period that would apply when determining whether any of the Retirement Account Contributions constitute fraudulent transfers (that would then be subject to the exemption limitation found at § 8124(b)(l)(ix)(C)13) would be from January 15, 2006, to January 15, 2010, rather than the 4/23/03-4/23/07 look-back period that applied with respect to the Arbogast Fraudulent Transfer Action. The Court so rules (a) because, as set forth earlier herein, the Arbogast Fraudulent Transfer Action only implicated the direct deposits of the Debtor’s wages into the Entireties Checking Account, that is such action failed to also implicate direct deposits that were made into the Retirement Accounts, and (b) because, absent the existence of some other relevant fraudulent transfer lawsuit that the Trustee and Trizee could leverage off of for which a different lookback period applies, the applicable 4-year lookback period would date back from when the Debtor would have first sought to utilize § 8124(b)(l)(ix), which date in this case would be when the Debtor filed for bankruptcy, see Allen, 228 B.R. at 136. Using a lookback period from January 15, 2006, to January 15, 2010, would operate to shield from classification as fraudulent transfers those Retirement Account Contributions that were made between 2003 and 2005. Left for consideration then would only be those Retirement Account Contributions that were made into the Debtor’s 401(k) account between 2006 and 2010, which contributions total $6,353. Such contributions equalling $6,353 would represent the sum and substance of that which the Trustee and Trizee could have recovered via their instant exemption objection (a) had the Debtor chosen to exempt the Retirement Accounts pursuant to § 8124(b)(l)(ix) rather than under § 522(b)(3)(C), and (b) presuming that the Court would overlook the failure of the *326Trustee and Trizec to place the Debtor on notice prior to trial that they intended to object to his exemption of Retirement Account Contributions that were made between 2005 and 2010.
III. The sanctions motion brought by the Debtor and Mrs. Arbogast.
The Court wishes to say very little regarding the motion for sanctions that the Debtor and Mrs. Arbogast brought prior to the first trial in the instant adversary proceeding. Such sanctions motion was brought to address the apparent failure by the Trustee and Trizec to comply with a consent case management Order of Court that was entered on April 21, 2010.
With respect to such motion, the Court understands that the Debtor and Mrs. Ar-bogast experienced much frustration in preparing for their defense at trial as a result of the failure by the Trustee and Trizec to provide greater detail regarding those transfers that they alleged were fraudulent in nature. However, the Court also understands that the Trustee and Trizec provided the information that they did, at least in part, as a means to preserve their position, in case of a possible appeal, that the applicable law that was to be used to resolve the instant matter had been misstated by the predecessor judges (i.e., the Common Pleas Court and Judge McCullough).
Because this Court agrees with the Trustee and Trizec that a certain portion of the applicable law that must be used to resolve the instant matter was indeed misstated by such predecessor judges, and since the confusion that ensued as a result of such misstatement has not been cleared up until now by the rendering of the instant opinion, the Court cannot see fit to monetarily sanction the Trustee and Trizec. Therefore, the Court will deny such sanctions motion.
IV. The impact of Stern v. Marshall on the instant matter.
Because of the recent decision by the United States Supreme Court in Stern v. Marshall, — U.S.-, 131 S.Ct. 2594, 180 L.Ed.2d 475 (U.S.2011), an issue arises as to whether this Court has the constitutional authority to enter a final decision in a fraudulent transfer action that is brought pursuant to state law by way of § 544(b)(1). See In re El-Atari, 2011 WL 5828013 at 3 n. 4 & 4 (E.D.Va.2011); Jonathan P. Friedland, Stern v. Marshall — The Supreme Court Revisits Marathon, Commercial Bankruptcy Litigation § 3:4 (2012). In fact, this very issue has been raised by certain similarly situated parties in other adversary proceedings that are presently pending before this Court. As the Court understands it, these litigants argue only that this Court lacks the constitutional authority to enter a final decision in a fraudulent transfer action brought under state law via § 544(b)(1), not that this Court lacks subject matter jurisdiction altogether regarding such an action.
This Court is inclined to agree with those authorities that construe the Stem decision narrowly and hold that, notwithstanding Stem, a bankruptcy court possesses the constitutional authority to enter a final decision regarding a fraudulent transfer action that is brought pursuant to state law by way of § 544(b)(1). See El-Atari, 2011 WL 5828013 at 3 n. 4 (citing cases). Therefore, this Court concludes that it possesses the constitutional authority to enter a final judgment in the Arbo-gast Fraudulent Transfer Action. Also supporting the preceding conclusion by the Court is the fact that the Debtor removed the Arbogast Fraudulent Transfer Action to this Court; because of such removal, the Debtor arguably consented to have *327this Court enter a final judgment in the Arbogast Fraudulent Transfer Action.
However, the Court also holds that, even if it does not possess such authority, it at least possesses subject matter jurisdiction over such a fraudulent transfer action and, thus, also the constitutional authority to submit proposed findings of fact and conclusions of law to a district court regarding said action. See In re Canopy Financial, Inc., 2011 WL 3911082 at *4-5 (N.D.Ill.2011); El-Atari, 2011 WL 5828013 at *3-4. Therefore, the Court concludes that, because it possesses subject matter jurisdiction over the Arbogast Fraudulent Transfer Action, it thereby is also vested with the constitutional authority to at least propose findings of fact and conclusions of law to a district court regarding such action.
In light of the foregoing, the Court takes the view that the instant Memorandum Opinion (and accompanying Order of Court) constitutes a final judgment to the extent that it pertains to the Arbogast Fraudulent Transfer Action. However, if a U.S. District Court ultimately disagrees with this Court and determines that, pursuant to Stern v. Marshall, this Court may not enter a final judgment in such action, then the portions of this Court’s opinion and order that pertain to such action constitute proposed findings of fact and conclusions of law.
CONCLUSION
For all of the foregoing reasons, the Court will grant judgment in favor of the Trustee, and against the Debtor and Mrs. Arbogast jointly and severally, on the Ar-bogast Fraudulent Transfer Action in the amount of $143,389.10. The Court will also overrule the objection of the Trustee and Trizec to the Debtor’s exemption of the Retirement Accounts, including the Retirement Account Contributions that were made into such accounts. Finally, the Court will deny the sanctions motion that has been brought by the Debtor and Mrs. Arbogast.
ORDER OF COURT
AND NOW, this 7th day of February, 2012, for the reasons, and utilizing the nomenclature, set forth in the accompanying Memorandum Opinion of the same date; it is hereby ORDERED, ADJUDGED, AND DECREED that:
(a) judgment is GRANTED in favor of the Trustee, and against the Debtor and Mrs. Arbogast jointly and severally, in the Arbogast Fraudulent Transfer Action in the amount of $143,-389.10;1
(b) the objection of the Trustee and Trizec to the Debtor’s exemption of the Retirement Accounts, including the Retirement Account Contributions that were made into such accounts, is OVERRULED; and
(c) the motion for sanctions that has been brought by the Debtor and Mrs. Arbo-gast is DENIED.
. With respect to the “insolvency” component of the Trustee’s constructive fraudulent transfer actions, she must prove under § 5105 that the Debtor was either insolvent at the time of, or was rendered insolvent by, the transfers in question. For her action under § 5104(a)(2)(ii), the Trustee must prove that the Debtor intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due.
. Trizec contends that (a) the Common Pleas Court’s entry of the February 3, 2010 State Court Order was only a ministerial act, and (b) the entry of such order by such court consequently did not violate the automatic stay in the instant bankruptcy case. The Court, for the reasons that are set forth in the post-trial brief of the Debtor and Mrs. Arbo-gast (filed on December 20, 2010, at Doc. No. 71), summarily rejects such position by Trizec.
. The spouse of the president of the debtor in Broadview Lumber, in contrast to Mrs. Arbo-gast, was held therein to be a mediate transferee of funds placed into a joint bank account by said president rather than an initial transferee of such funds. That is because said president was determined to be the initial transferee of such funds from the debtor in Broadview Lumber. Such difference between Broadview Lumber and the instant matter, however, does not provide a point for distinction since such spouse in Broadview Lumber was nevertheless held to be a transferee therein because she owned the deposits made into the joint account therein from the moment such deposits occurred.
. An examination of the Debtor’s Bankruptcy Schedules D & F reveals that at least several unsecured creditors of the Debtor existed at the time of bankruptcy filing other than those who have potential claims against the Debtor for indemnity or contribution arising out of the Lease Litigation.
. Essentially because indirect transfers are recast as such, "[t]he Uniform Fraudulent Transfer Act ... does not require that the debtor physically possess the asset” that such debtor is deemed to have indirectly transferred. Craig, 144 F.3d at 593; see also FBN Food Services, 185 B.R. at 273 (same).
. The Court is aware of a couple of decisions from jurisdictions other than Pennsylvania that have been cited, either by the Debtor and Mrs. Arbogast or by similarly situated parties in other adversary proceedings that are presently pending before this Court, in support of the position that deposits of wages by an employer directly into an employee’s bank account that is held by such employee as a tenant by the entirety do not constitute transfers for purposes of §§ 5104(a) and 5105. Those decisions are Daugherty v. Central Trust Co. of Northeastern Ohio, N.A., 28 Ohio St.3d 441, 504 N.E.2d 1100 (1986), and Goebel v. Brandley, 174 S.W.3d 359 (Tex.App.2005). Such decisions, as a threshold matter, are, of course, not binding on this Court. The Court also finds, as explained below, that both such decisions are distinguishable from the instant matter involving the Debtor and Mrs. Arbo-gast.
The Daugherty court held that, in Ohio, "personal earnings exempt from execution [while in the possession of an employer] ... retain their exempt status when deposited in a personal checking account, so long as the source of the exempt funds is known or reasonably traceable.” Daugherty, 504 N.E.2d at 1103. An undoubtable corollary of such decision in Daugherty is that wages, to the extent that they are traceable as such, remain exempt in Ohio while merely in the hands of an employee, either before deposit into a bank account or regardless of any such future deposit. Such result in Ohio is at odds with the law, that is it would not occur, in Pennsylvania because, as set forth earlier herein, in Pennsylvania wages are exempt only while they are in the hands of the employer. Therefore, that a transfer of wages by an employee in Ohio, either directly or indirectly, might not constitute a transfer for purposes of the Uniform Fraudulent Transfer Act in Ohio does not compel a similar result in Pennsylvania for purposes of Pennsylvania's version of such law.
Goebel involved indirect transfers of wages by an employee in Texas for the purchase of savings bonds for her children. In Texas, as in Ohio and Pennsylvania, wages are exempt while in the hands of an employer. See Goebel, 174 S.W.3d at 363-64. The Goebel court ultimately held that the indirect transfers at issue therein did not constitute transfers for purposes of Texas' Uniform Fraudulent Transfer Act. See Id. at 366. In the process of so holding, the Goebel court pointed out (a) that, after the amendment in 1989 of a Texas statute, proceeds of, or disbursements from, exempt property in Texas essentially retain the exempt status of such property in Texas, presumably if such proceeds or disbursements can properly be traced, and (b) that wages in Texas, therefore, upon their receipt by an employee do not lose their status as exempt. See Id. at 364-65. That being the case, an employee's transfer of such wages, either directly or indirectly, cannot constitute a transfer for purposes of Texas' Uniform Fraudulent Transfer Act. See Id. at 366. Such result in Texas is very similar to that which is reached in Ohio. Unfortunately for the Debtor and Mrs. Arbogast, as well as those other litigants to which the Court referred at the outset of the instant footnote, the result in Ohio is very different from that which is compelled by *313Pennsylvania law — i.e., in Pennsylvania wages, upon their receipt by an employee, immediately lose their exempt status. Therefore, that a transfer of wages by an employee in Texas, either directly or indirectly, might not constitute a transfer for purposes of Texas’ Uniform Fraudulent Transfer Act does not compel a similar result in Pennsylvania for purposes of Pennsylvania's version of such law.
. To be more precise, the Trustee, with respect to the issue of insolvency, must prove either (a) that the Debtor was insolvent at the time of, or was rendered insolvent by, the direct deposits (§ 5105), or (b) that the Debt- or, while such direct deposits were being made, intended to incur, or believed or reasonably should have believed that he would incur, debts beyond his ability to pay as they became due (§ 5104(a)(2)(ii)).
. The Court determines, with respect to the Florida Residence, that, if the lookback period for the Arbogast Fraudulent Transfer Action would have been from January 15, 2006, until January 15, 2010, then the Debtor would have failed to receive reasonably equivalent value in return for $123,816.04 worth of his salary that was directly deposited into the Entireties Checking Account. The Court arrives at such determination because (a) 48, rather than only 34, months worth of mortgage payments and maintenance expenditures would have been potentially recoverable had the lookback period been from 1/15/06 to 1/15/10, and (b) the rental income offset for the period between 1/15/06 and 1/15/10, according to the Debtor, equals $19,655 rather than the $34,753 figure for the period from 4/23/03 to 4/23/07. The $5,000 down payment would not have been recoverable had the lookback period been from 1/15/06 to 1/15/10 because such payment occurred in June 2004. The math would have been as follows if the lookback period had been from 1/15/06 to 1/15/10:
Mortgage Pay- 48 x $1,430.83 = $ 68,679.84 ments:
Maintenance 48 x $1,558.15 = $ 74,791.20
Payments:
Rental Income ($19,655.00)
Offset: _
Total $123,816.04
. The Court determines, with respect to the country club membership expenditures, that, if the lookback period for the Arbogast Fraudulent Transfer Action would have been from January 15, 2006, until January 15, 2010, then the Debtor would have failed to receive reasonably equivalent value in return for $59,500.57 worth of his salary that was directly deposited into the Entireties Checking Account. The Court arrives at such determination because, had the lookback period been from 1/15/06 to 1/15/10, then the relevant expenditures for (a) the Duquesne Club would have equalled $9,630.54, (b) the Long Vue Club would have equalled $24,816.46, (c) the Marsh Landing Country Club would have eq-ualled $25,053.57 (after subtracting out $13,250), and (d) all three clubs combined would have equalled $59,500.57.
. For the reasons set forth at the beginning of the Discussion section of the instant opinion, the Trustee cannot successfully pursue any of the Retirement Account Contributions, which contributions the Trustee values at $86,000, as fraudulent transfers via the Arbo-gast Fraudulent Transfer Action. Recovery of the Retirement Account Contributions, however, can be pursued via the exemption objection that has been lodged by both the Trustee and Trizec.
. The Court determines that, if the lookback period for the Arbogast Fraudulent Transfer Action would have been from January 15, 2006, until January 15, 2010, then the total extent to which the Debtor would have failed to receive reasonably equivalent value in return for the direct deposits of his salary into the Entireties Checking Account would have equalled $183,316.61 (i.e., $123,816.04 + $59,500.57).
. When ascertaining whether retirement account contributions constitute fraudulent conveyances so as to limit, pursuant to § 8124(b)(l)(ix)(C), the exemption that a debt- or can take in a retirement account under § 8124(b)(l)(ix), the 4-year statute of limitations or lookback period mandated under § 5109 of Pennsylvania's version of the Uniform Fraudulent Transfer Act must be applied. See In re Allen, 228 B.R. 132, 136 & n. 8 (Bankr.W.D.Pa. 1998).
. If it is ultimately determined that, pursuant to Stern v. Marshall, this Court may not enter a final judgment in the Arbogast Fraudulent Transfer Action, then this Court’s granting herein of a judgment in favor of the Trustee, and against the Debtor and Mrs. Arbogast, shall constitute this Court's recommendation (i.e., proposed findings of fact and conclusions of law) regarding such action to the U.S. District Court. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494625/ | ORDER DENYING CONFIRMATION OF CHAPTER 13 PLAN
HELEN E. BURRIS, Bankruptcy Judge.
THIS MATTER comes before the Court for confirmation of Debtors’ Chapter 13 plan, and Federal National Mortgage Association’s (“Fannie Mae”) Objection thereto. Debtors seek to cure through their Chapter 13 plan arrearages on a note secured by a mortgage attaching to their principal residence. However, they do not hold title to the property securing the debt and are not obligated on the note and mortgage. For the reasons set forth below, the Court sustains Fannie Mae’s objection and denies confirmation.
The Court has jurisdiction over this matter pursuant to 28 U.S.C. §§ 157 and 1334. The Court makes the following Findings of Fact and Conclusions of Law pursuant to Fed.R.Civ.P. 52, made applicable to this proceeding by Fed. R. Bankr.P. 7052 and 9014(c).1
Findings of Fact
1. Terence M. Morgan purchased real property located at 515 Tomotley Court, Greer, in Spartanburg County, South Carolina (the “Property”) on February 7, 2007, for $180,000. (Doc. 10, ¶21). On the same date, Morgan executed a mortgage on the Property in favor of Bankline Mortgage Corp. (“Mortgage”) which is recorded in Book 3831 at Page 410 in the Spartan-burg County Register of Deeds Office. Id. The Mortgage was subsequently assigned to Fannie Mae on May 10, 2011, by assignment recorded in Book 4466 at Page 73. Id.
2. Debtors allege that on July 22, 2009, they entered into an agreement labeled as a “Bond for Title” for acquisition of the *344Property from Morgan. (Doc. 13-2).2 Under the terms of the agreement, Morgan would deed the Property to the Debtors after the full purchase price of $185,000 was paid. Id. at ¶ 7. Debtors were required to put $1,000 down when the Bond for Title was signed, and then make another $8,000 down payment by November 22, 2009. Id. at ¶ 1(a). Debtors were supposed to make monthly payments in the amount of $1,500 until August 1, 2039. Id. at ¶ 1(c). The monthly payments consist of $1,291.43 for principal and interest, an estimated amount of $133.57 for pro-rated taxes and insurance, and $75.00 for a management fee. Id. If Debtors fail to pay the full purchase price by the end of the term of the Bond for Title, all rights and obligations under the Bond for Title “shall become null and void and [the] Bond for Title shall terminate at that time.” Id. The Bond for Title was recorded on August 24, 2009, in the office of the Register of Deeds for Spartanburg County in Book 94-K, Page 824. Id. at 1.
3.On May 18, 2011, Fannie Mae sought to foreclose its Mortgage encumbering the Property, initiating Federal National Mortgage Association v. Morgan, Case No. 2011-CP-42-02209, Court of Common Pleas, Spartanburg County. According to the foreclosure complaint, Morgan defaulted on the mortgage payments and the loan is in default and due for January 1, 2011. See Compl. ¶ 31, Case No. 2011-CP-42-02209. Fannie Mae declared the entire principal balance in the amount of $171,889.26, plus interest, advances, late charges, and costs from December 1, 2010, due and payable. Id. Debtors were named as defendants in the foreclosure lawsuit to extinguish their interest, if any, in the property by virtue of their recorded Bond for Title agreement with Morgan. Id. at ¶ 9.
4. There is no evidence that Fannie Mae had knowledge of the existence of the Bond for Title or had any reason to search the title records until after Morgan defaulted on the loan and the note was accelerated, in preparation of filing the foreclosure action.
5. At the Meeting of Creditors held in this case, Debtors testified that they were aware of the Mortgage but never made any mortgage payments directly to Fannie Mae or any prior loan servicer or holder.
6. On June 13, 2011, Debtors were served with the foreclosure action and subsequently filed their Chapter 13 petition in an attempt to stay the action. See Doc. 10, ¶ 17. The Property is the Debtors’ residence.
7. In their petition and schedules, Debtors claimed the entire Property as part of the bankruptcy estate by virtue of the Bond for Title and estimated the amount of the secured claim encumbering the Property at $171,537.03. This is essentially the principal balance Morgan owes to Fannie Mae on the Loan. See Doc. 1, Sch. A. Fannie Mae is named as a secured creditor of Debtors pursuant to a “Mortgage/Bond for Title.” Debtors valued their interest in the property at $170,000. See Doc. 1, Sch. D. Morgan is also listed as a secured creditor, but for “Notification Purposes Only,” and any property securing Morgan’s claim is scheduled at $0. Id. In Schedule J, Debtors listed their current monthly rent or home mortgage payment as only $1,167.00 a month instead of the $1,500 month payment due pursuant to the terms of the Bond for Title. (Doc. 1, Sch. J; Doc. 13-2, *345¶ 1(c)). They do not list any real estate taxes or homeowners’ insurance as expenses. Id. Debtors claim they have lived at the Property for at least three years prior to filing bankruptcy. See Doc. 1, Statement of Financial Affairs, ¶ 15; Doc. 13-2, ¶ 3.
8. In their Amended Schedule G, itemizing Executory Contracts and Unexpired Leases, Debtors identified: (1) a “Payment/Escrow Management Agreement” with National Real Estate Services.Com, Inc. (“NRES”) as an executory contract (Doc. 13, Am. Sch. G); (2) the Bond for Title between Morgan and the Debtors identified as Exhibit A; (3) a Payment/Escrow Management Agreement between Morgan and NRES identified as Exhibit B; and (4) a Payment/Escrow Management Agreement between Debtors and NRES identified as Exhibit C. All exhibits identified are attached to the Amended Schedule G. (Doc. 13-2). Many of these documents are also relevant to the related adversary proceeding, Flucker v. Gantt, Adv. Pro. No. 11-80078-hb.
9. Debtors’ Proposed Chapter 13 Plan lists the Fannie Mae loan under the heading supplied for long term or mortgage debt in this Court’s form plan, and the Plan states that it will cure Morgan’s ar-rearage to Fannie Mae over five (5) years and make regularly scheduled post-petition payments of Morgan’s loan directly to Fannie Mae. (Doc. 2, ¶ B(3)). The Bond for Title is not specifically mentioned in the Plan, but Debtors indicated that they intend to reject all executory contracts and unexpired leases. See Doc. 2, ¶ D.
10. Fannie Mae objected to the confirmation of Debtors’ Proposed Plan on the basis that the Property is not property of the estate, that Debtors do not own the Property, that Fannie Mae is not in privity of contract with the Debtors, and that entering into the Bond for Title is considered a material breach of the recorded mortgage which cannot be cured by making loan payments. (Doc. 14).
11.Fannie Mae had not filed a Proof of Claim in this case as of the date of the confirmation hearing. However, the Court’s records indicate that Fannie Mae filed a claim on October 17, 2011, for $171,889.26. (POC #16-1). The claim and its attachments indicate that the loan is in Morgan’s name. Furthermore, the claim states the following: “Please note that the four-digit number referenced above refers to an account which is not in the name of the debtor, and no number identifying debtor can be found. This POC is being filed because debtor named Federal National Mortgage Association as a creditor. Whether or not this property is part of the bankruptcy estate is the subject of a related adversary action.” Id.
Conclusions of Law
Debtors frame the question before this Court as whether a Chapter 13 debtor who is not in contractual privity with the mortgagee can repay a secured loan to that mortgagee through a Chapter 13 bankruptcy plan. Debtors claim this can be done on these facts and cite In re Trapp, 260 B.R. 267 (Bankr.D.S.C.2001), and In re Davis, C/A 10-02249-JW, 2010 WL 5173187, 2010 Bankr.LEXIS 4619 (Bankr.D.S.C. Oct. 12, 2010), to support their contention. In Trapp, the Court found that a mortgage holder held a “claim” against a debtor’s estate even though the debtor was not in privity of contract with the mortgage holder, because “ ‘it is undisputed ... that the debtors own the Property as to which the bank holds a lien and that the Property is property of the estate.’ ” Id. at 271 (quoting In re Allston, 206 B.R. 297, 299 (Bankr. E.D.N.Y.1997)). The debtors in Trapp *346and Davis3, both held legal title to the property in question; however, that is not the Debtors’ situation in the instant case.
It is generally recognized that the purchaser under an executory contract for the purchase and sale of real property has an equitable lien on the property in the amount paid on the purchase price. This equitable interest arises from the payment of the money and does not depend on the purchaser’s taking possession of the real estate.
S.C. Fed. Sav. Bank v. San-A-Bel Corp., 307 S.C. 76, 78-79, 413 S.E.2d 852, 854 (App.1992) (emphasis added) (internal citations omitted). However, debtors assert that:
The only distinction between the holdings in Trapp and Johnson4, and the case at bar, is the debtor is holding legal title versus an equitable interest in the property. However, this distinction leads to the same result, that is, in both instances the debtor’s interest is property of the estate (§ 105), and the creditor mortgagee has a claim against the estate (§ 105(5)) that the debtor has the right to cure (§ 1322(b)(3)).
(DR’s Prop. Or., Doc. No. 32 at 6) (footnote added).
It is true that § 1322(b)(3) of the Bankruptcy Code allows a debtor to propose a plan to “provide for the curing or waiving of any default.” 11 U.S.C. § 1322(b)(3). Fannie Mae certainly holds a claim secured by a “security interest in real property that is the debtor’s principal residence” as set forth in 11 U.S.C. § 1322(b)(2). These facts, however, do not make Fannie Mae the holder of a “secured claim” in this case secured by property of the Debtors. The finding in Trapp that the mortgage holder held a secured claim was based on the fact that the debtor owned the property (by holding legal title) on which the bank had a lien, making the claim squarely secured by property of the estate. Trapp, 260 B.R. at 271. In the instant case, the only intersection between Fannie Mae’s debt and Debtors is that Fannie Mae holds a mortgage lien secured *347by property owned by Morgan and Debtors have an equitable lien on and occupy that property owned by Morgan.5 Accordingly, Fannie Mae holds a lien on real property that is not property of the estate. The Court cannot find, and the parties have not supplied, any authority sufficient to support a finding that possession plus an equitable lien on real property for amounts paid thus far transforms Debtor’s interest into one sufficient to fit the factual pieces of this puzzle into 11 U.S.C. § 1322.
In an attempt to find applicable authority, the Court considered In re Rivers-Jones, C/A No. 07-02607-JW, 2007 Bankr.LEXIS 2992 (Bankr.D.S.C. Sept. 4, 2007), where Judge Waites found that a debtor not in privity of contract with a creditor could value a mobile home titled in the name of another in her Chapter 13 plan based on the Debtor’s equitable interest in the property. However, the facts of that case are far different from this one because the Court found that the debtor’s equitable interest arose from a resulting trust she held in the home. Id. at *9-10. That is, the Court essentially found that she was a current owner of the property in question by operation of law to the facts of that case. The debtor held a resulting trust because the loan and mobile home were placed in the grandmother’s name in order to assist the debtor, but the debtor made all the payments on the mobile home directly to the creditor, including taxes and insurance, the debtor always resided there, and the grandmother intended for the debtor to have at least a current ownership interest in the home. Id. at *10.6 Judge Waites found that the resulting trust effectuated the “intent of the parties!,]” which was either sole or joint ownership of the property at that point in time. Id. at *9. There are no allegations that the facts in the instant case create a resulting trust — there was no intention on the part of Morgan and Debtors for Debtors to have an ownership interest in the home before the full debt set out in the Bond for Title was paid. The terms of the contract itself do not support such a finding.
Debtors have not provided any authorities that would convince the Court that they have met their burden of proof that the plan complies with the standards for confirmation set forth in 11 U.S.C. § 1325.7
*348IT IS THEREFORE ORDERED:
That Confirmation of the Plan is denied.
. To the extent any of the following Findings of Fact constitute Conclusions of Law, they are adopted as such, and to the extent any Conclusions of Law constitute Findings of Fact, they are also so adopted.
. Debtors' counsel refers to this as an installment sale contract as well in pleadings filed with the Court.
. While ruling on a motion for relief from stay filed after a plan was confirmed without objection that cured a default to movant on a mortgage when there was no privity of contract between the debtor and creditor, the court in In re Davis, C/A 10-02249-JW, 2010 WL 5173187, 2010 Bankr.LEXIS 4619 (Bankr.D.S.C. Oct. 12, 2010), found that confirmation was not inappropriate.
In this case, Debtor has title to the property by virtue of the Deed from [Mortgagor], which was recorded prior to the bankruptcy filing. Even prior to the Deed, Debtor asserted an equitable interest due to his Lease with Option to Purchase, possession of the property, and making of payments — some directly to [Mortgagee]. The Court finds that the Property is property of the estate. Since Debtor is the owner of the Property as to which [Mortgagee] holds a lien and that Property is property of the estate, [Mortgagee] therefore holds a claim against Debtor within the meaning of § 1322(b) and such claim may be treated in the Plan.
Id. at *3, 2010 Bankr.LEXIS 4619, at *7.
. In In re Johnson, 429 B.R. 540 (Bankr. D.S.C.2010), a creditor with a security interest in a dump truck sought relief from the automatic stay or, alternatively, that the truck was not subject to the stay because it was not property of the Chapter 13 estate under 11 U.S.C. § 541. Id. at 542-43. The court rejected the debtor’s argument that mere possession of personal property was sufficient to establish an equitable interest in the truck in order to trigger the automatic stay. The court found that the debtor failed to demonstrate a good-faith, colorable claim or basis for possession of the truck because it was leased in the name of debtor's employer only, and the debtor received paychecks from her employer indicated that her right to use the truck arose from her employment of the company. Id. at 545. Therefore, the court concluded that the truck was not property of the debtor or her estate and not subject to the automatic stay. Id.
.Debtors also argued at the hearing that Fannie Mae acknowledged their ownership interest in the Property by naming them as defendants in its foreclosure action against Morgan. The recorded Bond for Title constitutes notice of an equitable lien held by Debtors on the subject property which is junior and subsequent to Fannie Mae's mortgage. S.C. Fed. Sav. Bank, 307 S.C. at 78-79, 413 S.E.2d at 854. In other words, it is possible that the Debtors are creditors of Morgan to the extent they have made payments under the Bond for Title. Id. Fannie Mae properly named the Debtors in the foreclosure action because all possible junior lien holders must be named in order to extinguish their interests at the foreclosure sale, or to put the junior lien holder on notice of possible surplus funds. See Berkowitz et al., South Carolina Foreclosure Law Manual 23 (2006).
. But see In re Lee, C/A No. 10-07833 JW, slip op. (Bankr.D.S.C. Feb. 28, 2011) (denying confirmation because debtor failed to show that she held an equitable interest through a resulting trust or through possession because she did not provide a "good-faith, colorable claim to or basis for possession of the Mobile Home.”).
. The court notes, however, that the automatic stay of 11 U.S.C. § 362 may be applicable as a result of Debtors' possession of the property combined with their recorded Bond for Title interest from Morgan, as they may have some minimal equitable interest that is property of the estate (contract rights, equitable lien). See In re Anderson, 2004 WL 3643696, 2004 Bankr.LEXIS 2359 (Bankr.D.S.C. April 15, 2004). This is not inconsistent with a finding that the mortgage arrearage cannot be paid through the plan. The scope and appli*348cation of the automatic stay are entirely different issue than application of 11 U.S.C. § 1322. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494629/ | MEMORANDUM ON MOTION FOR JUDGMENT ON THE PLEADINGS
RICHARD STAIR, JR., Bankruptcy Judge.
This adversary proceeding is before the court upon the Complaint filed by the Plaintiff on July 8, 2011, seeking a determination, pursuant to 11 U.S.C. § 506 (2006), of the nature, extent, and priority of the Defendants’ lien, if any, on the Debtor’s residential real property and, in the event the lien is not perfected or determined to be void, seeking a judgment that the Plaintiffs interest in the Debtor’s residential real property is superior to that of the Defendants, thus allowing her to sell the property and use the proceeds for the benefit of the Debtor’s estate. The Defendants filed their Answer to Complaint on September 6, 2011, setting forth a number of affirmative defenses and denying that the Plaintiff was entitled to the relief requested in her Complaint.
On October 25, 2011, the Defendants filed a Motion for Judgment on the Pleadings pursuant to Rule 12(c) of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Rule 7012 of the Federal Rules of Bankruptcy Procedure. Filed contemporaneously with the Motion for Judgment on the Pleadings was a Memorandum in Support of Motion for *441Judgment on the Pleadings (Memorandum in Support of Motion for Judgment), to which the following documents were attached: (1) a Note signed by the Debtor in favor of New Century Mortgage Corporation dated December 15, 2004 (December 15, 2004 Note), in the amount of $110,500.00; (2) a Deed of Trust securing the December 15, 2004 Note executed by the Debtor and her non-filing spouse, William Hunter, granting New Century Mortgage Corporation a lien on real property located at 6136 General Carl West Stiner Highway, LaFollette, Tennessee (Stiner Highway Property), recorded on December 22, 2004, in the Office of the Campbell County Register of Deeds; and (3) an Allonge to Note executed by Bryan Bly on behalf of New Century Mortgage Corporation endorsing the December 15, 2004 Note, without recourse, to U.S. Bank National Association, as Trustee for Asset Backed Securities Corporation Home Equity Loan Trust, Series 2005-HE2 (U.S. Bank National Association).
Because additional documents were included in support of the Motion for Judgment on the Pleadings, the court, in an Order entered on October 27, 2011, directed, pursuant to Rule 12(d) of the Federal Rules of Civil Procedure, that the Motion for Judgment on the Pleadings would be treated as a motion for summary judgment under Federal Rule of Civil Procedure 56 and ordered the Defendants to supplement the Motion for Judgment on the Pleadings to include a statement of undisputed material facts as required by Rule 56(c). In accordance with the Order, the Defendants filed the Defendants’ Statement of Undisputed Material Facts (Statement of Undisputed Facts) on November 14, 2011, in addition to the Declaration of Austin L. McMullen (McMullen Declaration)1 and the Supplemental Memorandum in Support of Motion for Judgment on the Pleadings, both of which were filed on November 10, 2011.
Pursuant to the October 27, 2011 Order, the Plaintiff filed the Plaintiffs Response to Defendants’ Motion for Judgment on the Pleadings on November 25, 2011, together with a brief in support thereof and the Plaintiffs Response to Defendants’ Statement of Undisputed Material Facts and of Additional Undisputed Material Facts2 to which the following exhibits were attached: (A) the December 15, 2004 Note as attached to the Defendants’ Proof of Claim filed in the Debtor’s bankruptcy case on December 21, 2010, and the Motion for Judgment on the Pleadings; (B) the December 15, 2004 Note as attached to the Motion for Relief from the Automatic Stay and Abandonment of Property by Trustee as to U.S. Bank National Association, as Trustee for Asset Backed Securities Corporation Home Equity Loan Trust, Series 2005-HE2, Regarding Real Property Located at 6136 General Carl West Stiner Hwy, LaFollette, Tennessee 37766 (Motion for Stay Relief) filed in the Debt- or’s bankruptcy case on January 24, 2011, by U.S. Bank National Association; (C) *442the Allonge to Note as attached to the Motion for Stay Relief and the Motion for Judgment on the Pleadings; (D) the Objection of Trustee to Motion of U.S. Bank National Association, as Trustee for Asset Backed Securities Corporation Home Equity Loan Trust, Series 2005-HE2 to Modify Automatic Stay and Abandon Property (Objection to Motion for Stay Relief) filed by the Plaintiff in the Debtor’s bankruptcy case on January 31, 2011; and (E) materials concerning Bryan Bly, including (1) portions of the July 2, 2010 deposition of Bryan Bly in Deutsche Bank National Trust Company v. Hannah, Case No. 2009-CA-1920, pending in the Circuit Court for the Fourth Judicial Circuit in and for Clay County, Florida, Division B; (2) a Discharge of Mortgage, an Assignment of Mortgage, a second Assignment of Mortgage, and a Release of Mortgage executed by Bryan Bly; and (3) a website posting by Bill Bullard, Jr., Register of Deeds for Oakland County, Michigan, dated July 21, 2011, entitled “Oakland County Clerk Bill Bullard Uncovers More Evidence of Mortgage Fraud by Major Banks.”
As authorized by the December 12, 2011 Order, the Defendants filed the Defendants’ Reply to Plaintiffs Response to Defendants’ Motion for Judgment on the Pleadings on December 15, 2011. The Defendants also filed the Defendants’ Response to Plaintiffs Statement of Additional Undisputed Material Facts on December 9, 2011; however, because it was not timely filed, pursuant to E.D. Tenn. LBR 7056-l(c), the additional material facts set forth in the Statement of Additional Undisputed Facts are deemed admitted. The court also takes judicial notice, pursuant to Rule 201 of the Federal Rules of Evidence, of the following documents of record in the Debtor’s bankruptcy case which were expressly referred to by the parties in the Statement of Undisputed Facts and the Statement of Additional Undisputed Facts: (1) Motion for Stay Relief and all attachments thereto filed by U.S. Bank National Association on January 24, 2011; (2) Proof of Claim and supporting documentation evidencing a secured claim in the amount of $104,834.71 filed by Saxon Mortgage Services, Inc., as agent for U.S. Bank National Association on December 21, 2010; (3) Schedule AReal Property filed by the Debtor on December 10, 2010; and (4) Chapter 7 Individual Debtor’s Statement of Intention filed by the Debtor on December 10, 2010. The court likewise takes judicial notice of the documents attached to the Memorandum in Support of Motion for Judgment on the Pleadings filed by the Defendants on October 25, 20113, which were also expressly referred to in the Statement of Undisputed Facts filed on November 14, 2011, and in the McMullen Declaration dated November 10, 2011.
This is a core proceeding. 28 U.S.C. § 157(b)(2)(A), (K), (O) (2006).
I
The following facts are not in dispute or have not been rebutted. The Debtor filed the Voluntary Petition commencing her Chapter 7 bankruptcy case on December 10, 2010, and the Plaintiff was duly appointed Chapter 7 Trustee. Stmt, of Un-disp. Facts at ¶ 1; Pl.’s Resp. to Stat. of Undisp. Faots at ¶ 1; compl. at ¶¶ 1, 2. As evidenced by the Statement of Intention filed contemporaneously with her Voluntary Petition and other statements and schedules, the Debtor expressed her inten*443tion to surrender to Saxon Mortgage Services, Inc. the Stiner Highway Property, which she valued in Schedule A at $120,000.00, subject to a lien in the amount of $103,000.00. Stmt, of Add’l Undisp. Facts at ¶¶ 19, 20. On December 21, 2010, Saxon Mortgage Services, Inc. filed a Proof of Claim in the amount of $104,834.71, attaching thereto copies of the December 15, 2004 Note between the Debtor and New Century Mortgage Corporation and the Deed of Trust executed by the Debtor and her non-filing spouse, William Hunter, and recorded with the Campbell County Register of Deeds, pledging the Stiner Highway Property as security for the Note. Stat. of Undisp. Facts at ¶¶ 6-8; Pl.’s Resp. to Stat. of Undisp. Facts at ¶¶ 6-8; Stat. of Add’l Undisp. Facts at ¶¶ 15, 16; Stat. of Add’l Undisp. Facts Ex. A; McMullen Decl. at ¶¶ 4-5; see also Mem. in SuppoRT of Mot. FOR Judg. Ex. A; Mem. in Support of Mot. for Judg. Ex. B. The December 15, 2004 Note contains a blank endorsement signed by Magda Villanueva on behalf of New Century Mortgage Corporation. Stat. of Undisp. Facts at ¶¶6, 9; Pl.’s Resp. to Stat. of Undisp. Facts at ¶¶ 6, 9; Stat. of Add’l Undisp. Facts at ¶ 16; Stat. of Add’l Undisp. Facts Ex. A; McMullen Decl. at ¶ 4; Mem. in Support of Mot. for Judg. Ex. A.
On January 24, 2011, U.S. Bank National Association filed its Motion for Stay Relief as to the Stiner Highway Property, asking the court to grant relief pursuant to 11 U.S.C. § 362(d) for cause, including failure to make payments and failure to provide adequate protection, and to order the abandonment of the property by the Plaintiff as burdensome and of inconsequential value to the estate. Stat. of Undisp. Facts at ¶ 2; Pl.’s Resp. to Stat. of Undisp. Facts at ¶ 2. In support of the Motion for Stay Relief, U.S. Bank National Association attached the Allonge to Note containing an endorsement, without recourse, to U.S. Bank National Association, the December 15, 2004 Note, the Deed of Trust, and a computer print-out entitled “Appraisal Detail Page”; however, the copy of the December 15, 2004 Note was different from the copy attached to the Proof of Claim filed by Saxon Mortgage Services, Inc. on December 21, 2010, and did not reflect the endorsement from New Century Mortgage Corporation. Stat. of Undisp. Facts at ¶ 10; Pl.’s Resp. to Stat. of Undisp. Facts at ¶ 10; Stat. of Add’l Undisp. Facts at ¶ 17; Stat. of Add’l Undisp. Facts Ex. A; Stat. of Add’l Undisp. Facts Ex. B; Stat. of Add’l Undisp. Facts Ex. C; McMullen Deol. at ¶ 6; Mem. in Support of Mot. for Judg. Ex. C.
The Plaintiff filed her Objection to Motion for Stay Relief on January 31, 2011, arguing that, based on the documentation attached to the Motion for Stay Relief, she could not determine that U.S. Bank National Association was the proper party to seek relief and objecting to the authenticity of the signatures on the endorsements to the December 15, 2004 Note as well as the authority of those who had endorsed the instruments to do so. Stat. of Undisp. Faots at ¶ 3; Pl.’s Resp. to Stat. of Undisp. Facts at ¶ 3; Stat. of Add’l Undisp. Facts at ¶ 18; Stat. of Add’l Undisp. Facts Ex. D. In April 2011, the December 15, 2004 Note carrying the blank endorsement by New Century Mortgage Corporation was produced to the Plaintiff for inspection and is currently in the possession of the Defendants’ counsel. Stat. of Undisp. Facts at ¶ 11; Pl.’s Resp. to Stat. of Undisp. Facts at ¶ 11; Compl. at ¶ 7; MoMullen Decl. at ¶ 4.
Thereafter, on July 8, 2011, the Plaintiff filed the Complaint initiating this adversary proceeding “to determine the nature, extent and priority of [the Defendants’] lien, if any” on the Stiner Highway Prop*444erty. Stat. of Undisp. Facts at ¶ 4; Pl.’s Resp. to Stat. of Undisp. Facts at ¶4; Compl. at ¶ 3. The Complaint additionally avers that “the Defendants have failed and refused, despite repeated requests, ... to provide sufficient documentation for Plaintiff to determine whether there is a properly perfected security interest in the property; in the alternative, they have provided inconsistent documentation which raises the question of the validity of the negotiation of the mortgage note.” Compl. at ¶ 8. The Defendants filed their Answer on September 6, 2011, denying that the Plaintiff is entitled to any relief and setting forth a number of affirmative defenses. Stat. of Undisp. Facts at ¶ 5; Pl.’s Resp. to Stat. of Undisp. Facts at ¶ 5; Answer.
II
“After the pleadings are closed — but early enough not to delay trial — a party may move for judgment on the pleadings.” Fed.R.Civ.P. 12(c). Courts consider a motion for judgment on the pleadings under Rule 12(c) using the same standard for motions to dismiss under Rule 12(b)(6) and construe the complaint in a light most favorable to the non-moving party, accepting all well-pled factual allegations as true and determining whether the moving party is entitled to judgment as a matter of law. Sensations, Inc. v. City of Grand Rapids, 526 F.3d 291, 295 (6th Cir.2008). Detailed factual allegations are not required; however, the allegations “must be enough to raise a right to relief above the speculative level” and the plaintiff must present “more than labels and conclusions, and a formulaic recitation of the elements of a cause of action[.]” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007). “The court should first identify any conclusory allegations and bare assertions that are not entitled to an assumption of truth, then consider the factual allegations that are entitled to a presumption of truth and determine if they plausibly suggest entitlement to relief [and] must permit an inference of more than a mere possibility of misconduct.” Young v. BAC Home Loans Servicing, 2012 WL 72299, at *2 (E.D.Mich. Jan. 10, 2012) (citing Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1951, 173 L.Ed.2d 868 (2009)).
“If, [however,] on a motion under Rule 12(b)(6) or 12(c), matters outside the pleadings are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Rule 56[, and the parties are] given a reasonable opportunity to present all the material that is pertinent to the motion.” Fed.R.CivP. 12(d). Pursuant to Rule 56(a) of the Federal Rules of Civil Procedure, “[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law[,]” utilizing the following procedures:
(1) Supporting Factual Positions. A party asserting that a fact cannot be or is genuinely disputed must support the assertion by:
(A) citing to particular parts of materials in the record, including depositions, documents, electronically stored information, affidavits or declarations, stipulations (including those made for purposes of the motion only), admissions, interrogatory answers, or other materials; or
(B) showing that the materials cited do not establish the absence or presence of a genuine dispute, or that an adverse party cannot produce admissible evidence to support the fact.
(2) Objection That a Fact Is Not Supported by Admissible Evidence. A party may object that the material cited *445to support or dispute a fact cannot be presented in a form that would be admissible in evidence.
(3) Materials Not Cited. The court need consider only the cited materials, but it may consider other materials in the record.
(4) Affidavits or Declarations. An affidavit or declaration used to support or oppose a motion must be made on personal knowledge, set out facts that would be admissible in evidence, and show that the affiant or declarant is competent to testify on the matters stated.
Fed.R.Civ.P. 56(c) (applicable in adversary proceedings pursuant to Rule 7056 of the Federal Rules of Bankruptcy Procedure).
When deciding a motion for summary judgment, the court does not weigh the evidence to determine the truth of the matter asserted but simply determines whether a genuine issue for trial exists, and “[o]nly disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510, 91 L.Ed.2d 202 (1986). The moving party bears the burden of proving that, based upon the record presented to the court, there is no genuine dispute concerning any material fact and the opposing party’s claims are factually unsupported, entitling him to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S.Ct. 2548, 2553, 91 L.Ed.2d 265 (1986); Owens Corning v. Nat’l Union Fire Ins. Co., 257 F.3d 484, 491 (6th Cir.2001). The burden then shifts to the nonmoving party to prove that there are genuine disputes of material fact for trial through the use of affidavits or other evidence although reliance solely on allegations or denials contained in the pleadings or “mere scintilla of evidence in support of the nonmoving party will not be sufficient.” Nye v. CSX Transp., Inc., 437 F.3d 556, 563 (6th Cir.2006); see also Mat-sushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 586-87, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986).
The facts and all resulting inferences are viewed in a light most favorable to the non-movant, with the court deciding whether “the evidence presents a sufficient disagreement to require submission to a jury or whether it is so one-sided that one party must prevail as a matter of law.” Anderson, 106 S.Ct. at 2512. Nevertheless, “[wjhere the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no ‘genuine issue for trial.’ ” Matsushita, 106 S.Ct. at 1356 (citations omitted). Through their Motion for Judgment on the Pleadings, the Defendants aver that the Plaintiff cannot establish that U.S. Bank National Association is not the proper party to enforce the December 15, 2004 Note and Deed of Trust or that U.S. Bank National Association does not possess a valid and properly perfected lien on the Stiner Highway Property superior to any interest acquired by the Plaintiff in her role as Chapter 7 Trustee, and they are, therefore, entitled to a judgment dismissing this adversary proceeding. Based upon the record, the court agrees that there is no genuine dispute as to any material fact and that U.S. Bank National Association is entitled to judgment as a matter of law that it is the proper party to enforce the December 15, 2004 Note and the Deed of Trust, that U.S. Bank National Association’s lien is superior to any interest held by the Plaintiff in the Stiner Highway Property securing the December 15, 2004 Note, and that the Plaintiffs Complaint should be dismissed.
Ill
The Plaintiff filed her Complaint “to determine the nature, extent and priority of *446Saxon Mortgage Services, Inc. and U.S. Bank, National Association, as Trustee for Asset Backed Securities Corporation Home Equity Loan Trust, Series 2005-HE2, ... lien, if any, on the property of the Debtor(s), pursuant to Bankruptcy Rule 7001(2) and 11 U.S.C. § 506” and requests as relief “[t]hat upon a finding that the lien of the Defendants in the property is not perfected or void pursuant to 11 U.S.C. § 506(d), the Court issue an order finding the interest of the Plaintiff in the property to be superior to that of the Defendants, and allow her to sell the property and use the proceeds of the sale for the benefit of the bankruptcy estate.” Compl. at ¶¶ 3, C.
Unquestionably, Rule 7001(2) of the Federal Rules of Bankruptcy Procedure states, in material part, that “a proceeding to determine the validity, priority, or extent of a lien or other interest in property, other than a proceeding under Rule 4003(d) [lien avoidance against exempt property]” is an adversary proceeding. Fed. R. BankR.P. 7001(2). The court questions, however, the Plaintiffs reliance on § 506, which reads as follows:
(a)(1) An allowed claim of a creditor secured by a lien on property in which the estate has an interest, or that is subject to setoff under section 553 of this title, is a secured claim to the extent of the value of such creditor’s interest in the estate’s interest in such property, or to the extent of the amount subject to set-off, as the case may be, and is an unsecured claim to the extent that the value of such creditor’s interest or the amount so subject to setoff is less than the amount of such allowed claim. Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.
(2) If the debtor is an individual in a case under chapter 7 or 13, such value with respect to personal property securing an allowed claim shall be determined based on the replacement value of such property as of the date of the filing of the petition without deduction for costs of sale or marketing. With respect to property acquired for personal, family, or household purposes, replacement value shall mean the price a retail merchant would charge for property of that kind considering the age and condition of the property at the time value is determined.
(b) To the extent that an allowed secured claim is secured by property the value of which, after any recovery under subsection (c) of this section, is greater than the amount of such claim, there shall be allowed to the holder of such claim, interest on such claim, and any reasonable fees, costs, or charges provided for under the agreement or State statute under which such claim arose.
(c) The trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit tot he holder of such claim, including the payment of all ad valorem property taxes with respect to the property.
(d) To the extent that a lien secures a claim against the debtor that is not an allowed secured claim, such lien is void, unless—
(1) such claim was disallowed only under section 502(b)(5) or 502(e) of this title; or
(2) such claim is not an allowed secured claim due only to the failure of any entity to file a proof of such claim under section 501 of this title.
*44711 U.S.C. § 506. “Section 506 ... governs the amount and treatment of secured claims ... [and] ‘was intended to facilitate valuation and disposition of property in the reorganization chapters of the Code.’ ” Shook v. CBIC (In re Shook), 278 B.R. 815, 822 (9th Cir. BAP 2002) (quoting Oregon v. Lange (In re Lange), 120 B.R. 132, 135 (9th Cir. BAP 1990)). “ ‘[Validity’ means the existence or legitimacy of the lien itself, ‘priority’ means the lien’s relationship to other claims or interests in the collateral, and ‘extent’ means the scope of the property encompassed by or subject to the lien.” In re Millspaugh, 302 B.R. 90, 96 (Bankr.D.Idaho 2003) (quoting In re King, 290 B.R. 641, 648 (Bankr.C.D.Ill.2003)).
As the basis for her cause of action, the Plaintiff alleges the following:
4. That Debtor(s) on Schedule D listed Saxon Mortgage Services, Inc., Defendant, as a creditor holding security, the security being a mortgage on the home of the Debtor(s) located at 6136 General Carl West Stiner Hwy, LaFollette, TN.
5. That U.S. Bank, National Association, as Trustee for Asset Backed Securities Corporation Home Equity Loan Trust, Series 2005-HE2, Defendant, filed a Motion for Relief on January 24, 2011[sic]. The documents attached to the proof of claim include a deed of trust and note with allonge to U.S. Bank, National Association, Defendant. Brian Bly signed the allonge on behalf of original lender New Century Mortgage.
6. That Plaintiff has discovered there is controversy surrounding Brian Bly, who was employed by Nationwide Title Clearing in Palm Harbor, Florida and has signed a number of documents on behalf of a number of companies, claiming to hold positions for those companies that he did not.
7. That in April, 2011, counsel for U.S. Bank, National Association produced the original note for Plaintiffs inspection. That document did not have an allonge signed by Brian Bly, but did have an endorsement in blank on behalf of New Century Mortgage signed by someone whose name appears to be Marsha Villa-nova [sic], but is partially illegible.
8.That the Defendants have failed and refused, despite repeated requests, attached hereto as an exhibit, to provide sufficient documentation for Plaintiff to determine whether there is a properly perfected security interest in the property; in the alternative, they have provided inconsistent documentation which raises the question of the validity of the negotiation of the mortgage note.
Compl. at ¶¶4-8. Although the Plaintiff was unsure as to her identity at the time she filed the Complaint, in the Statement of Additional Undisputed Facts, she acknowledges that Magda Villanueva executed the blank endorsement on behalf of New Century Mortgage Corporation on the December 15, 2004 Note. Stat. op Add’l Undisp. Facts at ¶ 16.
In the Answer, the Defendants agreed that the documents referenced in paragraphs 4 and 5 of the Complaint speak for themselves, and with respect to paragraphs 6, 7, and 8, answered that they “are without sufficient information to admit or deny the allegations[.]” ANSWER at ¶¶ 4-8. Additionally, although the Defendants attached copies of the December 15, 2004 Note with and without an endorsement and/or allonge, the validity of the December 15, 2004 Note itself as between the Debtor and New Century Mortgage Corporation is not in dispute, and notwithstanding the Plaintiffs averment in the Complaint that she cannot determine whether there is a properly perfected security interest in the Stiner Highway Property, the record is clear — there is no dispute that the Stiner Highway Property *448is encumbered by a Deed of Trust recorded with the Campbell County Register of Deeds on December 22, 2004, which secured the December 15, 2004 Note to New Century Mortgage Corporation. Stmt, of Undisp. Facts at ¶¶ 6, 8; Pl.’s Resp. to Stat. of Undisp. Facts at ¶¶ 6, 8. Accordingly, through this adversary proceeding, it appears that rather than questioning the nature, extent, or validity of the lien against the Stiner Highway Property, the Plaintiff is instead questioning the standing of U.S. Bank National Association as successor in interest to the original lien-holder, New Century Mortgage Corporation, through the endorsement evidenced on the December 15, 2004 Note attached as an exhibit to the Proof of Claim and the Motion for Judgment on the Pleadings and/or the Allonge to Note attached to the Motion for Stay Relief and the Motion for Judgment on the Pleadings, to enforce the December 15, 2004 Note. Stat. of Add’l Undisp. Facts at ¶¶ 16-17; Stat. of Add’l Undisp. Facts Ex. A; Stat. of Add’l Undisp. Faots Ex. B; Stat. of Add’l Undisp. Facts Ex. C.
“The real party in interest with respect to a mortgage proof of claim and enforcement of the rights of a mortgagee in a bankruptcy is the party entitled to enforce the note and its accompanying mortgage.” In re Smoak, 461 B.R. 510, 517 (Bankr.S.D.Ohio 2011). The December 15, 2004 Note is a negotiable instrument governed by Article III of the Uniform Commercial Code, and the question of whether the Defendants are entitled to enforce it is determined under Tennessee’s adoption thereof.4 See generally Tenn. Code Ann. § 47-3-104 (Supp.2011). In material part, Tennessee Code Annotated defines a person entitled to enforce an instrument as “(i) the holder of the instrument, [or] (ii) a nonholder in possession of the instrument who has the rights of a holder[.]” Tenn.Code Ann. § 47-3-301 (2001); see also Tenn.Code Ann. § 47-3-301 Official Cmts. (“In revised Article 3, Section 3-301 defines ‘person entitled to enforce’ an instrument. The definition recognizes that enforcement is not limited to holders ... [and] includes any other person who under applicable law is a successor to the holder or otherwise acquires the holder’s rights.”). A “holder” is “the person [i]n possession of a negotiable instrument that is payable either to bearer or to an identified person that is the person in possession!,]” Tenn.Code ANN. § 47-1-201(21)(A) (Supp.2011), and the rights of a holder are conferred through negotiation:
(a) “Negotiation” means a transfer of possession, whether voluntary or involuntary, of an instrument by a person other than the issuer to a person who thereby becomes its holder.
(b) Except for negotiation by a remitter, if an instrument is payable to an identified person, negotiation requires transfer of possession of the instrument and its endorsement by the holder. If an instrument is payable to bearer, it may be negotiated by transfer of possession alone[;]
Tenn.Code Ann. § 47-3-201 (2001), and “endorsement” which is defined in material part as:
a signature, other than that of a signer as maker, drawer, or acceptor, that alone or accompanied by other words is *449made on an instrument for the purpose of (i) negotiating the instrument, (ii) restricting payment of the instrument, or (iii) incurring endorser’s liability on the instrument, but regardless of the intent of the signer, a signature and its accompanying words is an endorsement unless the accompanying words, terms of the instrument, place of the signature, or other circumstances unambiguously indicate that the signature was made for a purpose other than endorsement. For the purpose of determining whether a signature is made on an instrument, a paper affixed to the instrument is a part of the instrument.For the purpose of determining whether the transferee of an instrument is a holder, an endorsement that transfers a security interest in the instrument is effective as an unqualified endorsement of the instrument.
Tenn.Code ANN. § 47-3-204(a), (c) (2001). “If an endorsement is made by the holder of an instrument and it is not a special endorsement [payable to an identified person], it is a ‘blank endorsement.’ When endorsed in blank, an instrument becomes payable to bearer and may be negotiated by transfer of possession alone until specially endorsed ... by writing, above the signature of the endorser, words identifying the person to whom the instrument is made payable.” Tenn.Code Ann. § 47-3-205(b), (c) (2001). Additionally, “[t]he practice of multiple [endorsements which accompanied the growth in commerce eventually led to the acceptance of the use of allonges.” Adams v. Madison Realty & Dev., Inc., 853 F.2d 163, 167 (3d Cir.1988). Nevertheless, “[transfer of an instrument, whether or not the transfer is a negotiation, vests in the transferee any right of the transferor to enforce the instru-menté]” Tenn.Code Ann. § 47-3-203(b) (2001); see also Tenn.Code Ann. § 47-3-203 Offioial Cmts. at 1 (“Subsection (a) defines transfer by limiting it to cases in which possession of the instrument is delivered for the purpose of giving to the person receiving delivery the right to enforce the instrument.”).
The record reflects that U.S. Bank National Association, through its attorneys, is in possession of the December 15, 2004 Note, which contains a blank endorsement by New Century Mortgage Corporation that is supplemented by an Allonge to Note with a specific endorsement from New Century Mortgage Corporation to U.S. Bank National Association. On its face, U.S. Bank National Association is the holder of the December 15, 2004 Note, and either it or its designated agent, Saxon Mortgage Services, Inc., has the authority to enforce the note. Nevertheless, in the Complaint, the Plaintiff states that the Defendants’ inconsistent documents and her awareness of a “controversy” involving Brian Bly, whose signature appears on the Allonge, have raised the question of whether the Debtor’s mortgage note was validly negotiated. Compl. at ¶ 8.
The record contains two copies of the December 15, 2004 Note, one with a blank endorsement executed by Magda Villa-nueva on behalf of New Century Mortgage Corporation and one without any endorsement. Stat. of Add’l Undisp. Facts Ex. A; Stat. of Add’l Undisp. Facts Ex. B; Mem. in SuppoRT of Mot. foe Judg. Ex. A. However, the fact that the copies differ does not raise a genuine dispute as to a material fact. U.S. Bank National Association, through its counsel, is in possession of the original December 15, 2004 Note, which “contains the signature of Magda Villa-nueva indorsing the Note in blank.” McMullen Deol. at ¶ 4; Mem. in Support of Mot. for Judg. Ex. A; see also In re Wilson, 442 B.R. 10, (Bankr.D.Mass.2010) (“Regardless of when the note was indorsed, it is uncontroverted that it is now *450indorsed and in the possession of Deutsche Bank”)-5 Similarly, the fact that the Defendant did not attach a copy of the Al-longe to Note to the Proof of Claim is irrelevant, as U.S. Bank National Association, through counsel, is also in possession of that document, which clearly refers to the Debtor’s loan through an account number, the original loan amount, the date of the note, the borrower’s name, and the property address. Stat. of Add’l Undisp. Faots Ex. C; McMullen Deol. at ¶ 6; Mem. in Support of Mot. for Judg. Ex. C.
As to whether the December 15, 2004 Note was validly negotiated, Tennessee Code Annotated provides, in material part, the following concerning proof of signatures:
(a) In an action with respect to an instrument, the authenticity of, and authority to make, each signature on the instrument is admitted unless specifically denied in the pleadings. If the validity of a signature is denied in the pleadings, the burden of establishing validity is on the person claiming validity, but the signature is presumed to be authentic and authorized unless the action is to enforce the liability of the purported signer and the signer is dead or incompetent at the time of trial of the issue of validity of the signature. If an action to enforce the instrument is brought against a person as the undisclosed principal of a person who signed the instrument as a party to the instrument, the plaintiff has the burden of establishing that the defendant is liable on the instrument as a represented person under § 47-3-402(a).
Tenn.Code Ann. § 47-3-308(a) (Supp. 2011). As explained, in material part, by the Official Comments:
Section 3-308 is a modification of former Section 3-307. The first two sentences of subsection (a) are a restatement of former Section 3-307(1). The purpose of the requirement of a specific denial in the pleadings is to give the plaintiff notice of the defendant’s claim of forgery or lack of authority as to the particular signature, and to afford the plaintiff an opportunity to investigate and obtain evidence. If local rules of pleading permit, the denial may be on information and belief, or it may be a denial of knowledge or information sufficient to form a belief. It need not be under oath unless the local statutes or rules require verification. In the absence of such specific denial the signature stands admitted, and is not in issue. Nothing in this section is intended, however, to prevent amendment of the pleading in a proper case.
The question of the burden of establishing the signature arises only when it has been put in issue by specific denial. “Burden of establishing” is defined in Section 1-201. The burden is on the party claiming under the signature, but the signature is presumed to be authentic and authorized except as stated in the second sentence of subsection (a). “Presumed” is defined in Section 1-201 and means that until some evidence is introduced which would support a finding that the signature is forged or unauthorized, the plaintiff is not required to prove that it is valid. The presumption rests upon the fact that in ordinary experience forged or [un]authorized signa*451tures are very uncommon, and normally any evidence is within the control of, or more accessible to, the defendant. The defendant is therefore required to make some sufficient showing of the grounds for the denial before the plaintiff is required to introduce evidence. The defendant’s evidence need not be sufficient to require a directed verdict, but it must be enough to support the denial by permitting a finding in the defendant’s favor. Until introduction of such evidence the presumption requires a finding for the plaintiff. Once such evidence is introduced the burden of establishing the signature by a preponderance of the total evidence is on the plaintiff.
Tenn.Code ANN. § 47-3-308 Official Cmts. at 1.
Although the Plaintiff makes a reference that the original December 15, 2004 Note that she examined in April 2011, contains a blank endorsement that is partially illegible, the only issue raised by the Complaint with respect to the validity of signatures is the Plaintiffs allegation that a controversy has arisen surrounding Brian Bly, who allegedly signed documents in representative capacities he did not possess for several companies. See Compl. at ¶¶ 6-7. To support her contention that there is a genuine dispute of material fact as to whether the Allonge to Note is authentic and/or that Brian Bly was authorized to endorse an allonge on behalf of New Century Mortgage Association, the Plaintiff submitted a number of documents along with the Statement of Additional Material Facts, including deposition testimony given by Brian Bly on July 2, 2010, in Deutsche Bank National Trust Company v. Hannah, Case No. 2009-CA-1920, in the Circuit Court of the Fourth Judicial District for Clay County, Florida, sample documents purportedly signed by Brian Bly, and a posting on the webpage for the Register of Deeds for Oakland County, Michigan, found at http://www.oakgov/com/ clerkrod/news/2010/20110721_more_ mortgage_fraud.html. Stat. of Add’l Un-disp. FaCts Coll. Ex. E. These documents, however, are not authenticated or sworn to by affidavit or declaration, are inadmissible hearsay under Rule 802 of the Federal Rules of Evidence, and do not properly call into question the validity of Brian Bly’s signature on the Allonge to Note associated with the December 15, 2004 Note. The averments in the Complaint, supplemented by the Plaintiffs Response to Defendants’ Motion for Judgment on the Pleadings concerning Brian Bly’s authority, without more, are insufficient to establish, under Tennessee law, that his signature on the Allonge to Note is not valid.
Furthermore, irrespective of whether the Allonge to Note is validly endorsed to U.S. Bank National Association, the original December 15, 2004 Note contains a blank endorsement by Magda Villanueva, for which the Plaintiff has raised even less question as to its validity. Although the Plaintiff, in her Objection to Motion for Stay Relief filed on January 31, 2011, “object[ed] to the authenticity of the signatures on the endorsements to the promissory note and authority of the people signing endorsements to the promissory note[,]” Stat. of Add’l Undisp. Facts at ¶ 18; Stat. of Add’l Undisp. Facts Ex. D, the Complaint commencing this adversary proceeding, which was filed subsequently, on July 8, 2011, does not expressly contest the validity and authenticity of Magda Villanueva’s signature, nor does the Plaintiff offer into the record any proof calling into question the validity of the signature other than unsupported averments, which she then represents in the Plaintiffs Response to Defendants’ Motion for Judgment on the Pleadings as “her concern about Magda Villaneuva’s [sic] authority to sign the endorsement[.]” Pl.’s Resp. to *452Mot. for Judg. on Pleadings at ¶ 4. As with the allegations that Brian Bly’s signature is invalid on the Allonge to Note, mere allegations that the signature is invalid are insufficient under Tennessee law to overcome the presumption as to its validity. See Tenn.Code Ann. § 47-3-308(a); see also Wilson, 442 B.R. at 15 (holding that because the complaint did not “specifically deny the authenticity of the signature of Ms. [Magda] Villanueva[,] ... the authenticity of the signature is deemed admitted as a matter of law”). Through that blank endorsement, the bearer, U.S. Bank National Association, becomes the holder and is entitled to enforce the December 15, 2004 Note.6
The record is clear that U.S. Bank National Association, through its attorneys, is in possession of the original December 15, 2004 Note and is therefore the holder and owner by virtue of the blank endorsement from New Century Mortgage Corporation as well as the Allonge to Note with the specific endorsement from New Century Mortgage Corporation to U.S. Bank National Association. As the owner and holder of the Note, U.S. Bank National Association has the unqualified right to enforce the document pursuant to Tennessee Code Annotated § 47-3-301, which states, in material part, that “ ‘[pjerson entitled to enforce’ an instrument means (i) the holder of the instrument[,] ... [and a] person may be a person entitled to enforce the instrument even though the person is not the owner of the instrument or is in wrongful possession of the instrument.” Tenn.Code ANN. § 47-3-301. Likewise, the terms of the Note itself contemplate the possibility of transfer, expressly stating in the section entitled “Borrower’s Promise to Pay” that the Debtor “understand[s] that the Lender may transfer this Note. The Lender or anyone who takes this Note by transfer and who is entitled to receive payments under this Note is called the ‘Note Holder.’ ” Stat. of Undisp. Faots at ¶ 6; Pl.’s Resp. to Stat. of Undisp. Faots at ¶ 6; Stat. of Add’l Undisp. Facts at ¶¶ 15, 16; Stat. of Add’l Undisp. Facts Ex. A; Stat. of Add’l Undisp. Facts Ex. B; McMullen Deol. at ¶ 4; Mem. in Support of Mot. for Judg. Ex. A.
For the foregoing reasons, the Motion for Judgment on the Pleadings filed by the Defendants on November 10, 2011, shall be granted. U.S. Bank National Association is entitled to a judgment as a matter of law that it is the proper party to enforce the December 15, 2004 Note and the Deed of Trust and that the lien enforceable by U.S. Bank National Association is superior to any interest held by the Plaintiff in the Stiner Highway Property securing the December 15, 2004 Note. The Plaintiffs Complaint shall be dismissed.
A Judgment consistent with this Memorandum will be entered.
JUDGMENT
For the reasons set forth in the Memorandum on Motion for Judgment on the Pleadings filed this date, the court directs the following:
1. The Motion for Judgment on the Pleadings filed by the Defendants on October 25, 2011, having been treated by the court as a motion for summary judgment under Rule 56 of the Federal Rules of Civil Procedure, made applicable to this *453adversary proceeding by Rule 7056 of the Federal Rules of Bankruptcy Procedure, is GRANTED.
2.The Defendant U.S. Bank National Association is the proper party to enforce the December 15, 2004 Note executed by the Debtor Mary Melissa Hunter and the Deed of Trust securing the Note encumbering the real property known as 6136 General Carl West Stiner Highway, La-Follette, Tennessee.
8. The interest of the Defendant U.S. Bank National Association, as Trustee for Asset Backed Securities Corporation Home Equity Loan Trust, Series 2005-HE2, in the 6136 General Carl West Stiner Highway, LaFollette, Tennessee property is superior to the interest of the Plaintiff.
4. The Complaint filed by the Plaintiff on July 8, 2011, is DISMISSED.
. The Declaration filed on November 10, 2011, evidenced Mr. McMullen’s electronic signature, in violation of Section III.A.2. of the E.D. Tenn. Administrative Procedures for Electronic Case Filing, effective May 17, 2005, as amended. Pursuant to the court’s December 12, 2011 Order, a revised Declaration containing Mr. McMullen’s handwritten signature was filed on December 15, 2011.
. For the purposes of clarifying the record, the court will refer to this document as if it had been filed as two separate documents. References to the portion responding to the Statement of Undisputed Material Facts will be referred to as "Plaintiff’s Response to Statement of Undisputed Facts" and portions citing to the Plaintiff's Additional Undisputed Material Facts will be referred to as “Statement of Additional Undisputed Facts.”
. Briefs and documents attached thereto are not pleadings and, without judicial notice, are not otherwise part of the court’s record to be considered when determining a motion for summary judgment. See Fed.R.Civ.P. 7, 12, 56; Fed. R. Bankr.P. 7007, 7012, 7056.
. Paragraph 10 of the December 15, 2004 Note, entitled "APPLICABLE LAW,” provides that "[t]his Note shall be governed by the laws of the State of Tennessee.” Stat. of Undisp. Facts at ¶ 6; Pl.’s Resp. to Stat. of Undisp. Facts at ¶ 6; Stat. of Add'l Undisp. Facts at ¶¶ 15, 16; Stat. of Add'l Undisp. Facts Ex. A; Stat. of Add'l Undisp. Facts Ex. B; McMullen Decl. at ¶ 4; Mem. in Support of Mot. for Judg. Ex. A.
. "The mere existence of one or more copies of the note that were made from the original before it was indorsed does not create a genuine issue as the timing of the indorsement without further evidence as to when the copies were made from the original.” Wilson, 442 B.R. at 15 n. 6.
. So long as U.S. Bank National Association acquired possession of the December 15, 2004 Note from a party entitled to enforce it, whether there was a valid endorsement to make U.S. Bank National Association the owner or holder of the note is irrelevant because under Tennessee law, transfer of possession gave the transferee the rights to enforce previously held by the transferor. See Tenn.Code Ann. § 47-3-203 (b); accord Donaldson v. BAC Home Loans Servicing, LP, 813 F.Supp.2d 885, 896 (M.D.Tenn.2011). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494630/ | MEMORANDUM OF DECISION ON CHAPTER 13 PLAN CONFIRMATION
ROBERT J. HARRIS, Bankruptcy Judge.
This case presents the question of whether a chapter 13 debtor’s payments to unsecured creditors must increase when the debtors make their last payment on a secured auto loan. I conclude that the answer is yes, and therefore I will deny confirmation of the plan.
Mr. and Mrs. Montiho’s plan (dkt. no. 2) provides that they will continue to make their regular contractual payments of about $640 per month to Hawaii USA Federal Credit Union (“HIUSA”) on two auto loans. The last payment on the loans is due in April 2012. They will also pay $346 per month for 60 months to the trustee for distribution to holders of unsecured claims.
In addition to the claims based on the two auto loans, HIUSA also holds claims for about $70,000 based on a second mortgage and about $5,800 of credit card debt. The debtor asserts, and HIUSA apparently agrees, that the second mortgage claim is wholly unsecured because the value of the collateral is less than the first mortgage debt. Therefore, both of these claims are unsecured.
HIUSA objects to confirmation of the plan, arguing that the plan does not devote all of the debtor’s “projected disposable income” to the payment of unsecured creditors as section 1325(b)(1) requires. HIUSA contends that, in order to meet this standard, the plan payments must increase when the car loans are paid off.
Courts have wrestled with the phrase “projected disposable income” ever since Congress amended the Bankruptcy Code in 2005. The Supreme Court has interpreted the phrase in a pair of cases, both of which are relevant to the Montiho’s plan.
In Hamilton v. Lanning, — U.S. -, -, 130 S.Ct. 2464, 2478, 177 L.Ed.2d 23 (2010), the Court held that, in calculating projected disposable income, “the court may account for changes in the debtor’s income or expenses that are known or virtually certain at the time of confirmation.”
In Ransom v. FIA Card Services, N.A., — U.S.-, 131 S.Ct. 716, 178 L.Ed.2d 603 (2011), the Court held that a debtor who owns his car outright, and who there*541fore does not make any loan or lease payments on the car, cannot deduct the IRS standard vehicle ownership expense when calculating his projected disposable income.
HIUSA correctly points out that the elimination of the auto loan payments, and the corresponding increase in the debtors’ ability to pay unsecured creditors, is known and virtually certain to occur. Further, the debtors will own the cars outright once their car payments end.
Since Lanning and Ransom, most courts have held that the plan payments must “step up” when the debtors’ payments on a secured loan cease, because that event is “known or virtually certain at the time of confirmation.” See, e.g., In re Darrohn, 615 F.3d 470 (6th Cir.2010) (denying an allowance for payments on a debt secured by property which the debtors intended to surrender); In re McCullers, 451 B.R. 498 (Bankr.N.D.Cal.2011) (holding that plan payments must step up on final payment of a 401(k) loan); In re Wing, 435 B.R. 705, 714 (Bankr.D.Colo.2010) (holding that debtor may not deduct payments on a second mortgage that the debtor intended to strip off).1
Mr. and Mrs. Montiho respond in several ways.
First, they argue that, according to Lan-ning, adjustments to projected disposable income for future events should occur “only in unusual cases.” Lanning, 130 S.Ct. at 2475. They point out that the typical auto loan has a five year maturity and most chapter 13 plans have a five year term. The debtors therefore argue that many chapter 13 cases would involve auto loans maturing during the plan term, and that requiring an adjustment to plan payments would not be unusual. The Supreme Court did not say exactly what it would consider “unusual;” more importantly, the logic of the decision does not turn on how frequently it would apply.
Mr. and Mrs. Montiho also argue that administrative efficiency suggests that their plan should be confirmed as filed, leaving the trustee or a creditor to file a motion to modify the plan after the auto loan payments end. This argument might have more force if the auto loans matured in (say) four years; plan modification might be more appropriate in that sort of case, to take account of other changes in income and expenses that might have occurred in the meantime. In this case, however, the auto loans will mature in only three months. The simplest solution in this case is to require a plan that accounts for events that will surely happen, just as Lanning suggests.
Mr. and Mrs. Montiho also cite cases where the debtor had actual expenses in a particular category, but the actual expenses are less than the relevant allowance. In such circumstances, some courts have decided that the debtors can deduct the full amount of the allowance. See, e.g., In re Scott 457 B.R. 740 (Bankr.S.D.Ill.2011); In re O’Neill Miranda, 449 B.R. 182 (Bankr.D.P.R.2011); In re Owsley, 384 B.R. 739 (Bankr.N.D.Tex.2008); Musselman v. eCast Settlement Corp., 394 B.R. 801 (E.D.N.C.2008). Other courts have held that the allowances are caps, not fixed allowances, and that debtors can deduct the lesser of the allowance or their actual expense. See, e.g., In re Rezentes, 368 B.R. 55 (Bankr.D.Haw.2007). The Supreme Court has declined to weigh in on this issue. Ransom, 131 S.Ct. at 728 n. 8. This question has no relevance to this case, however, because it is clear that the debtor *542will have no car payments after April 2012 and Ransom holds that, when the debtor’s car payment is zero, the debtor is not entitled to any allowance for automobile ownership expense.
The debtors argue that requiring stepped up plan payments upon payoff of a car loan makes it more difficult to complete form B22, the form which is intended to capture the “means test” calculation. The difficulties do not seem serious to me. In any event, HIUSA correctly points out that forms promulgated by the judiciary cannot alter the meaning of statutes passed by the legislature.
In its supplemental post-hearing memorandum, HIUSA argues that, because Mr. Montiho has obtained a new job at a higher wage, the debtors’ projected disposable income is even higher. Because the debtors have not had an opportunity to respond to this argument, I will not address it here.
The trustee is directed to submit an order in the usual form providing for the denial of plan confirmation.
. Cases that were decided before Lanning and Ransom and are inconsistent with the Supreme Court's decisions are no longer authoritative. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494631/ | ORDER DENYING GREG ANTONICH’S MOTION TO STAY ENFORCEMENT OF STATE COURT JUDGMENT
MICHAEL G. WILLIAMSON, Bankruptcy Judge.
THIS CASE came on for consideration without a hearing on Greg Antonich’s Mo*556tion to Stay Enforcement of State Court Judgment (“Motion”).1 Antonich seeks to stay enforcement of a judgment for costs entered against him by a state court in Volusia County, Florida. For the reasons discussed below, this Court does not have jurisdiction over Antonich’s Motion. And even if it did, the Court is barred by the Full Faith & Credit Act and Rooker-Feld-man Doctrine from overturning the state court judgment. Accordingly, Antonich’s Motion is denied.
Background
The Debtor filed this chapter 11 case on September 14, 2007. At the time it filed for bankruptcy, the Debtor was a defendant in a declaratory judgment action filed by International Speedway Corporation.2 International Speedway apparently filed that action seeking a declaratory judgment that it did not owe the Debtor commissions under a broker agreement. The Debtor eventually sought relief from the automatic stay so that it could pursue the state court action on Antonich’s behalf.3
Antonich was a sales agent for the Debt- or. Under his agreement with the Debtor, Antonich apparently was entitled to 95% of the commissions allegedly owed by International Speedway. So the Debtor alleged that Antonich was the real party in interest. The Court granted the Debtor’s motion for stay relief. The Court’s original stay relief order provided that the “automatic stay [did] not apply to any non-debtor parties” and that the stay was otherwise modified as to all parties except the Debtor.4 That order, however, was later modified at the Debtor’s request to permit the Debtor to take any action on behalf of Antonich necessary to obtain payment of any commissions.5
The Debtor later assigned to Antonich all of its right, title, and interests — and all of its obligations — under the agreement with International Speedway. That assignment specifically provides that Anto-nich “desires to accept said assignment and assume the obligations of [the Debtor] under the Agreement.” More importantly, the assignment provides that Antonich “accepts the assignment of the Agreement ... and agrees to assume and be responsible for all costs and attorneys’ fees and any other monetary amounts associated with the [state court lawsuit].”
Antonich then participated in the state court lawsuit as a party, although the extent of his participation is somewhat unclear because Antonich only filed portions of the state court record with his Motion. From what the Court can tell, though, International Speedway sought to join An-tonich as an indispensable party to the state court action it had filed, and the state court joined Antonich as a co-defendant to International Speedway’s complaint and a co-plaintiff to the counterclaim filed by the other defendants. That counterclaim apparently sought the recovery of the real estate commissions based on contract and equitable claims. Antonich had apparently also filed a separate lawsuit against International Speedway that was later consolidated with International Speedway’s claim.6
*557It appears that International Speedway ultimately prevailed on its complaint and the defendants’ counterclaim. The state court entered a final judgment in favor of International Speedway on November 9, 2009. That judgment provided that International Speedway was entitled to recover its costs. Antonich opposed the entry of costs against him, claiming that he was only joined as an indispensable party to the state court action to “stand in the shoes” of the Debtor, and this Court had previously discharged the Debtor from any liability. Thus, Antonich argued, he cannot be liable for any costs. Nevertheless, the state court entered a final judgment for costs against Antonich in the amount of $6,119.50 on November 16, 2011.
Antonich now asks this Court to stay enforcement of the state court’s final judgment against him. The basis for Anto-nich’s Motion is largely the same argument that the state court previously considered and rejected. Antonich claims the Debt- or’s discharge in this case prohibited the state court from entering a final judgment against him in the state court action.
Conclusions of Law
This Court does not have jurisdiction over Antonich’s motion. Under 28 U.S.C. § 1334, bankruptcy courts only have jurisdiction over civil proceedings (i) arising under title 11; (ii) arising in a case under title 11; or (iii) related to a case under title 11.7 Antonich’s Motion does not implicate either of the first two grounds for jurisdiction. That only leaves the third basis — “related to” jurisdiction. A matter is “related to” a case under title 11 when its outcome could conceivably have any effect on the estate being administered in bankruptcy.8
Here, the outcome of Antonich’s Motion could not conceivably have any effect on the administration of the Debtor’s estate. To begin with, the Debtor’s liquidating plan was confirmed almost four years ago,9 and this case was closed on October 7, 2008. Moreover, Antonich does not claim that International Speedway is attempting to collect a judgment against the Debtor. In fact, the final judgment attached to Antonich’s Motion — the final judgment An-tonich seeks to stay — does not even reference the Debtor. Accordingly, the Court does not have jurisdiction over Antonich’s Motion.
And in any event, the Court cannot grant the relief Antonich seeks. In reality, Antonich wants this Court to act as an appellate court and reverse the state court final judgment. But the Court cannot do so for two reasons. First, under the Full Faith and Credit Act, “judicial proceedings ... shall have the same full faith and credit in every court within the United States ... as they have by law or usage in the courts of such State ... from which they are taken.”10 Second, under the Rooker-Feldman doctrine, lower federal courts — including this Court — have no jurisdiction to review state court judgments.11 Therefore, the Court cannot *558grant the relief Antonieh seeks even if it did have jurisdiction over this matter. Accordingly, it is
ORDERED that Antonich’s Motion to Stay Enforcement of State Court Judgment is DENIED.
DONE and ORDERED.
. Doc. No. 119.
. The state court action, filed in the Circuit Court for the Seventh Judicial Circuit, in and for Volusia County, was styled International Speedway Corporation, et al. v. RX Realty, Inc., et al., Case No. 05-30087-CICI.
. Doc. No. 29.
. Doc. No. 41.
. Doc. No. 51.
. That action, also filed in the Circuit Court for the Seventh Judicial Circuit, in and for Volusia County, was styled Greg Antonich, et al. v. International Speedway Corp., et al., Case No. 09-33449-CICI.
.Section 1334, of course, confers jurisdiction on the federal district court. But the district courts have referred jurisdiction to bankruptcy courts under 28 U.S.C. § 157(a). See In re Strawberry, 2012 WL 244055, at *2 (Bankr. N.D.Fla. Jan. 25, 2012) ("District courts can refer to bankruptcy judges 'any or all proceedings arising under title 11 or arising in or related to a case under title 11’ as has been done in all bankruptcy courts.”)
. In re Lemco Gypsum, Inc., 910 F.2d 784, 788 (11th Cir.1990).
. Doc. No. 79.
. 28 U.S.C. § 1738.
. The Rooker-Feldman doctrine stems from the United States Supreme Court decisions in Rooker v. Fidelity Trust, 263 U.S. 413, 44 S.Ct. *558149, 68 L.Ed. 362 (1923) and District of Columbia Court of Appeals v. Feldman, 460 U.S. 462, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983). It is premised on both prudential grounds (namely the preservation of system consistency) and statutory grounds. See 28 U.S.C. § 1257 (giving the United States Supreme Court exclusive federal jurisdiction to review state court judgments); 28 U.S.C. §§ 1331 and 1334 (defining the jurisdiction of federal district courts as original, not appellate). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494632/ | LAMOUTTE, Bankruptcy Judge.
Zbigniew P. Slabicki, a/k/a Peter Sla-bicki, (“Slabicki”) filed an adversary proceeding seeking compensatory and punitive damages under § 362(k)(l)1 against Robert Carp (“Carp”) and Mark Gleason (“Gleason”)2 for allegedly violating the automatic stay. Slabicki contended that the appellees violated the stay when Gleason, through Carp, a constable in Gleason’s employ, executed a capias3 against him in a civil action to enforce Gleason’s prepetition judgment against a corporation of which Slabicki was president and sole shareholder. The bankruptcy court concluded that the actions in question were “designed, intended and appropriately limited to obtain recovery from the corporation, not Slabicki or his assets,” and therefore, that there was no stay violation. For the reasons set forth below, we AFFIRM.
BACKGROUND
A. The Small Claims Proceeding
At all times relevant to this appeal, Sla-bicki was the president and sole shareholder of Boston Electronic Cash Registers, Inc. (“BECR”).4 BECR installed electronic cash register systems and video equipment primarily for Dunkin’ Donuts restaurants. Gleason, doing business as Mark Gleason Electric,5 performed electrical work for BECR at numerous locations around metropolitan Boston. In the *575course of dealings between the parties, Gleason sent invoices to BECR for work performed, and BECR paid Gleason with checks from its corporate account.
In April 2009, Gleason filed a small claims proceeding in the Framingham District Court to collect monies due to him for work performed for BECR. On the Statement of Small Claims form, Gleason identified the defendant as “Boston ECR, Attention: Peter Slabicki.” Gleason testified that he initially identified the defendant as “Boston ECR,” but was advised by court personnel to also list the name of a corporate official, and that he then’added “Peter Slabicki” to the form.
The state court ultimately entered a default judgment against Boston ECR in the amount of $2,086.10. The judgment ordered Boston ECR to make payment by September 11, 2009, and to appear at a payment review hearing on September 28, 2009. The judgment also provided that “[t]he defendant(s) is subject to arrest for failing to appear.” No one appeared for Boston ECR at the payment review hearing and the state court issued a capias against “Boston ECR, Attention: Peter Slabicki.” The capias provided:
The Court considers the above named judgment debtor to be in contempt for failure to appear in court as ordered. WE COMMAND YOU, therefore, to arrest the above named judgment debtor and forthwith to bring him or her before this Court to answer for his (or) her alleged contempt.
Gleason thereafter hired Carp, a Massachusetts licensed attorney, licensed private investigator, and an appointed constable for the City of Newton, Massachusetts, to execute the capias. On December 2, 2009, Carp went to Slabicki’s residence at approximately five o’clock in the morning to effectuate the capias. He handcuffed Sla-bicki and transported him to the Framing-ham District Court to await the hearing.6 At the hearing, the court took no further action on the capias and stayed further proceedings on the small claims case.
B. The Bankruptcy Proceedings
Slabicki filed a chapter 7 petition on November 21, 2009, eleven days before the arrest.7 The petition identified the debtor as Zbigniew P. Slabicki a/k/a Peter Sla-bicki; it did not include any related business or trade names. On his Schedule F, Slabicki listed Gleason as an unsecured creditor with a claim in the amount of $2,086.10. In addition, on Schedule H, Slabicki listed BECR as a codebtor with respect to Gleason’s claim.8
On December 11, 2009, Slabicki filed an adversary proceeding against Carp and Gleason seeking compensatory and punitive damages under § 362(k)(l) for violations of the automatic stay resulting from the arrest. After a two-day trial at which four witnesses testified, the bankruptcy court entered a judgment dismissing the *576complaint on the merits. In its Memorandum of Decision, the bankruptcy court concluded that the actions in question were an attempt to collect a debt owed by the corporation, not by Slabicki himself, and that the collection action “was designed, intended and appropriately limited to obtain recovery from the corporation, not Slabicki or his assets, and therefore, that no violation of the stay occurred.” In so holding, the bankruptcy court stated:
The actions occurred entirely in a small-claims action filed by Gleason against BECR. Slabicki himself was not a defendant in that action, and, as Gleason and Slabicki both understood, he was not personally indebted to Gleason. After judgment entered by default against the corporation, Slabicki as president of the corporation was ordered to appear at a payment review hearing but failed to do so, placing him in contempt of that order, and it was upon that contempt that a capias issued against him. The defendants’ intent was to enforce the debt against the corporation, not against Sla-bicki, his assets, or those of his bankruptcy estate. The enforcement mechanism they used, a capias against the president of the defendant corporation, was a legitimate means for enforcement of a judgment debt against the corporation. See Mass. Gen. Laws ch. 224[,] § 18 (In supplementary proceedings in civil proceedings, “[t]he court may issue warrants for arrest and other processes to secure the attendance of debtors or creditors to answer for any contempt under this chapter. The term debtor, as used in this section shall mean, if the debtor is a corporation or a trust with transferable shares, the contemnor as defined in section fourteen or section sixteen.”) and Mass. Gen. Laws ch. 224[,] § 16 (“Failure, without just excuse, to obey any lawful order of the court in supplementary proceedings shall constitute a contempt of court; and if the debtor is a corporation, the court shall treat the president, treasurer, cashier or other officer or agent in charge of the payment of debts as the contemnor.”). Slabicki does not cite a particular part of the stay that he contends the defendants violated. The stay does not protect a debtor from actions by creditors of corporations of which they are officers to collect their claims against the corporation, and I do not understand Slabicki to contend otherwise. Slabicki has not carried his burden of proving that the actions of Gleason and Carp were attempts to obtain satisfaction of Gleason’s claim from Slabicki or his assets. The Court is satisfied that the defendants’ actions were not violations of the automatic stay. Judgment will therefore enter for the defendants.
This appeal followed.
JURISDICTION
Before addressing the merits of an appeal, the Panel must determine that it has jurisdiction, even if the issue is not raised by the litigants. See Boylan v. George E. Bumpus, Jr. Constr. Co. (In re George E. Bumpus, Jr. Constr. Co.), 226 B.R. 724 (1st Cir. BAP 1998). The Panel has jurisdiction to hear appeals from: (1) final judgments, orders and decrees; or (2) with leave of court, from certain interlocutory orders. 28 U.S.C. § 158(a); Fleet Data Processing Corp. v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (1st Cir. BAP 1998). A decision is considered final if it “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment,” id. at 646 (citations omitted), whereas an interlocutory order is one which “only decides some intervening matter pertaining to the cause, and which requires further steps to be taken in order to enable the court to adju*577dicate the cause on the merits.” Id. (quoting In re American Colonial Broad. Corp., 758 F.2d 794, 801 (1st Cir.1985)). Generally, bankruptcy court orders finding stay violations and imposing or denying damages for such violations are final appeal-able orders. See Heghmann v. Indorf (In re Heghmann), 316 B.R. 395, 400 (1st Cir. BAP 2004) (citations omitted).
STANDARD OF REVIEW
Appellate courts apply the clearly erroneous standard to findings of fact and de novo review to conclusions of law. See Lessard v. Wilton-Lyndeborough Coop. School Dist., 592 F.3d 267, 269 (1st Cir.2010). Generally, a bankruptcy court’s determination as to whether the automatic stay provisions of § 362 have been violated involves a question of law that is subject to de novo review. See Varela v. Quinones Ocasio (In re Quinones Ocasio), 272 B.R. 815, 822 (1st Cir. BAP 2002) (citation omitted); see also In re Heghmann, 316 B.R. at 400 (citations omitted). A bankruptcy court’s assessment of damages for violations of the automatic stay is reviewed for an abuse of discretion. See In re Heghmann, 316 B.R. at 400 (citation omitted).
Here, the bankruptcy court determined that the actions in question did not violate the automatic stay because they were “designed, intended and appropriately limited to obtain recovery from the corporation, not Slabicki or his assets.” Slabicki takes issue with many of the factual findings upon which the bankruptcy court based its decision. We review such findings of fact for clear error. A finding is clearly erroneous when, although there is evidence to support it, the Panel is left with the definite impression that a mistake has been made. See Douglas v. Kosinski (In re Kosinski), 424 B.R. 599, 607 (1st Cir. BAP 2010) (citing Gray v. Travelers Ins. Co. (In re Neponset River Paper Co.), 231 B.R. 829, 830-31 (1st Cir. BAP 1999)). Where findings are based on the credibility of witnesses, even greater deference is accorded to the trial court’s findings. See id. (citing Fed. R. Bankr.P. 8013; Rodriguez-Morales v. Veterans Admin., 931 F.2d 980, 982 (1st Cir.1991)).
DISCUSSION
I. The Automatic Stay
When a bankruptcy petition is filed, an automatic stay prevents creditors from taking any collection actions against the debtor or the property of the debtor’s estate for pre-petition debts. 11 U.S.C. § 362(a). The automatic stay “is a critical component of the [Bankruptcy] Code’s dual mandate to provide a fresh start to the honest debtor and to ensure a uniform distribution of nonexempt assets to creditors of the same class.” In re Panek, 402 B.R. 71, 76 (Bankr.D.Mass.2009) (citations omitted). It “springs into being immediately upon the filing of a bankruptcy petition” and acts to prevent a scramble by creditors to “capture the lion’s share of the debtor’s assets.” Soares v. Brockton Credit Union (In re Soares), 107 F.3d 969, 975 (1st Cir.1997). The stay provides breathing space for the debtor while at the same time protecting creditors from one another. Id.
When the automatic stay is violated, the Bankruptcy Code explicitly provides a remedy. Section 362(k)(l) provides that “an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.” 11 U.S.C. § 362(k)(l). A debtor seeking damages under this section bears the burden of proving by a preponderance of the evidence the following three elements: (1) that a violation of *578the automatic stay occurred; (2) that the violation was willfully committed; and (3) that the debtor suffered damages as a result of the violation. In re Panek, 402 B.R. at 76 (citations omitted). Thus, without a willful violation, the damages provision of § 362 by its terms is irrelevant. Vázquez Laboy v. Doral Mortgage Corp. (In re Vázquez Laboy), 647 F.3d 367, 373-74 (1st Cir.2011).
II. Analysis
Slabicki does not cite a particular subsection of § 362(a) that he contends the appellees violated; he simply alleges that Gleason and Carp’s actions in executing the capias violated the automatic stay. The bankruptcy court concluded, however, that Slabicki had not carried his burden of proving that the actions of Gleason and Carp were attempts to obtain satisfaction of Gleason’s claim from Slabicki or his assets and, therefore, that their actions in executing the capias did not violate the automatic stay. The record supports this conclusion. As the bankruptcy court noted, the actions at issue occurred entirely in a small claims action filed by Gleason against BECR, and Slabicki himself was not a defendant in that action. After judgment entered by default against the corporation, Slabicki, as president of the corporation, failed to appear at a payment review hearing, placing him in contempt of court. It was upon that contempt that a capias issued against him. The bankruptcy court concluded that the appellees’ execution of a capias against the president of the defendant corporation was a legitimate means for enforcing a judgment debt against the corporation. Moreover, the bankruptcy court concluded that the automatic stay does not protect a debtor from actions by creditors of corporations of which they are officers to collect their claims against the corporation. Thus, the bankruptcy court was satisfied that the appellees’ actions were not violations of the automatic stay.
Slabicki raises a variety of arguments to support his claim that the bankruptcy court erred in concluding that there was no violation of the automatic stay. First, he argues that the bankruptcy court erred in finding there was no stay violation because the appellees’ intent was to enforce the debt against the corporation, and not against Slabicki or his assets. Second, in a related argument, he contends that the bankruptcy court erred in finding that the debt in question was owed solely by the corporation and not Slabicki individually. Third, he argues that the bankruptcy court erred in holding that Mass. Gen. Laws ch. 224, §§16 and 18 justified the use of a capias as an enforcement mechanism in a small claims proceeding. And fourth, he argues that the bankruptcy judge erred in finding that the automatic stay did not apply to him in his capacity as a corporate officer. As the first, second, and third arguments are related, we will address them first, followed by the fourth argument.
A. Did the bankruptcy court err in finding that there was no stay violation because the arrest was designed, intended, and appropriately limited to obtain recovery only from the corporation and not from Slabicki individually?
Slabicki first takes issue with the bankruptcy court’s finding that the appel-lees’ intent in executing the capias was to enforce the debt solely against the corporation, which he claims was the primary basis for the bankruptcy court’s conclusion that no stay violations occurred. Slabicki argues that the bankruptcy court’s finding was inconsistent with the evidence. According to Slabicki, Gleason knew the corporation was in severe financial trouble not *579only because his invoices had not been paid for some time, but also from conversations Gleason had with him and the former CFO. In addition, he claims that Gleason knew that the corporate headquarters had been closed down and that mail for BECR was no longer received there. Sla-bicki also points to the fact that Gleason filed a proof of claim in Slabicki’s personal case, wherein he listed himself as a creditor of Slabieki, asserted a claim for “services performed,” and attached copies of the judgment and a number of invoices made out to “Boston ECR.” All of this, Slabieki argues, makes it clear that Gleason did not intend to solely enforce the judgment against the corporation, and the bankruptcy court’s finding was clearly erroneous.
There is, however, other evidence in the record to support the bankruptcy court’s finding regarding Gleason’s intent. At trial, Gleason repeatedly testified that at all times, he believed that he was owed money solely by BECR, and not Slabieki personally. Moreover, although Gleason may have known that BECR was experiencing financial difficulties, there is no evidence that he knew or thought that BECR was “defunct.” As to the proof of claim, Gleason explained that when he received the proof of claim form in the mail, he did not understand its significance or why he had received it and so he called the chapter trustee, whose information was listed on the form. He testified that he decided to file the proof of claim as a protective measure based on the trustee’s advice. Moreover, because Gleason filed the proof of claim six weeks after the capias was executed, it is not irrefutable evidence of his earlier intent. Based on the foregoing evidence in the record, we cannot conclude that the bankruptcy court’s finding was clearly erroneous.
B. Did the bankruptcy court err in finding that the debt was owed solely by the corporation and not by Slabieki individually?
Slabieki argues that the bankruptcy court erred in finding that the debt was owed solely by the corporation and not by Slabieki individually. According to Sla-bicki, this finding was erroneous in light of his testimony that he was not sure whether he had personally guaranteed the debt and the fact that he listed the debt on his schedules. Slabieki explains that Gleason was threatening to sue him personally, and therefore, he was uncertain as to whether he could be held personally liable for the debt. He contends that because he did not know whether he had personally guaranteed certain corporate debts, including the debt to Gleason, he listed those corporate debts on his schedules to “clarify the issue and to protect himself.” This, he claims was evidence that the debt was owed by Slabieki and not just by the corporation. He also argues that because there was uncertainty about whether Slabieki was personally liable for the debt, the bankruptcy court should have “favor[ed] the stay until or unless further proceedings determined otherwise.”
The record supports the bankruptcy court’s finding that the debt was owed solely to BECR. First, the parties agree that Gleason performed work for the corporation, not for Slabieki. Gleason always received payment for work performed by corporate checks, drawn on the corporate account, and never by personal funds. Following BECR’s failure to pay for the work performed, Gleason filed a small claims action naming BECR as the defendant. Although Slabicki’s name appeared underneath BECR’s on the small claims form, Gleason testified that he was not suing Slabieki personally, but added Sla-bicki’s name only at the direction of a *580court official after the court was unable to serve the document at the corporation’s headquarters. Moreover, even if Slabicki had personally guaranteed any of BECR’s debt, no evidence of such a guaranty was offered as evidence. Thus, based on the record before the bankruptcy judge, it was not erroneous for him to conclude that the debt was owed by the corporation and not Slabicki personally.
C. Did the bankruptcy court err in finding that the automatic stay did not apply to Slabicki in his capacity as a corporate officer?
As noted above, § 362(a) establishes what actions are protected from the commencement, continuation, enforcement, creation, or collection procedures against the debtor or property of the estate. See 11 U.S.C. § 362(a). In order to trigger the automatic stay, there must be an act against either the debtor, his property, or property of his estate. The automatic stay generally does not bar acts against non-debtors. Slabicki argues, however, that the stay should be extended to protect the non-debtor corporation (and therefore prohibit actions taken against him in his capacity as a corporate officer) because there was “inseparable identity” between him and the corporation.
Although the automatic stay is “extremely broad in scope ... and should apply to almost any type of formal or informal action against the debtor or the property of the estate,” it does not extend “to separate legal entities such as corporate affiliates, partners in debtor partnerships or to codefendants in pending litigation.” Patton v. Bearden, 8 F.3d 343, 349 (6th Cir.1993) (quoting 2 Collier on Bankruptcy ¶ 362.04 (15th ed. 1993)); see also Donarumo v. Furlong (In re Furlong), 660 F.3d 81, 89-90 (1st Cir.2011) (stating that it is well settled that the automatic stay “does not extend to the assets of a corporation in which the debtor has an interest, even if the interest is 100% of the corporate stock”) (citing cases).
Nonetheless, some courts have held that the debtor’s stay may be extended to non-bankrupt parties in “unusual circumstances.” Patton v. Bearden, 8 F.3d at 349 (citations omitted). Such circumstances arise when: “(i) the non[-]debtor and debtor enjoy such an identity of interests that the suit of the non-debtor is essentially a suit against the debtor; or (ii) the third-party action will have an adverse impact on the debtor’s ability to accomplish reorganization.” In re R & G Fin. Corp., 441 B.R. 401, 409 (Bankr.D.P.R.2010) (quoting In re Philadelphia Newspapers, LLC, 407 B.R. 606, 616 (E.D.Pa.2009)).9 “The power of the bankruptcy courts to enjoin certain actions not subject to the automatic stay, such as an action against non[-]debtor parties, has been recognized, when such action is interfering improperly with the purposes of the bankruptcy law or the debtor’s reorganization efforts.” In re Bora Bora, Inc., 424 B.R. 17, 23 (Bankr.D.P.R.2010). Although typically called an extension of the automatic stay to non-debtor parties, these are in fact injunctions issued by a bankruptcy court under § 105(a), after determining that the situation requires it to protect the interests of the bankruptcy estate. Id. (citing Patton v. Bearden, 8 F.3d at 349). “A request for extension of the automatic stay provisions of [§ ] 362(a) to a non[-]debtor constitutes an action for in-junctive relief and should be initiated by an adversary proceeding.” In re R & G Fin. Corp., 441 B.R. at 407 (citing In re Bora Bora, 424 B.R. at 24-25). Thus, such *581an extension should have been presented to and decided by the bankruptcy court.
Here, Slabicki did not request the bankruptcy court to extend the automatic stay to BECR, the non-debtor corporation, either by motion or by commencing an adversary proceeding. Nonetheless, he argues that the automatic stay of his personal bankruptcy case should have extended to actions taken against him in his corporate capacity. In support, he claims that although he did not seek a formal extension of the automatic stay, it was “evident to all parties that the corporation was defunct.” Moreover, he claims that “there clearly exists identity between Sla-bicki and the corporation where it is not a stretch to view them as one and the same.” Accordingly, Slabicki argues that “there existed the type of identity where a judgment against a corporation in effect was the same as a judgment against Sla-bicki.”
Slabicki has not shown the kind of unusual circumstances that would justify extending the automatic stay in that way. Rather, the record shows that at all times relevant to this appeal, BECR was a valid corporation under Massachusetts law, making it a distinct and separate legal entity from Slabicki. For example, Sla-bicki testified that although BECR was experiencing financial difficulties, it was still in existence and was still making corporate filings with the Secretary of the State of the Commonwealth of Massachusetts as recently as one month prior to the trial. Although Slabicki claims that BECR was defunct, he did not offer any supporting evidence that would convince a court to ignore the formal distinctions between the corporation and its directors or shareholders.
Furthermore, the invoices presented at trial show that in the course of dealings between the parties, Gleason sent invoices to BECR for work performed, and BECR paid Gleason with checks from its corporate account. This refutes Slabicki’s claim that there was an identity of interest between BECR and Slabicki that was obvious to Gleason. Therefore, the bankruptcy court did not err in concluding that the automatic stay of Slabicki’s personal bankruptcy case did not extend to BECR, a non-debtor corporation, nor did it prohibit actions taken against Slabicki in his capacity as a corporate officer.
D. Did the bankruptcy court err in holding that Mass. Gen. Laws ch. 224, §§ 16 and 18 are applicable to small claims proceedings?
Finally, Slabicki argues that the bankruptcy court erred in holding that the procedure set forth in Mass. Gen. Laws ch. 224, §§16 and 18 was a legitimate means for enforcement of a judgment debt stemming from a small claims proceeding. According to Slabicki, the court’s holding “erroneously applie[d] a procedure reserved for arrests on executions and supplementary process matters to small claims cases.”
As a preliminary matter, it is worth noting that the bankruptcy court did not apply the procedure; rather, it was the state court that issued the capias. As such, Slabicki is barred from challenging the validity of the state court proceedings by the doctrine of res judicata and/or the Rooker-Feldman doctrine. See In re Heghmann, 316 B.R. at 402-403; In re Zambre, 306 B.R. 428 (Bankr.D.Mass. 2004) (“The doctrine divests any lower federal court of jurisdiction to act as a ‘super-appeals’ court for a state court determination; only the Supreme Court has such authority.”). Even if the state court erred in entering judgment against BECR or in issuing the capias, neither BECR nor Sla-bicki appealed the state court’s decision and Slabicki cannot challenge it in the *582bankruptcy court or before this Panel. Moreover, even if the bankruptcy court erred in its observation that Mass. Gen. Laws ch. 224, §§ 16 and 18 are applicable to small claims proceedings, the error was of no consequence.
CONCLUSION
For the reasons set forth above, we AFFIRM.
. Unless expressly stated otherwise, all references to "Bankruptcy Code” or to specific statutory sections shall be to the Bankruptcy Reform Act of 1978, as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA”), Pub. L. No. 109-8, 119 Stat. 23, 11 U.S.C. §§ 101, et seq.
. Carp and Gleason are sometimes referred to collectively as "the appellees.”
. A capias is a writ requiring an officer to take a defendant into custody. Black’s Law Dictionary 199 (7th ed. 1999).
. The corporation is commonly referred to as both "BECR” and "Boston ECR.”
. Although Gleason conducted business under the name “Mark Gleason Electric,” neither the parties nor the bankruptcy court distinguish between the individual and the trade name. As there is no evidence in the record that they are separate legal entities, we will also refer to them both as “Gleason.”
. Although there was much disputed testimony regarding the events that took place at Slabicki's house during the arrest and upon their arrival at the courthouse, these events did not factor into the bankruptcy court's decision and, therefore, are not relevant here.
. Testimony was presented at trial regarding the processing of the Form B9A notice by the Bankruptcy Noticing Center and when the various parties received the notice (i.e. before or after the date of the arrest). As the bankruptcy court ultimately determined that no stay violation had occurred, it did not consider the issue of when the appellees received notice of Slabicki’s bankruptcy filing.
.In January 2010, Gleason filed a proof of claim in the amount of $4,564.10 for "services performed." At trial, Gleason testified that he received the form in the mail and filled it out after the chapter 7 trustee advised him to do so.
. See also AM. Robins Company, Inc. v. Picci-nin, 788 F.2d 994, 999 (4th Cir.1986). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494633/ | HAINES, Bankruptcy Judge.
Chapter 7 debtor John R. Bradley appeals the bankruptcy court’s order granting summary judgment for the plaintiff, *584B.B.,1 on her claim that the judgment debt owed her is excepted from discharge pursuant to § 523(a)(6) of the Bankruptcy Code.2 Summary judgment was premised on the issue preclusive effect of B.B.’s pre-bankruptcy state court judgment. But because the record does not establish that all elements of B.B.’s § 523(a)(6) claim were finally determined in the state court litigation, we will VACATE the order granting summary judgment and REMAND the matter for further proceedings.
BACKGROUND
In 2008, B.B. obtained a judgment against Bradley in California on a number of theories asserting that he had caused her physical and emotional harm.3 After a bench trial, the state court awarded B.B. a judgment providing in pertinent part:
... Witnesses were sworn and testified. Oral and documentary evidence was introduced on behalf of the respective parties and the cause was argued and submitted for decision. After hearing the evidence and arguments, the Court finds in favor of:
Plaintiff [B.B.] and against Defendant John Bradley on all causes of action including: (1) Negligence; (2) Negligent Infliction of Emotional Distress; (3) Intentional Infliction of Emotional Distress; and (4) Fraud; and further finds that Defendant John Bradley acted with fraud and malice; and that Plaintiff [B.B.] suffered and will suffer past and future loss of earnings in the amount of $5,000,000.00 and general damages in the amount of $7,500,000.00.
NOW, THEREFOR, IT IS ORDERED, ADJUDGED and DECREED that Plaintiff [B.B.] have and recover from Defendant John Bradley, the sum of $12,500,000.00, with interest thereon at the rate of ten percent per annum from the date of judgment until paid together with costs and disbursements....
In 2010, Bradley filed a chapter 7 petition in Massachusetts. B.B. thereafter filed a timely complaint seeking a determination that the judgment debt Bradley owed her was excepted from discharge under § 523(a)(6) (willful and malicious injury to person or property). B.B. moved for summary judgment, supporting the motion with a copy of the California judgment, a statement of material facts, and a memorandum of law. Citing the state court’s determination, she contended that, “[biased upon intentional infliction of emotional distress, [Bradley was] collaterally [estopped] from re-litigating the issue of fraud and malice and the issue of dis-chargeability pursuant to ... [§ ] 523(a)(6).” Bradley opposed the motion, contending that the judgment’s provisions were too imprecise to establish that the state court had conclusively determined all the elements required to trigger § 523(a)(6)’s discharge exception. In addition, he pointed out that the state court had not apportioned damages among the sundry claims mentioned in its award.
*585After argument, the bankruptcy court granted B.B.’s motion, concluding:
That’s not a problem for me because it’s always been my position that I can’t give money judgments, anyway. So I don’t care where the money went.
Frankly, I think the language of the California judgment, which I can’t go behind under Rooker-Feldman, is sufficient to satisfy [§ ] 523(a)(6). I don’t think you’ve raised the [sic] substantial issue of a genuine dispute as to a material fact.
This appeal ensued.
JURISDICTION
We are duty-bound to determine jurisdiction before proceeding to the merits even if the litigants have not raised the issue. See Boylan v. George E. Bumpus, Jr. Constr. Co. (In re George E. Bumpus, Jr. Constr. Co.), 226 B.R. 724, 726 (1st Cir. BAP 1998). We are empowered to hear “appeals from ‘final judgments, orders and decrees,’ [28 U.S.C. § ] 158(a)(1), or ‘with leave of the court, from interlocutory orders and decrees.’ [28 U.S.C. § ] 158(a)(3).” Fleet Data Processing Corp v. Branch (In re Bank of New England Corp.), 218 B.R. 643, 645 (1st Cir. BAP 1998). An order granting summary judgment, where no counts remain, is a final order. Harrington v. Donahue (In re Donahue), No. 11-026, 2011 WL 6737074 (1st Cir. BAP Dec. 20, 2011). Thus, we have jurisdiction.
STANDARD OF REVIEW
A bankruptcy court’s findings of fact are reviewed for clear error and its conclusions of law are reviewed de novo. See Lessard v. Wilton-Lyndeborough Coop. School Dist., 592 F.3d 267, 269 (1st Cir.2010). Orders granting summary judgment are reviewed de novo. DCC Operating, Inc. v. Rivera Siaca (In re Olympic Mills Corp.), 477 F.3d 1, 14 (1st Cir. 2007); Backlund v. Stanley-Snow (In re Stanley-Snow), 405 B.R. 11, 17 (1st Cir. BAP 2009); see also Blacksmith Invs., Inc. v. Woodford (In re Woodford), 418 B.R. 644, 650 (1st Cir. BAP 2009) (applying de novo review to application of collateral es-toppel).
DISCUSSION
I. Summary Judgment Standard
Under Fed.R.Civ.P. 56, made applicable to bankruptcy proceedings pursuant to Fed. R. Bankr.P. 7056, “[i]t is apodictic that summary judgment should be bestowed only when no genuine issue of material fact exists and the movant has successfully demonstrated an entitlement to judgment as a matter of law.” Desmond v. Varrasso (In re Varrasso), 37 F.3d 760, 763 (1st Cir.1994). “As to issues on which the nonmovant has the burden of proof, the movant need do no more than aver ‘an absence of evidence to support the non-moving party’s case.’ ” Id. at 763 n. 1 (citation omitted). “The burden of production then shifts to the nonmovant, who, to avoid summary judgment, must establish the existence of at least one question of fact that is both genuine and material.” Id. (internal quotations and citations omitted). The “mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986) (emphasis in the original).
*586II. Collateral Estoppel Principles4
“[Cjollateral estoppel principles ... apply in discharge exception proceedings pursuant to § 523(a).” Grogan v. Garner, 498 U.S. 279, 284 n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). “As a result, where there has been a prior state court judgment, the bankruptcy court’s ultimate dischargeability determination will be governed by any factual issues that were actually and necessarily decided by the state court.” McCurdie v. Strozewski (In re Strozewski), 458 B.R. 397, 403 (Bankr. W.D.Mich.2011) (citation omitted).
“Under the full faith and credit statute, 28 U.S.C. § 1738, the preclusive effect of a state court judgment in a subsequent nondischargeability proceeding under federal bankruptcy law is governed by the collateral estoppel law of the state from which the judgment is taken.” Stowe v. Bologna (In re Bologna), 206 B.R. 628, 630-31 (Bankr.D.Mass.1997); see also In re Woodford, 418 B.R. at 650. We therefore turn to the California law of judgments.
California courts apply the collateral estoppel doctrine if the following five threshold requirements are satisfied:
First, the issue sought to be precluded from relitigation must be identical to that decided in a former proceeding. Second, this issue must have been actually litigated in the former proceeding. Third, it must have been necessarily decided in the former proceeding. Fourth, the decision in the former proceeding must be final and on the merits. Finally, the party against whom preclusion is sought must be the same as, or in privity with, the party to the former proceeding.
Lucido v. Superior Court, 51 Cal.3d 335, 272 Cal.Rptr. 767, 795 P.2d 1223, 1225 (1990).
“The party asserting the doctrine has the burden of proving that all of the threshold requirements have been met.... To meet this burden, the moving party must have pinpointed the exact issues litigated in the prior action and introduced a record revealing the controlling facts.” Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 382 (9th Cir. BAP 2011) (explaining further that “[rjeasonable doubts about what was decided in the prior action should be resolved against the party seeking to assert preclusion.”).5
*587III. Elements for Nondischargeability Under § 523(a)(6)
Section 523(a)(6) provides that a debt for “willful and malicious injury by the debtor to another entity or to the property of another entity” is not dis-chargeable. 11 U.S.C. § 523(a)(6). The Supreme Court explained that the word “willful,” as used in § 523(a)(6), “modifies the word ‘injury,’ ” indicating that nondis-chargeability under that section therefore requires “a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.” Kawaauhau v. Geiger, 523 U.S. 57, 61-62, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). It further explained that “[ijntentional torts generally require that the actor intend ‘the consequences of an act,’ not simply ‘the act itself ” Id. (citing Restatement (Second) of Torts § 8A) (emphasis in original). “In light of the Supreme Court’s citation to the Restatement (Second) of Torts, courts have concluded that the Supreme Court meant the willfulness element to include actions intentionally done and known by the debt- or to be ‘substantially certain to cause injury.’ ” Hermosilla v. Hermosilla (In re Hermosilla), 430 B.R. 13, 22 (Bankr.D.Mass.2010) (footnotes omitted).
Prior to Geiger, in Printy v. Dean Witter Reynolds, Inc., 110 F.3d 853, 859 (1st Cir.1997), the First Circuit addressed the element of “malice” required under § 523(a)(6) and explained that it requires the creditor to show that the injury was caused “without just cause or excuse.” Courts in this circuit continue to apply the Printy standard post-Geiper. See In re Hermosilla, 430 B.R. at 22; see also Jones v. Svreck (In re Jones), 300 B.R. 133, 140 (1st Cir. BAP 2003); Puzzo v. Martin (In re Martin), 419 B.R. 524, 531 (Bankr.D.N.H.2009); Vuitton Malletier v. Ortiz (In re Ortiz), No. 08-0123, 2009 WL 2912497, at *4 (Bankr.D.P.R. June 4, 2009); McAlister v. Slosberg (In re Slosberg), 225 B.R. 9, 19-22 (Bankr.D.Me.1998).
Accordingly, in order for a debt to be excepted under § 523(a)(6), “the creditor must show that: (1) the creditor suffered an injury; (2) the injury was the result [of] the debtor’s actions; (3) the debtor intended to cause the injury or that there was a substantial certainty that the injury would occur; and (4) the debtor had no just cause or excuse for the action resulting in injury.” In re Hermosilla, 430 B.R. at 22.
IV. Elements of Intentional Infliction of Emotional Distress Under California Law
To prevail at summary judgment on a § 523(a)(6) claim by invoking issue preclusion, a plaintiff must demonstrate that in entering judgment for intentional infliction of emotional distress, the state court necessarily finally determined each of the elements to establish nondischarge-ability. Under California law, the elements of the tort are:
(1) extreme and outrageous conduct by the defendant with the intention of causing, or reckless disregard of the probability of causing, emotional distress; (2) the plaintiffs suffering severe or extreme emotional distress; and (3) actual and proximate causation of the emotional distress by defendant’s outrageous conduct.
*588Sabow v. United States, 93 F.3d 1445, 1454 (9th Cir.1996) (citation omitted) (emphasis added).6
Y. Is There Identity of Elements?
In order for collateral estoppel to compel entry of a judgment in her favor under § 523(a)(6), it was incumbent on B.B. to introduce a record demonstrating that the California court finally and necessarily determined that Bradley either intended to cause her injury or that he was substantially certain his intentional acts would cause injury. See In re Honkanen, 446 B.R. at 382. Unfortunately, the summary judgment record contains nothing of substance beyond the California court’s judgment. Whether the state court found that Bradley intended to cause B.B.’s injury or that he recklessly disregarded the probability of causing such injury is not apparent. Because B.B. has not “pinpointed” the factual issues actually litigated and necessarily determined in the California case, “reasonable doubt” remains about what was actually decided there.
More precisely, if the California judgment were based unambiguously upon Bradley’s subjective intent to injure B.B., collateral estoppel would apply to establish § 523(a)(6)’s element of willfulness.7 As the judgment may well have been premised on the court’s finding that Bradley acted in reckless disregard of the probability his actions would cause injury, the issue becomes whether such a finding would suffice to establish willfulness for § 523(a)(6) dischargeability purposes.
The majority of courts that have considered the issue have concluded that a state court judgment that could have been based on reckless disregard is not the equivalent of the substantial certainty required by § 523(a)(6). See Fielding v. Lavender, No. 02 C 0991, 2003 WL 742190 (N.D.Ill. Mar. 3, 2003) (affirming judgment for debtor as unclear whether state judgment based on intent or reckless disregard); Morra v. Goldman (In re Goldman), No. 10-3541, 2011 WL 344602 (Bankr.S.D.Fla. Jan. 31, 2011); Hall v. Desper (In re Des-per), No. 09-5051, 2010 WL 653864 (Bankr.S.D.Miss. Feb. 9, 2010); Doughty v. Hill (In re Hill), 265 B.R. 270, 276 (Bankr.M.D.Fla.2001); see also Mermel-stein v. Elder (In re Elder), 262 B.R. 799, 809 (C.D.Cal.2001) (recognizing when judgment based on either intent or reckless disregard, judgment would not satisfy Geiger), aff'd, 40 Fed.Appx. 576 (9th Cir. 2002); but see Gonzalez v. Moffitt (In re Moffitt), 252 B.R. 916 (6th Cir. BAP 2000) (applying collateral estoppel given extensive language in state court judgment and extenuating procedural facts); and In re Strozewski, 458 B.R. at 408 (applying collateral estoppel after applying an objective instead of subjective standard). We agree.
As the court in Hill, supra, explained:
Reckless misconduct differs from intentional wrongdoing in a very important particular. While an act to be reckless must be intended by the actor, the actor does not intend to cause the harm which results from it. It is enough that he realizes or, from facts which he knows, should realize that there is a strong probability that harm may result, even though he hopes or even expects that his conduct will prove harmless. However, a strong probability is a different thing from the substantial certainty without *589which he cannot be said to intend the harm in which his act results.
In re Hill, 265 B.R. at 276 (emphasis supplied) (citing Restatement (Second) of Torts § 500 cmt. f (1965)).8
The court concluded:
It is clear that an act in reckless disregard of the rights of others does not constitute willful and malicious conduct for the purposes of § 523(a)(6). American Cast Iron Pipe v. Wrenn (In re Wrenn), 791 F.2d 1542, 1544 (11th Cir. 1986); see also [] Geiger, [supra] (holding that § 523(a)(6) requires a specific intent to injure and that recklessly inflicted injuries are insufficient). Because the jury’s finding of intentional infliction of emotional distress could have been based upon a finding of reckless disregard, the elements of intentional infliction of emotional distress under California law do not closely mirror the requirements for excepting a debt from discharge under § 523(a)(6). Accordingly, collateral estoppel does not apply to the jury’s finding of intentional infliction of emotional distress.
Id.9
To reiterate, the basis for the state court’s determination that damages would lie for intentional infliction of emotional distress is opaque. We do not have the state court complaint, transcript, or detailed findings. If the judgment were based upon reckless disregard, a “strong probability” is not identical to “substantial certainty.”10 Because the record did not demonstrate the requisite “identity of issues,” summary judgment was not appropriate.11
CONCLUSION
Based upon the foregoing, we VACATE the order granting summary judgment and *590REMAND the matter for proceedings consistent with this opinion.
. B.B. is Bradley's ex-wife. The bankruptcy court granted B.B.’s motion to impound certain documents in order to protect her identity. Those documents remain sealed. See 1st Cir. BAP L.R. 8018-1 and 1st Cir. Loe. R. 11.0.(c)(l).
. Unless otherwise indicated, the terms “Bankruptcy Code,” "section” and "§ " refer to Title 11 of the United States Code, 11 U.S.C. §§ 101, et seq., as amended by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109-8, 119 Stat. 37.
.Because B.B. did not supply the Panel or the bankruptcy court with copies of her state court complaint or the transcript from the bench trial, it is impossible to confirm her precise allegations.
. Traditionally, res judicata was the umbrella term for both claim preclusion and collateral estoppel. Grella v. Salem Five Cent Sav. Bank, 42 F.3d 26, 30 (1st Cir.1994). In modern nomenclature, collateral estoppel is now referred to as issue preclusion and res judica-ta as claim preclusion. Eastern Pilots Merger Comm. v. Continental Airlines, Inc. (In re Continental Airlines, Inc.), 279 F.3d 226, 232 (3d Cir.2002). The two terms replace "a more confusing lexicon” but may continue to be "collectively referred to as 'res judicata.' ” Taylor v. Sturgell, 553 U.S. 880, 892, 128 S.Ct. 2161, 171 L.Ed.2d 155 (2008). "Claim preclusion generally refers to the effect of a prior judgment in foreclosing successive litigation. ... Issue preclusion generally refers to the effect of a prior judgment in foreclosing successive litigation of an issue ... actually litigated and resolved in a valid court determination essential to the prior judgment....” New Hampshire v. Maine, 532 U.S. 742, 748-49, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001). This case entails an assertion of issue preclusion only. B.B. does not contend that the California court determined her claim of non-dischargeability, as that claim was not, indeed could not have been, brought before it. Cf. Wendt v. Hanson (In re Hanson), No. 11-90361, 2011 WL 6148429, *2 (Bankr.S.D.Cal. Nov. 21, 2011) (declining to apply claim preclusion as prior state court cause of action was not identical to subsequent claim for non-dischargeability) .
. The party urging preclusion must also establish "that the public policies underlying the collateral estoppel doctrine would be fur*587thered by application of preclusion to the particular issue before the court.” Baldwin v. Kilpatrick (In re Baldwin), 249 F.3d 912, 919 (9th Cir.2001) (citation omitted). Those policies include identifying "preservation of the integrity of the judicial system, promotion of judicial economy, and protection of litigants from harassment by vexatious litigation.” Id. (citation and quotations omitted). For today, we need not consider this prerequisite.
. Malicious or evil purpose is not essential to liability. Spinks v. Equity Residential Briarwood Apts., 171 Cal.App.4th 1004, 90 Cal.Rptr.3d 453, 486 (2009).
. See, e.g., Maloney v. Converse, 98 F.3d 1333 (1st Cir.1996) (affirming application of collateral estoppel to state court judgment for intentional infliction of emotional distress given explicit state court finding of intent).
. Restatement (Second) of Torts § 500 cmt. f (1965), provides, in pertinent part:
[t]he actor’s conduct is in reckless disregard of the safety of another if he does an act or intentionally fails to do an act which it is his duty to the other to do, knowing or having reason to know of facts which would lead a reasonable man to realize, not only that his conduct creates an unreasonable risk of physical harm to another, but also that such risk is substantially greater than that which is necessary to make his conduct negligent.
. When confronted with a comparable statute, the Ninth Circuit has ruled similarly. Barboza v. New Form, Inc. (In re Barboza), 545 F.3d 702 (9th Cir.2008) (reversing summary judgment because unclear if “willful” element of copyright infringement award was based upon intent or recklessness).
. Although the state court stated that Bradley "acted with fraud and malice,” that determination provides no help. The record does not reveal to what cause of action the judge attributed those findings or what standards he applied in making them. It may be that B.B. alleged malice and fraud in order to obtain punitive damages. Although we do not know if she made such a request for other counts, we do know that when the court made its "fraud and malice” findings, it did not ascribe them to any count and it did not award punitive damages. Cf., e.g., Redd v. Lee (In re Lee), No. 09-5033, 2011 WL 841247, at *4 (Bankr. N.D.Cal. March 7, 2011) (ruling because jury imposed punitive damages, finding supported conclusion of “without just cause” because punitive damages statute requires "oppression, fraud, or malice” finding).
.Having so ruled, we need not reach issues concerning whether a judgment for intentional infliction of emotional distress under California law requires the same "without just cause or excuse” element as that required to prove malicious injury under § 523(a)(6), whether such issues were "actually litigated" and "necessarily decided,” whether the judgment is too imprecise as to apportionment of damages, or whether the bankruptcy court properly invoked the Rooker-Feldman doctrine. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494634/ | OPINION CONCERNING MOTIONS TO DISMISS AMENDED COMPLAINT
ARTHUR J. GONZALEZ, Chief Judge.
Before the Court are various motions to dismiss certain counts of an amended com*605plaint filed in this adversary proceeding against directors of a Delaware corporation. The relevant counts relate to the transfer of certain corporate assets, and seek to hold the directors liable for monetary damages for alleged breaches of fiduciary duties and corporate waste in authorizing such transfers.
The Court concludes that the amended complaint does not adequately allege that the directors breached their duty of loyalty. The Court further concludes that because there was an exculpation provision in the corporation’s certificate of incorporation, as permitted by the law of the state of Delaware, and because the amended complaint does not adequately allege a lack of good faith on the part of the directors, the directors could not be found personally liable for monetary damages for any alleged breaches of the fiduciary duty of care or corporate waste. Therefore, the counts of the complaint at issue should be dismissed.
Motion to Dismiss Standard
Federal Rule of Civil Procedure (“Rule”) 12(b)(6) is incorporated into bankruptcy procedure by Federal Rule of Bankruptcy Procedure (“Bankruptcy Rule”) 7012(b). In considering a Rule 12(b)(6) motion to dismiss for failure to state a claim for relief, the court “must accept as true all of the factual allegations contained in the complaint.” Erickson v. Pardus, 551 U.S. 89, 94, 127 S.Ct. 2197, 2200, 167 L.Ed.2d 1081 (2007). In addition, the court draws all reasonable inferences from the factual allegations in favor of the plaintiff. Walker v. City of New York, 974 F.2d 293, 298 (2d Cir.1992); Myvett v. Williams, 638 F.Supp.2d 59, 64 (D.D.C.2009).
In considering such a motion, although a court accepts all the factual allegations in the complaint as true, the court is “not bound to accept as true a legal conclusion couched as a factual allegation.” Papasan v. Allain, 478 U.S. 265, 286, 106 S.Ct. 2932, 2944, 92 L.Ed.2d 209 (1986). Bare assertions, “devoid of ‘further factual enhancements,]” are not sufficient to withstand a motion to dismiss. Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (citation omitted).
The need to provide the “grounds” for entitlement to relief requires “more than labels and conclusions” and more than “a formulaic recitation of the elements of a cause of action.” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 1964-65, 167 L.Ed.2d 929 (2007). There must be a “reasonably founded hope” that the discovery process will uncover relevant evidence. Id. at 559, 563 n. 8, 127 S.Ct. 1955, 1969 n. 8.
To adequately support the claim, there must be sufficient facts identified to suggest that the legally vulnerable conduct is plausible. Id. at 556, 127 S.Ct. at 1965. A complaint meets the plausibility standard when factual content is pled “that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Iqbal, 556 U.S. at 678, 129 S.Ct. at 1949. Once the plausibility-standard threshold is met, the complaint survives even if the identified facts seem improbable or recovery is thought to be remote or unlikely. Twombly, 550 U.S. at 556, 127 S.Ct. at 1965. Although Twombly was decided in the context of an antitrust litigation, the plausibility standard to test the sufficiency of a complaint applies in all civil actions. Iqbal, 556 U.S. at 684, 129 S.Ct. at 1953.
Rule 8(a)(2) “requires a ‘showing,’ rather than a blanket assertion, of entitlement to relief.” Twombly, 550 U.S. at 555 n. 3, 127 S.Ct. at 1965 n. 3. However, once the claim is adequately supported, specific facts beyond those needed to state the claim are not necessary. Id. at 570, 127 *606S.Ct. at 1973-74. In determining whether a plausible claim for relief is contained in a complaint, a reviewing court “draw[s] on its judicial experience and common sense.” Iqbal, 129 S.Ct. at 1950. Many considerations factor into the plausibility determination including, “the full factual picture presented by the complaint, the particular cause of action and its elements, and the existence of alternative explanations so obvious that they render plaintiffs inferences unreasonable.” In re Old CarCo LLC, No. 11 Civ. 5039 DLC, 2011 WL 5865193 (S.D.N.Y. Nov. 22, 2011) (citing L-7 Designs, Inc. v. Old Navy LLC, 647 F.3d 419, 430 (2d Cir.2011)).
In reviewing a Rule 12(b)(6) motion, a court may consider the allegations in the complaint, exhibits attached to the complaint or incorporated therein by reference, and matters of which judicial notice may be taken. Brass v. American Film Techs., Inc., 987 F.2d 142, 150 (2d Cir.1993). In addition, a court may consider a document of which plaintiff has notice and relied upon in bringing the claim or that is integral to the claim. Cortec Indus. v. Sum Holding, L.P., 949 F.2d 42, 48 (2d Cir.1991). However, mere notice or possession of such document is not sufficient. Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir.2002). Rather, a necessary prerequisite for a court’s consideration of a document is that the plaintiff relied “on the terms and effect of a document in drafting the complaint.” Id. As such, the document relied upon in framing the complaint is considered to be merged into the pleading. Id. at 153 n. 3 (citation omitted).
In contrast, when assessing the sufficiency of a complaint, a court does not consider extraneous material because considering such material would run counter to the liberal pleading standard, which requires only a short and plain statement of the claim showing entitlement to relief. Id. at 154. Nevertheless, in considering a Rule 12(b)(6) motion, a court may consider facts as to which the court may properly take judicial notice under Federal Rule of Evidence 201. In re Merrill Lynch & Co., Inc., 273 F.Supp.2d 351, 357, 357 n. 13 (S.D.N.Y.2003) (citing Chambers, 282 F.3d at 153).
To survive a motion to dismiss, a plaintiff only has to allege sufficient facts, not prove them. Koppel v. 4987 Corp., 167 F.3d 125, 133 (2d Cir.1999). A court’s role in ruling on a motion to dismiss is to evaluate the legal feasibility of the complaint, not to weigh the evidence which may be offered to support it. Cooper, 140 F.3d at 440. The determination is not whether a claimant will ultimately prevail, but whether the claimant should be allowed to offer evidence to support the claim. Swierkiewicz, 534 U.S. at 511, 122 S.Ct. at 997.
Thus, for the purposes of the motion to dismiss, the Court accepts as true all of the material factual allegations in the Complaint filed by the plaintiff. As such, most of the following facts are taken from the Complaint and accepted as true solely for the purposes of the motion to dismiss.
FACTS
Marakon Associates, Inc. (“Marakon”), founded in 1978, was a closely held stock corporation, which operated as a corporate strategy consultancy firm. Marakon promoted the view that companies be managed in a way that built long-term value, and its roster of clients included major corporations. Marakon had approximately 30 shareholders who referred to themselves as “partners.” In addition, Marakon had approximately 300 employees operating out of offices in New York, London, Zurich, and Singapore. A board of directors (the “Marakon Directors”), *607who were its largest shareholders, managed Marakon. The three most senior and influential partners were James McTaggart (“McTaggart”), Brian Burwell (“Burwell”), and Ronald Langford (“Lang-ford”). An additional director of Marakon was Kenneth Favaro (“Favaro,” together with McTaggart, Burwell, and Langford, are the referenced “Marakon Directors”).
Integrated Finance Limited, LLC (“IFL”) is a corporation organized under the laws of the State of Delaware, with its principal place of business located in New York, New York. IFL operated as an investment banking firm with approximately 70 employees in offices in New York, London and Tokyo. IFL was formed by three individuals, Roberto Mendoza (“Mendoza”) and Peter Hancock, who were both formerly banking officers, and Robert Merton (“Merton”), a business school professor and noted economist. In addition Eugene Shanks, Jr. (“Shanks”) was a member or principal of IFL.
Aside from its investment banking services, IFL had other business lines, including a pension management software program known as “Smartnest,” which it sought to market to private and public sectors, and the IFL Victoria Fund LP (the “Victoria Fund”), a hedge fund seeded with Mendoza’s own money.
In February 2007, Marakon entered into a business combination with IFL, in which IFL was merged into Marakon, and the combined entity was renamed Trinsum Group, Inc. (“Trinsum”). Trinsum is a Delaware corporation and includes an exculpation provision in its amended certificate of incorporation (the “Trinsum Cert.”), which protects its directors from personal liability for monetary damages for breaches of fiduciary duty to the fullest extent permitted by Delaware Law. (“Trin-sum Cert. ¶ 7”). In the merger transaction, Marakon acquired the assets of IFL and diluted its stock, thereby giving Mara-kon control of 51 % of the combined entity and IFL 49%. Thus, the Marakon Directors retained control of the merged entity and all of the Marakon Directors were included as directors of Trinsum. McTag-gart was named CEO of Trinsum. IFL members, including Mendoza, Merton and Shanks, were also made directors of Trin-sum. Additional Trinsum directors include Jose Luis Daza (“Daza”), David Deming (“Deming”), Neal Kissel (“Kis-sel”), Mason Kissell (“Kissell”). (McTag-gart, Burwell, Favaro, Langford, Daza, Deming, Kissel, Kissell, Mendoza, Merton, and Shanks are collectively referred to as the “Trinsum Directors”).1
In March 2007, Trinsum transferred its ownership in the Victoria Fund to QFR Capital Management, L.P. and QFR Capital Group, LLC (together “QFR”), entities created for the purpose of holding the fund, for 10% of the Fund’s revenue stream. Trinsum subsequently sold the 10% revenue stream for $5.9 million. The entire board of directors of Trinsum, including the Marakon Directors, appointed Daza, who owns all or part of QFR, as the person to negotiate the transfer of these assets to QFR. There was unanimous approval by the entire Trinsum board of Daza’s actions. The Complaint includes an *608allegation that, aside from Daza’s work, no other members of the Trinsum board of directors performed due diligence or sought outside professional assistance concerning the value of the fund before it was sold to QFR.
Also after the merger, and around the same time as the Victoria Fund transfer, the Trinsum Directors authorized and directed the payment to certain IFL principals and employees of approximately $5 million in incentive payments without an obligation to make such payments and against the protests of the Chief Financial Officer (“CFO”) of Trinsum. The Distributing Agent alleges that the incentive payments were made with Marakon funds.
The merger did not prove successful, according to the Distributing Agent, because Trinsum, acquired certain additional debt obligations in the merger and IFL failed to generate the revenue expected. The Distributing Agent also alleges that Marakon and IFL were insolvent prior to the merger and that the resulting entity, Trinsum, was also insolvent,
On July 3, 2008, an involuntary proceeding was commenced against Trinsum under Chapter 7 of Title 11 of the United States Code (the “Bankruptcy Code”). On January 28, 2009 (the “Conversion Date”), Trinsum converted the Trinsum bankruptcy case to one under Chapter 11. Since the Conversion Date, Trinsum has continued to operate and manage its business as debtor-in-possession pursuant to sections 1107 and 1108 of the Bankruptcy Code.
On February 24, 2009, IFL filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. On March 6, 2009, the Court entered an order directing Joint Administration of the Trin-sum and IFL bankruptcy cases. On November 10, 2010, the Court confirmed the Debtors’ First Modified Joint Plan of Liquidation (the “Plan”). On that same date, Marianne T. O’Toole, Esq. was appointed as Distributing Agent (the “Distributing Agent”) under the Plan. Pursuant to sections 1.16 and 10.02 of the Plan, the Distributing Agent is authorized to pursue any “claims, suits, actions and causes of action” belonging to the Debtors or their estates.
In the counts of the amended complaint relevant to these motions to dismiss, it is alleged that by authorizing the transfers of the Victoria Fund and the incentive payments for less than reasonably equivalent value, the Trinsum Directors breached the fiduciary duties they owed to the corporation and that such transfers constituted corporate waste.2 As such, the Distributing Agent seeks to hold the Trinsum Directors personally liable for monetary damages for such alleged breaches.
Procedural Background
The Distributing Agent initially filed a complaint (the “Initial Complaint”) on January 27, 2011. Thereafter, the Marakon Directors and Trinsum Directors filed motions to dismiss the Initial Complaint. On June 21, 2011, immediately prior to the scheduled hearing date on the various motions to dismiss, the Distributing Agent filed a motion seeking to amend the Initial Complaint. On August 10, 2011, the Court granted the motion to amend the Initial Complaint, and, the Distributing Agent filed an amended complaint, dated August 16, 2011 (hereinafter, the “Complaint”), *609which is the one currently before the Court.
The Court afforded the various defendants an opportunity to supplement their briefing on the motions to dismiss to address any additional issues raised by the amendments, with a scheduling order for the briefing entered on August 18, 2011, and a revised scheduling order entered on August 28, 2011. Thereafter, the parties filed the supplemental briefing.
In addition, after the Court issued an Opinion in another adversary proceeding in the Trinsum bankruptcy cases, which concerned certain similar factual issues, the Distributing Agent filed a motion seeking leave to file a Second Amended Complaint in the instant adversary proceeding. The Trinsum Directors filed opposition to the request for leave to file the Second Amended Complaint. The hearing on this new motion to amend is scheduled for January 25, 2012.
DISCUSSION
Pursuant to the General Corporation Law of the State of Delaware, the directors of a corporation are charged with managing the business and affairs of a corporation. In re Citigroup Inc. Shareholder Derivative Litig., 964 A.2d 106, 120 (Del.Ch.2009) (citing 8 Del. C. § 141(a)). In managing a corporation, those directors have fiduciary duties to the corporation and its shareholders. Aronson v. Lewis, 473 A.2d 805, 811 (Del.1984), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del.2000). The duties are of due care and loyalty. See Stone v. Ritter, 911 A.2d 362 (Del.2006). Although, the concept of “good faith” traditionally had been viewed as an independent, third-fiduciary duty of corporate directors, more recently good faith considerations have been subsumed within the analysis of the duty of loyalty. Stone, 911 A.2d at 370.
Duty of Care
“The fiduciary duty of due care requires that directors of a Delaware corporation use that amount of care which ordinarily careful and prudent men would use in similar circumstances, and consider all material information reasonably available in making business decisions.” In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 749 (Del.Ch.2005) (“Disney I”) (citations and internal quotations omitted). However, directors’ deficiencies in meeting these requirements are “actionable only if the directors’ actions are grossly negligent.” Id. In this context, gross negligence has been defined as a “reckless indifference to or a deliberate disregard of ... stockholders” or “actions which are with out the bounds of reason.” Id. at 750 (citations and internal quotations omitted).
The two contexts in which liability for a loss may be the consequence of a breach of the duty of care are (i) where a board “decision” was ill advised or the result of negligence, and (ii) where there was “an unconsidered failure of the board to act in circumstances in which due attention would, arguably, have prevented the loss.” Id. at 749 (emphasis in original). A board’s “conscious decision to refrain from acting,” however, may be a valid exercise of its business judgment. Id. at 728 n. 416. (emphasis in original).
The duty of care concerns the director’s obligation “to act on an informed basis.” Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 367 (Del.1993). This duty is breached if, before voting with respect to a significant transaction, the director was not fully informed concerning it or failed to fully consider it. Id. at 368. In reviewing a director’s compliance with his duty of care, the court does not consider the content of the decision where the process *610employed was rational and used in a good faith attempt to promote corporate interests. Disney I, 907 A.2d at 749-50.
Duty of Loyalty
The duty of loyalty requires that the corporation’s best interest must take precedence over any interest of the director that is “not shared by the stockholders generally.” Cede, 634 A.2d at 361. A director may not use his “position of trust and confidence” to further a “private interest,” as there may not be a conflict between a director’s duty and his self-interest. Disney I, 907 A.2d at 750-51. The “[c]lassic examples of director self-interest in a business transaction involve either a director appearing on both sides of a transaction or a director receiving a personal benefit from a transaction not received by the shareholders generally.” Cede, 634 A.2d at 362. A director is considered independent concerning a decision if it “is based entirely on the merits of the transaction and is not influenced by personal or extraneous considerations.” Id. An example of an extraneous consideration or influence would be where one director controls another. In re Alloy, Inc. Shareholder Litig. 2011 WL 4863716 at *7 (Del. Ch.2011). With respect to an individual director, the alleged “disqualifying self-interest or lack of independence must be material,” that is, “reasonably likely to affect the decision-making process of a reasonable person.” Id. In instances where promoting a transaction would confer a substantial benefit upon a director, such director could not objectively be considered disinterested or independent. Cede, 634 A.2d at 362. To support a breach of loyalty claim, there must be a factual showing that “a majority of the board of directors was not both disinterested and independent.” Alloy, 2011 WL 4863716 at *7. See also In re Lukens Inc. Shareholders Litig., 757 A.2d 720, 730 (Del.Ch.1999) (noting that when one director is interested in the transaction, without any allegation that the interested director “controlled of majority of the board, there is no basis to say that the board as a whole lacked independence”). However, it may be sufficient if the complaint contains well-pled allegations that the board failed to act in good faith. Id. at *7.3 Thus, even with majority approval by disinterested and in*611dependent directors, a breach of the duty of loyalty may be found if the challenged decision “is so far beyond the bounds of reasonable judgment that it seems essentially inexplicable on any ground other than bad faith.” Id.
The duty of loyalty requires a directors “undivided loyalty to the corporation” to protect its interests. Disney I, 907 A.2d at 751. The director must “refrain from doing anything that would work injury to the corporation, or to deprive it of profit or advantage.” Id. To act loyally to a corporation, a director must have “the good faith belief’ that the actions he takes are in the best interest of the corporation. Stone, 911 A.2d at 370. In alleging that a director breached his duty of loyalty, the element of the director’s scienter must be pled with particularity. Goldman, 2011 WL 4826104 at *14 (Del.Ch.2011).
Good Faith
Good faith equates to “honesty of purpose” and requires a “genuine care” for one’s constituents. Disney I, 907 A.2d at 753. A director fails to act in good faith where the director intentionally (i) acts with a purpose other than that of advancing the corporations’ best interest, (ii) acts to violate applicable law, and (iii) fails to act in the face of a known duty to act thereby showing conscious disregard for his duties. In re Walt Disney Co. Derivative Litig., 906 A.2d 27, 67 (Del.2006) (“Disney II”) (citation omitted). These intentional actions would constitute a conscious disregard of duties. Disney I, 907 A.2d at 755.
Where an action is taken with the intent to harm a corporation, it is a disloyal act in bad faith. Id. at 753. In addition, good faith may be absent where the conduct “falls between ‘conduct motivated by subjective bad intent,’ and ‘conduct resulting from gross negligence.’ ” Goldman, 2011 WL 4826104 at *13 (quoting, Disney II, 906 A.2d at 66). Thus, conduct that is “more culpable than simple inattention or failure to be informed of all material facts” relevant to a transaction may be a conscious disregard that amounts to bad faith. Id. at *13. To constitute a failure to act in good faith, the conduct at issue must be “qualitatively different from, and more culpable than [gross negligence],” as the latter conduct by itself would amount to a breach of the fiduciary duty of care. Id., at *13 (quoting, Stone, 911 A.2d at 369; see also Disney II, 906 A.2d at 65) (noting that by itself, conduct that constitutes gross negligence is not considered a failure to act in good faith).
As it relates to the intent to do harm, or to consciously disregard one’s duties, there must be particularized allegations of fact that show “that the directors acted with scienter, i.e., there was an ‘intentional dereliction of duty1 or ‘a conscious disregard’ for their responsibilities, amounting to bad faith.” Goldman, 2011 WL 4826104, at *12 (quoting Disney I, 907 A.2d at 755). In the transactional context, to establish that a disinterested director intentionally disregarded his duties requires “an extreme set of facts.” Lyondell Chemical Co. v. Ryan, 970 A.2d 235, 243 (Del.2009). If the director merely failed to do everything they should have under the circumstances, that would be a breach of the duty of care. Id. (noting that “there is a vast difference between an inadequate or flawed effort to carry out fiduciary duties and a conscious disregard for those duties”); see also Citigroup, 964 A.2d at 128 (noting that bad business decisions are not the same as bad faith conduct from consciously disregarding duties). It is only where a director “knowingly and completely failed to undertake his responsibility” that a breach of duty of loyalty is implicated. Lyondell, 970 A.2d at 243-44.
*612With respect to inaction by the directors, only a showing of a “sustained or systemic failure of a director to exercise reasonable oversight” will suffice to show the requisite absence of good faith. Disney I, 907 A.2d at 750. The standard of liability for violations of the duty of care because of inaction has been described as “extremely high.” Id., 907 A.2d at 750. The “demanding test” required in the “oversight” context serves to encourage qualified candidates to serve as directors. Id. (quoting In re Caremark Int’l Inc. Derivative Litig., 698 A.2d 959, 967-68 (Del.Ch.1996)).4
Exculpation Provisions
Section 102(b)(7) of the General Corporation Law of Delaware allows a corporation to include in its certificate of incorporation a provision that eliminates or limits the liability of a director with certain exceptions. The exceptions from exculpation relevant to this matter are “(i) for any breach of the director’s duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; ... (iv) for any transaction from which the director derived an improper personal benefit.” 8 Del. Ch. § 102(b)(7). The purpose of a section 102(b)(7) provision is “to exculpate directors from any personal liability for the payment of monetary damages for breaches of their duty of care, but not for duty of loyalty violations, good faith violations and certain other conduct.” Disney I, 907 A.2d at 751-52 (citation omitted). Thus, “to the extent that directors have engaged in conscious wrongdoing or in unfair self-dealing, the exculpatory charter provision does not insulate them from fiduciary duty claims.” Id. at 795.
Section 102(b)(7) is intended to encourage directors to pursue business strategies that may be risky but that hold the potential for value maximization. Id. at 752. Thus, as long as the directors efforts to pursue such strategies are made in good faith, their actions are protected by section 102(b)(7). Id. Indeed, the application of an exculpation provision is “most useful” when, despite a directors good faith efforts to pursue a business strategy, the effort proves unsuccessful financially, resulting in a potentially biased “hindsight” evaluation of the director’s action, improperly influenced by the unsuccessful outcome. Id.
An exculpation provision protects a director from due care claims brought by the corporation, including derivative claims, as well as from claims by creditors. Production Resources Group, L.L.C. v. NCT Group, Inc., 863 A.2d 772, 776-77, *613793-94 (Del.Ch.2004). Indeed, limiting creditors to the same rights afforded shareholders is consistent with the creditors’ ability to protect themselves through contracting and fraudulent conveyance laws. Id. at 777.
Asserting exculpation from liability pursuant to section 102(b)(7) is an affirmative defense, and the director seeking application of the section has the burden to establish entitlement to its protection. Disney I, 907 A.2d at 752-53. Nevertheless, the protection of the exculpation provision may be asserted on a motion to dismiss. Alloy, 2011 WL 4863716 at *5 n. 19. In an action against a corporation with a section 102(b)(7) exculpatory provision, “the complaint must state a nonexculpated claim, ie., a claim predicated on a breach of the directors’ duty of loyalty or bad faith conduct.” Id. at *7.
As noted, in considering either the duty of care or loyalty, good faith is a factor. However, grossly negligent conduct, including the failure to inform oneself of available material facts, without more, may not constitute a failure to act in good faith. Disney II, 906 A.2d at 64-65.5 This premise stems, in part, from the ability of a corporation to exculpate its directors for monetary liability for breaches of the duty of care but not from conduct that fails to comply with the obligation to act in good faith. Id. at 65 (noting that if an act or omission that violated the duty of care were automatically treated as lacking in good faith, the protections afforded by section 102(b)(7) would be eliminated). Indeed, acts not in good faith, whether related to the duty of care or loyalty, aren’t exculpated because “they are disloyal to the corporation.” Disney I, 907 A.2d at 755-56 n. 463.
Business Judgment Rule
The directors’ management of a corporation is advanced by application of the business judgment rule, which is a presumption that business decisions made by corporate directors are made on an informed basis, in good faith and in the honest belief that actions taken are in the corporation’s best interest. Walt Disney II, 906 A.2d at 52. The presumption serves to preclude a court from unreasonably imposing its views with respect to corporate decisions. Disney I, 907 A.2d at 747 (citations omitted). As long as fraud, bad faith or self-dealing are not present, the presumption applies. Id. The board’s decision is valid if it serves any “rational business purpose.” Id. See also Caremark, 698 A.2d at 967 n. 15. (citing, American Law Institute, Principles of Corporate Governance § 4(c) (noting that for the business judgment rule to apply, the director “must ‘rationally’ believe that the decision is in the best interests of the corporation”)). In the absence of allegations of interestedness or disloyalty to the corporation, the rule precludes a court from second-guessing the decision of the directors as long as they utilized a “rational process” to reach their decision and “availed themselves of all material and reasonably available information.” Citigroup, 964 A.2d at 124. See also Goldman, 2011 WL 4826104, at *16 (noting that the board is only required “to reasonably inform itself’) (emphasis in original). With respect to whether directors were adequately informed, there must be particularized allegations of fact that cast reasonable doubt *614concerning the directors’ good faith. Goldman, 2011 WL 4826104 at *15.
If a business decision was made in good faith, it is the process employed to reach the decision, not the decision itself, that is at issue. Disney I, 907 A.2d at 750 (citing Caremark, 698 A.2d at 967-68). Indeed, even if, in hindsight, a court does not agree with the substantive decision made in good faith by the board, there is no basis for director liability because the court should not substitute its view for that of the elected board. Id. Certain corporate decisions are core functions of the board of directors exercising business judgment, including compensation decisions, Goldman, 2011 WL 4826104 at *14, and decisions to purchase or allow others in the company to purchase certain investment assets. Citigroup, 964 A.2d at 136 n. 96.
The protections of the business judgment rule do not apply to director inaction, where the standard for liability is gross negligence. Disney I, 907 A.2d at 748. However, as previously noted, a conscious decision to refrain from acting may be a valid exercise of business judgment.
The party challenging the directors’ decision has the burden to rebut the business judgment presumption. Id. The presumption afforded by the business judgment rule may be rebutted by showing “that the directors breached their fiduciary duty of care or of loyalty or acted in bad faith.” Disney II, 906 A.2d at 52. If the presumption is rebutted, then the burden shifts to the directors to show “that the challenged act or transaction was entirely fair to the corporation and its shareholders.” Id.
Corporate Waste
To state a claim for corporate waste under Delaware law, stringent requirements must be met. Citigroup, 964 A.2d at 136. The party challenging a transaction made pursuant to a board decision has the burden of proving that “the exchange was ‘so one sided that no business person of ordinary, sound judgment could conclude that the corporation has received adequate consideration.’ ” Disney II, 906 A.2d at 74 (citing Brehm v. Eisner, 746 A.2d at 263). Corporate waste is present only in “unconscionable” cases where corporate assets have been “irrationally squandered]” or given away. Id. The burdensome standard naturally follows from the precept, under the business judgment rule, that decisions of the board of directors are upheld unless not attributable to any rational business purpose. Id.
Committing corporate waste is an act in bad faith. Disney I, 907 A.2d at 749 n. 422. Thus, facts must be pled that overcome the presumption of good faith. Citigroup, 964 A.2d at 137. The directors’ decision must be shown to be egregious or irrational to the extent that it could not possibly have been based on a valid judgment concerning the best interest of the corporation. Id. at 136. Indeed, one must surmount a “high hurdle” to prove corporate waste. Disney II, 906 A.2d at 75.
Corporate waste is not found where there is “substantial consideration received by the corporation” and where “there is a good faith judgment that in the circumstances the transaction is worthwhile.” Goldman, 2011 WL 4826104 at *16. Delaware corporate directors have broad discretion to make business decisions, including compensation decisions. Citigroup, 964 A.2d at 138. Absent bad faith on the part of the directors, courts are not suited to second-guess their business decisions and weigh whether the consideration received was adequate. Goldman, 2011 WL 4826104 at *18.
*615
The Relevant Counts
In the counts of the Complaint relevant to the motion before the Court, the Distributing Agent alleges that, after the merger of IFL into Marakon, as directors of the surviving Trinsum entity, the Trin-sum Directors authorized certain transactions that breached their fiduciary duty (Count III) and constituted corporate waste (Count IV). Specifically, the Distributing Agent contends that the Trin-sum Directors authorized the transfer of the Victoria Fund to the insider-owned QFR for, what the Distributing Agent alleges was, “little or no consideration.” The additional transfers at issue consist of incentive payments made to certain IFL principals and employees, allegedly with Marakon funds, in the aggregate amount of approximately $5 million.
In the Initial Complaint, in addition to the counts contained in the Complaint currently before the Court, the Distributing Agent had asserted certain counts alleging gross negligence. However, after the directors raised the defense of the exculpatory provision contained in Trinsum’s certificate of incorporation, the Distributing Agent eliminated the gross negligence claims when she filed the current Complaint.
In addition, recognizing that the section 102(b)(7) exculpation provision shields the directors from liability for money damages for duty of care violation, the Distributing Agent attempts to set forth allegations that would fall within the exception to the exculpation provision as “acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law.” Specifically, the Distributing Agent alleges that the transfer of the Victoria Fund to QFR was a fraudulent transfer in violation of New York law as it “was a transfer of assets for less than fair consideration at a time when Trinsum was insolvent.” Further, the Distributing Agent alleges that “the Board of Directors knew that its acts were illegal.”
The Directors’ Decisions
Absent fraud, bad faith or self-dealing, the business judgment rule affords directors the benefit of the presumption that their corporate decisions are made on an informed basis, in good faith and in the honest belief that actions taken are in the corporation’s best interest. The corporate decisions at issue here are the decision to sell a corporate asset, the Victoria Fund, and the decision to make the incentive payments.
As previously noted, the duty of care concerns an obligation to act on an informed basis. A director must be fully informed and fully consider the action to be undertaken. The Distributing Agent alleges that the Trinsum Directors appointed Daza, who had an interest in QFR, as the person to negotiate the sale of the Victoria Fund to QFR, which sale gained unanimous approval of the board of directors, including Daza. She further alleges that, other than the work performed by Daza, who was an interested party, none of the other Trinsum Directors did any due diligence or obtained any professional assistance concerning the value of the Victoria Fund prior to its sale.
There is no allegation that the Trinsum Directors were not informed of Daza’s interest in QFR. In addition, while acknowledging that the Trinsum Directors unanimously voted to approve the sale, there are no allegations addressing the process employed by the Trinsum Directors to reach their decision concerning the sale. The Distributing Agent acknowledges the economics and financial background of various directors, including Merton, whom she describes as “a business school professor and distinguished economist.” Thus, she does not allege that they were incapable of *616valuing assets to be sold. Rather, the allegations are that they failed to be fully informed and fully consider all the options by failing to do adequate due diligence and to obtain professional assistance to value the Fund prior to its sale. Therefore, she alleges, in a conclusory manner, that they did not adequately perform due diligence and failed to do everything they should have done, and as a result, their efforts were flawed in approving the sale.
Even aside from her failure to consider the Trinsum Directors’ ability to value financial assets, all of these allegations address the issue of the Trinsum Directors’ alleged inadequacy in performing due diligence and fully informing themselves. As such, at most, the allegations are that the directors were grossly negligent by not fully informing themselves and approving a decision reached by the interested director. As noted, the Trinsum certifícate of incorporation includes an exculpation provision that protects directors, with certain limited exceptions, from personal liability for violations of the breach of duty of care.6
With respect to the incentive payments made, the allegations are that there was no obligation to make the payments and that they were made notwithstanding opposition from Trinsum’s CFO. The Distributing Agent further alleges that the payments were made with Marakon funds at a time when it was insolvent. There is no allegation that the Trinsum Directors were unaware of the CFO’s opposition to the payments or that they were incapable of determining appropriate payment amounts to be made. The allegations concern a disagreement with the substance of the decision, not the process undertaken to reach that decision. The allegations concerning the incentive payments are insufficient to support a breach of duty of care claim.
With respect to the sale of the Victoria Fund and the duty of loyalty, the Distributing Agent indicates that director Daza could not be considered disinterested because, based upon his interest in QFR, he does appear on both sides of the transaction. Nevertheless, all of the other directors, with no conflicting interest, approved the transaction. There are no allegations that Daza controlled the other directors. In fact, the allegation in the Complaint is that the Marakon Directors *617controlled Trinsum because Marakon retained 51 % interest in Trinsum. Thus, the allegations fail to support an inference that a majority of the board was not disinterested and independent. In addition, there is an absence of any allegation from which to infer that the majority of the disinterested and independent directors had any motivation to approve a sale that would work injury to Trinsum or deprive it of profit or advantage.
Aside from the absence of allegations challenging the disinterestedness and independence of the majority of directors, the allegations are insufficient to support an inference that the challenged decision violated the duty of loyalty because it was “beyond the bounds of reasonable judgment” and is not capable of being explained other than as an act of bad faith. The Distributing Agent includes a conclu-sory allegation that the receipt of the 10% revenue stream for the sale of the Victoria Fund was “essentially nothing.” However, there are no allegations in the Complaint that provides any basis upon which to value the Victoria Fund. Moreover, the 10% revenue stream that Trinsum received in the transaction represented a 10% payment from revenue, without that revenue being reduced by expenses. QFR would be responsible for all expense obligations. More specifically, there are no allegations that provide a basis upon which to evaluate how the 10% revenue stream, with no deductions for expenses, compared with the value of the Victoria Fund.7
In an effort to show the absence of good faith and the breach of the duty of loyalty, as well as the inapplicability of the exculpation provision, the Distributing Agent argues that the Trinsum Directors knowingly violated the law by transferring the Victoria Fund for less than fair consideration at a time when Trinsum was insolvent. The Distributing Agent contends that this was a fraudulent transfer violating New York law. The Distributing Agent further alleges that the board of directors knew that the sale of the Victoria Fund was illegal.
The claim that the transfer of the Victoria Fund violated the law is based upon allegations of a constructive fraudulent conveyance under New York law. In the Complaint, the Distributing Agent alleges that the sale of the Victoria Fund “was a transfer of assets for less than fair consideration at a time when Trinsum was insolvent.” The Distributing Agent, however, has not alleged any particularized facts to support these conclusory allegations. First, there are no allegations concerning Trinsum’s solvency at the time of the transfer. Rather, all allegations concerning Trinsum’s insolvency relate to other periods of time. In addition, as previously discussed, there are no allegations concerning the Victoria Fund’s value from which to determined whether the receipt *618of the 10% revenue stream was not fair consideration.
More importantly, the allegation directed to the putative violation of the New York constructive fraudulent transfer law concerns a provision for which the convey- or’s actual intent is irrelevant. For example, under New York Debtor & Creditor Law § 273, a conveyance that renders one insolvent is a fraudulent conveyance as to that person’s creditors regardless of the conveyor’s “actual intent” when the conveyance lacks fair consideration. See N.Y. Debt. & CRED. Law § 273. Thus, the trans-feror’s knowledge is irrelevant to the applicability of the section. However, with respect to the violation of a director’s fiduciary duty of loyalty and the director’s good faith obligations, there must be particularized allegations that the director acted with scienter. In addition, with respect to misconduct or violations of the law, it is only when there has been “intentional misconduct or a knowing violation of law” that the exculpation provision does not protect a director from personal liability. 8 Del. Ch. § 102(b)(7) (emphasis added). Therefore, it does not appear that allegations concerning a violation of a law that would not actually call into question a director’s good faith would be sufficient to support an allegation of intentional conduct amounting to bad faith or a breach of the duty of loyalty or to a knowing violation of the law.
To recapitulate, authorizing the sale of corporate assets is properly within the scope of a director’s function as a valid exercise of business judgment. Where an exculpatory provision applies, a director’s decision in that regard is only subject to challenge if there are allegations to support disloyalty, lack of good faith, intentional misconduct or knowing violations of the law. There are no particularized factual allegations to support any claims to that effect.
An allegation that a director breached its fiduciary duty by a conscious disregard of such duty must be plead with particularity. A director must have knowingly and completely failed to take on his responsibility. There are no allegations that the Trinsum Directors knowingly failed to undertake their responsibility or that they knowingly violated the law, or otherwise engaged in intentional misconduct.
With respect to the incentive payments, there are no allegations that any of the Trinsum Directors were not disinterested or independent. Specifically, there are no allegations that the Trinsum Directors would personally benefit from such payments or that benefitting parties controlled the directors. Moreover, compensation decisions are at the core of a director’s responsibility. There are no allegations that the Trinsum Directors were unaware of the CFO’s opposition to the payments. Further, there are no allegations challenging the process utilized by the directors prior to authorizing the incentive payments. The allegations only challenge the substance of the decision, for which the directors are protected by the business judgment rule and the exculpation provision.
The allegations of the Complaint are not sufficient to support a claim that the Trin-sum Directors lacked good faith or breached their duty of loyalty. Moreover, the Complaint fails to allege intentional misconduct or knowing violation of the law. As such, the Trinsum Directors decisions to authorize the sale of the Victoria Fund and to authorize incentive payments are protected by the business judgment rule. Further, the exculpation provision protects the Trinsum Directors from any remaining claims that are premised upon breaches of *619their duty of care. Accordingly, Count III of the Complaint is dismissed.
Furthermore, inasmuch as facts have not been pled to overcome the presumption of good faith, the corporate waste claim must also be dismissed. Absent allegations of bad faith, a court will not substitute the director’s decision with a hindsight-based decision. As previously noted, there are no allegations concerning the value of the Victoria Fund, therefore no inference can be drawn that the receipt of 10% of the revenue stream for the sale of the fund was inadequate consideration. Certainly, there are no allegations from which to infer that the sale of the Victoria Fund was one-sided or that corporate assets were irrationally squandered or that the decision to authorize the sale was irrational. Thus, the allegations are not sufficient to support a claim for corporate waste. Similarly, corporate directors have broad discretion in making compensation decisions and in the absence of allegations of bad faith, or a sufficient basis upon which to infer that the decision was irrational, a court will not weigh the adequacy of the consideration received for the authorized payments. Accordingly, Count IV of the Complaint is dismissed.
Request for Leave to Amend
In her memorandum in support of her opposition to the Motion, the Distributing Agent requested that any dismissal be accompanied by authorization to again amend the Complaint. However, certain of the Trinsum Directors have requested that any dismissal be with prejudice. As previously noted, prior to the issuance of this decision, the Distributing Agent filed a motion, on December 1, 2011, seeking leave to file a Second Amended Complaint, attaching a copy of the proposed Second Amended Complaint to the motion. The Trinsum Directors filed opposition to the request for leave to file the Second Amended Complaint.
Federal Rule of Civil Procedure 15(a) requires that leave to amend a pleading be freely given. Foman v. Davis, 371 U.S. 178, 182, 83 S.Ct. 227, 230, 9 L.Ed.2d 222 (1962). However, a court will not allow an amendment of a pleading if there has been undue delay, bad faith or dilatory motive in proposing the amendment, if there has been repeated failure to cure the deficient pleading in previous amendments, if there would be undue prejudice to the opponent in allowing the amendment, or if the amendment would be futile. Id.
The proposed Second Amended Complaint includes additional information gleaned from an October 31, 2006 report (the “Cohn Report”) issued by Marakon’s accountant J.H. Cohn LLP, based upon projections provided by the Marakon and IFL directors prior to the merger.8 The information in the Cohn Report was available to the Distributing Agent prior to her filing of the earlier complaints as she referenced other aspects of it in those complaints. The proposed Second Amended Complaint includes an allegation concerning profit projections for the Victoria Fund. The projections were allegedly supplied “only months before the sale [of the Victoria Fund]” as part of the due diligence for the merger.
First, the referenced projections were made in the third quarter of 2006 and were based upon speculation as to the volume of *620assets that would come under the management of the Victoria Fund by the end of the following year and the rate of return. Relying upon the projections of what potentially could have occurred at the end of 2007, the Distributing Agent alleges that in October 2006 the Trinsum Directors envisioned revenue of 21.3 million dollars per year. The Distributing Agent alleges that expenses were approximately 8 million. However, these projections were generated several months prior to the March 2007 sale of the Victoria Fund and, as described by the allegations, were projections of events to occur, in part, at the end of the following year.
Absent from the proposed Second Amended Complaint are any allegations concerning the market conditions at the time the decision was reached to sell the Victoria Fund in March 2007. Market conditions are subject to constant flux that may greatly impact valuations. Inasmuch as the allegations are that the pre-merger directors, who provided the projections for the Cohn Report, were Trinsum Directors at the time of the sale of the Victoria Fund, they were aware of those earlier projections when subsequently evaluating the sale. The sale of the fund occurred over five months after those projections were generated and there are no allegations concerning the Trinsum Directors’ evaluation of projected revenues at the time of the sale of the Victoria Fund. There are no allegations that market and other conditions remained stagnant from October 2006 to March 2007 or that the earlier projections as to the volume of funds that would come under management or other factors were materializing. Thus, there are no particularized allegations concerning the value of the Victoria Fund at the time of its sale to support the concluso-ry allegation that the sale of the fund for 10% of the revenue stream, free of expenses, as payment was inadequate consideration for the sale.
More importantly, with respect to the violation of a director’s fiduciary duty of loyalty and the director’s good faith obligations, the proposed Second Amended Complaint does not include any particularized allegations that the directors acted with scienter. Therefore, even if the amendment were allowed, for the reasons previously discussed, the allegations in the Second Amended Complaint are insufficient to support a claim of intentional conduct amounting to bad faith or a breach of the duty of loyalty or to a knowing violation of the law.9 Thus, as concerns Counts III and IV of the Complaint, leave to allow the filing of the Second Amended Complaint would be futile. Therefore, the motion for leave to amend with respect to those counts is denied and those counts are dismissed with prejudice.
Conclusion
The Trinsum Directors exercised their business judgment in determining to authorize the sale of the Victoria Fund and to authorize the incentive payments. As such, those decisions are entitled to the presumption that they were made on an informed basis, in good faith and in the honest belief that the actions were taken in the corporation’s best interest. There are no allegations set forth in the Complaint to rebut that presumption.
The Court concludes that the Complaint does not adequately allege that the Trin-sum Directors breached their duty of loyalty, acted in bad faith, committed either intentional misconduct or a knowing violation of law. The Court further concludes that because there was an exculpation pro*621vision in the corporation’s certificate of incorporation, as permitted by the law of the state of Delaware, and because the Complaint does not adequately allege a lack of good faith, breach of duty of loyalty, the commission of intentional misconduct or knowing violation of the law on the part of the Trinsum Directors, they could not be found personally liable for monetary damages for any alleged breaches of the fiduciary duty of care or corporate waste. In addition, the allegations of the Complaint are insufficient to support a claim of corporate waste.
Finally, the proposed amendments, as set forth in the Second Amended Complaint, would be unavailing to protect Counts III and IV from dismissal.
Therefore, with respect to Counts III and IV of the Complaint, the Distributing Agent’s motion to file the Second Amended Complaint is denied. Further, Counts III and IV of the Complaint are dismissed, with prejudice.
The Trinsum Directors are to settle an order consistent with this Opinion.
. Prior to the merger, the Marakon Directors had formed a "Strategy Council,” which was comprised of themselves and certain other Marakon directors to consider three (3) options for the development of Marakon: (i) merging with or acquiring a smaller consultancy firm; (ii) becoming acquired by a larger consulting firm; and (iii) remaining independent and attempting to grow the business. Those options were presented to the Marakon partners and ultimately the merger was chosen. There are other allegations in the amended complaint concerning the propriety of the Marakon Directors's conduct in promoting the options, however, they are not relevant to the current motion.
. Counts I and II of the Amended Complaint are against the Marakon Directors and concern their conduct leading up to and culminating in the merger. Counts III and IV of the Amended Complaint are directed to the Trinsum Directors and concern Trinsum's transfer of assets after the merger. The current motion to dismiss only involves counts III and IV of the Amended Complaint.
. Section 144(a) of the Delaware General Corporate Law validates a transaction between a corporation and its directors or officers if approved by a majority of the independent directors, where those approving directors:
(1) are aware of the conflict,
(2) are aware of all facts material to the transaction; and
(3) act in good faith.
In reviewing the implications of this section on inside transactions, the Disney I court emphasized why, apart from traditional notions of the duties of care and loyalty, good faith would play an important role in protecting shareholder interests.
[T]he inside transaction is valid where the independent and disinterested (loyal) directors understood that the transaction would benefit a colleague (factor 1), but they considered the transaction in light of the material facts (factor 2 — due care) mindful of their duty to act in the interests of the corporation, unswayed by loyalty to the interests of their colleagues or cronies (factor 3 — good faith). On the other hand, where the evidence shows that a majority of the independent directors were aware of the conflict and all material facts, in satisfaction of factors 1 and 2 (as well as the duties of loyalty and care), but acted to reward a colleague rather than for the benefit of the shareholders, the Court will find that the directors failed to act in good faith and, thus, that the transaction is voidable. In such a case, the duties of care and loyalty, as traditionally defined, might be insufficient to protect the equitable interests of the shareholders, and the matter would turn on the good faith of the directors.
Disney I, 907 A.2d at 756 n. 464.
. For purposes of oversight, the directors must implement an information and reporting system that is adequate to ensure that appropriate information is timely brought to the directors’ attention. Stone, 911 A.2d at 368. While the Disney and Caremark courts speak of oversight liability in the context of the duty of care, the Stone court treats it as a director’s breach of the duty of loyalty by "failing to discharge that obligation in good faith.” Stone, 911 A.2d at 370. In any event, the Stone court adopts the Caremark standard to establish liability in the oversight context. Lyondell, 970 A.2d at 243. As set forth by the Stone court, the Caremark standard requires a showing that "the directors (a) utterly failed to implement any reporting or information system or controls or (b) having implemented such a system or controls, consciously failed to monitor or oversee its operations thus disabling themselves from being informed of risks or problems requiring their attention.” Stone, 911 A.2d at 370. Moreover, "imposition of liability requires a showing that the directors knew that they were not discharging their fiduciary obligations.” Lyondell, 970 A.2d at 243. (emphasis added). Indeed, bad faith is a required element for director oversight liability. Stone, 911 A.2d at 370.
. Although, as set forth in the next section, to avail itself of the business judgment presumption the board is required “to reasonably inform itself.” Goldman, 2011 WL 4826104 at *16.
. The Distributing Agent argues that the Bridgeport Holdings Inc. Liquidating Trust v. Boyer (In re Bridgeport Holdings, Inc.) 388 B.R. 548 (Bankr.D.Del.2008) court concluded that a liquidating trust adequately alleged facts to support its claim that the directors were disloyal and acted in bad faith by abdicating decision making authority to the recently appointed chief operating officer, "then failing adequately to monitor his execution of a [sales’ strategy], which resulted in an abbreviated and uninformed sale process; and approving the sale ... for grossly inadequate consideration.” Id. at 565. In referencing the failure to "monitor” the sale, the Bridgeport court was addressing oversight liability. As previously noted, bad faith is a required element to establish oversight liability. Here, as subsequently discussed, the Court concludes that the Complaint does not contain sufficient allegations to support a claim of bad faith. In regard to monitoring the sale of the Victoria Fund, there are no allegations that the Trinsum Directors were unaware of Daza’s interest in QFR. In addition, the Complaint recognizes the financial and economic sophistication of various of the Trinsum Directors, and presumably their expertise in valuing the assets. Moreover, in the Bridgeport case, there were allegations that the asset at issue was sold for grossly inadequate consideration because it had been valued at four times the purchase price by the purchaser’s board of directors, as well as in publicly available opinions of financial market analysts. Id. at 565-66. Here, there are no allegations concerning the value of the Victoria Fund at the time of the sale to allow for an evaluation of whether the consideration was adequate.
. Moreover, the Trinsum Directors’ unanimous approval of the sale of the Victoria Fund was an instance of discrete decision-making protected by the business judgment rule. As such, the Distributing Agent takes issue with the Trinsum Directors' alleged failure to be fully informed or fully consider alternatives to the sale to QFR. These allegations concerning flawed or inadequate efforts are duty of care issues for which the directors are protected from personal liability by the exculpation provision.
Thus, it does not appear that "oversight” is at issue, however, even if the claims could be deemed oversight liability claims for failure to "monitor” the sale process, allegations would be required that the directors consciously failed to monitor or oversee, thereby preventing them from learning of risks or other problems that required their attention. Any such claims would require allegations of bad faith. The allegations in the Complaint are insufficient.
. The Distributing Agent also included certain additional information concerning solvency; however, with respect to Counts III and IV of the Complaint, the amendment does not remedy the absence of allegations concerning Trinsum's solvency at the relevant time of the sale of the Victoria Fund.
. Nor would the additional allegations in the proposed Second Amended Complaint impact any of the Court's conclusions concerning the duty of care or corporate waste. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494636/ | MEMORANDUM OPINION
2
KEVIN GROSS, Bankruptcy Judge.
The Court has before it the Majestic Star Casino, LLC’s and affiliated entities’ (“Debtors”) Motion for Summary Judgment Against All Defendants (the “Summary Judgment Motion”) (D.I. 43) on Counts I and II of the Debtors’ Complaint filed in the above captioned adversary proceeding on December 31, 2010 (the “Complaint”) (D.I. 1). The Debtors’ seek to avoid a transfer and disposition of alleged property of the estate under §§ 549, 550 and 362 of title 11 of the United States Code (the “Bankruptcy Code”). Defendant United States of America on Behalf of the Internal Revenue Service (the “IRS”) filed its Motion to Dismiss on February 14, 2011 (the “Motion to Dismiss”) (D.I. 23). Defendants Don H. Barden (“Barden”) and Barden Development, Inc. (“BDI”), filed their joint Motion for Judgment on the Pleadings and Memorandum in Support on February 28, 2011 (D.I. 33, 34). The Debtors filed their Summary Judgment Motion on March 16, 2011. Thereafter, Defendant Indiana Department of Revenue filed its Opposition to Debtor-Plaintiffs Motion for Summary Judgment Against All Defendants on April 13, 2011 (D.I. 49). The Court heard oral argument on July 29, 2011. At issue is whether a non-debtor parent’s revocation of its “S” corporation status, which subsequently by operation of the Internal Revenue Code, 26 U.S.C. § et seq. (the “IRC”) revoked the debtor-subsidiary’s “qualified subchapter ‘S’ subsidiary” (“QSub”) status, is an avoidable transfer of estate property in violation of Bankruptcy Code § 549. The Court must first determine whether the Debtors’ QSub status is property of the estate. For the reasons discussed below, the Court will grant the Debtors’ Motion for Summary Judgment, and deny both Defendants BDI and Barden’s Motion for Judgment on the Pleadings, and the IRS’s Motion to Dismiss.
I. JURISDICTION
The Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334. This is a core proceeding under 28 U.S.C. § 157(b)(2). Venue is proper pursuant to 28 U.S.C. §§ 1408 and 1409.
II. FACTS
Founded in 1993, the Debtors operate as a multi-jurisdictional gaming company that owns casino properties in Indiana and other states. Compl. at ¶ 10. Defendant *669BDI is the non-debtor parent of the Debtors, including The Majestic Star Casino, II (“MSC II”). Compl. at ¶¶2, 16. Prior to and as of November 23, 2009, (the “Petition Date”), BDI was classified as an “S” corporation under subchapter S3 of the IRC and, effective 2005, BDI elected to classify its wholly-owned subsidiary, MSC II, as a QSub4. Id. at ¶ 2. Defendant Barden is the sole shareholder of BDI and is the President and Chief Executive Officer of MSC II. Id. at ¶ 12.
Because it was a QSub, MSC II was not required to pay federal and state income taxes on its net taxable income under chapter 1 of the IRC and chapter 2 of the Indiana Code. Id. at ¶¶2, 17-20. See 26 U.S.C. §§ 1361(b)(3)(A), 1362(a), 1366(a)-(b); Ind.Code § 6-3-2-2.8(2); 26 C.F.R. § 1.1361-4(a). Additionally, MSC II was not required to file income tax returns separate from BDI. Compl. at ¶2 n. 2. Instead, since a QSub is treated as a flow-through entity, BDI’s income tax return included all items of income or loss generated by MSC II. Id. Although this income and loss must be reported on its tax return, an “S” corporation like BDI generally is not required to pay tax on such income; rather, the items of income and loss are reported on the personal tax return of the “S” corporation’s shareholders (in this case, BDI’s sole shareholder, Bar-den), who may be required to pay tax on the income. Id. at ¶ 2 n. 2. See 26 C.F.R. § 1.1366-l(a).
On the Petition Date, both BDI and MSC II retained their status as an “S” corporation and QSub, respectively. Compl. at ¶¶ 2, 17, 30. After the Petition Date, but before March 16, 2010, BDI filed a notice with the IRS revoking its status as an “S” corporation as of January 1, 2010 (the “Revocation”). Id. at ¶ 21. As a result, U.S. Treasury regulations dictated that, MSC II’s QSub status was automatically terminated as of the end of the prior tax year,5 December 31, 2009, and both BDI and MSC II became “C” corporations as of January 1, 2010. Id. at ¶ 21. 26 U.S.C. §§ 1361(b)(3)(B) — (C), 1362(d); 26 C.F.R. §§ 1.1361-4(a), 1.1361-5(a)-(b), 1.1362-2(a).
As a consequence of becoming a “C” corporation, MSC II became responsible for filing its own tax returns and paying income taxes on its holdings and operations (26 C.F.R. §§ 1.11 — 1(a); 1.6016-1-1.6016-4), which include the Majestic Star II riverboat casino and the Majestic Star Hotel at Buffington Harbor in Gary, Indiana. Compl. at ¶¶ 22, 25.
*670Neither BDI nor Barden sought or obtained authorization from the Court for the Revocation. Id. at ¶23. The Complaint alleges that BDI and Barden did not consult with the Debtors or the Debtors’ ad-visors before the Revocation. Id. The Debtors did not learn of the termination of MSC II’s QSub status until July 19, 2010, which is believed to be at least four months after BDI and Barden filed the Revocation with the IRS. Id. at ¶ 24.
The Debtors allege that because MSC II was not informed about the Revocation, it was unaware that it had a new obligation to report and pay income taxes. Id. at ¶ 27. The Debtors allege that due to the change of MSC II’s tax status, MSC II has had to pay approximately $2.26 million in estimated income tax to the Indiana Department of Revenue for 2010 that it otherwise would not have had to pay. Id. However, as of April 2011, the Debtors had paid no federal income taxes to the IRS as a result of the Revocation. If the Debtors owe any federal taxes, they had to make their estimated tax payments for MSC II to the IRS on April 15, 2011. Additionally, the Debtors had to make their estimated tax payments and penalties for the year ended December 31, 2010, to the Indiana Department of Revenue, on April 20, 2011. Id.
III. DISCUSSION
Debtors seek summary judgment on both counts alleged in the Complaint against all Defendants pursuant to Fed. R.Civ.P. 56(a) and Fed. R. Bankr.P. 7056. Defendants Indiana Department of Revenue, BDI, Barden, and the IRS have filed oppositions to the Summary Judgment Motion. Additionally, the IRS has filed a Motion to Dismiss the Complaint for lack of jurisdiction under Fed.R.Civ.P. 12(c), incorporated by Fed. R. Bankr.P. 7012(b), or alternatively F.R. Civ. P. 12(b)(6), for failing to state a claim upon which relief can be granted. Finally, Defendants Bar-den and BDI have filed their Motion for Judgment on the Pleadings under Fed. R.Civ.P. 12(c). With respect to the IRS’s Motion to Dismiss and Defendants Barden and BDI’s Motion for Judgment on the Pleadings the question is whether the Debtors have sufficiently stated facts which, if proven, would entitle them to relief. Secondly, with respect to the Summary Judgment Motion, the question is whether there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law.
The IRS’s Motion to Dismiss
Lack of Jurisdiction
The IRS argues that this Court does not have jurisdiction under § 505(a)(1) over the claims alleged in the Complaint because the Debtors have not alleged that MSC II has not paid any federal corporate income taxes or filed any federal income tax returns. The IRS argues that the only relief the Debtors seek is restoration of BDI’s “S” Corporation status and MSC II’s QSub status for use in future tax returns. As a result, the IRS argues that the request is not yet ripe for review because there is no actual controversy between the parties at this time. Motion to Dismiss at 2, 4-5. The IRS argues that in essence, the Debtors “are seeking a ruling concerning MSC II’s tax status to assist them in computing then-future corporate income tax liabilities.” Motion to Dismiss, at 5.
The Court disagrees with the IRS’s argument that it does not have jurisdiction over the Debtors’ claims. The IRS’s position is based on a fundamental flaw that the Debtors’ claims against the IRS, regard the amount or legality of any tax claim under section 505(a)(1). The Debtors are not seeking a declaratory judgment of the amount of any tax under sec*671tion 505(a)(1), rather, the Debtors are seeking to avoid the revocation of MSC II’s QSub status as an unauthorized transfer of estate property under § 549. This Court has jurisdiction under 28 U.S.C. § 157(b)(2) to determine an avoidable transfer under § 549, and the IRS’s lack of jurisdiction argument.
Failure to State a Claim
The IRS also argues that the Motion to Dismiss should be granted because the Debtors failed to state a claim upon which relief can be granted. A motion to dismiss pursuant to Rule 12(b)(6) serves to test the sufficiency of the factual allegations in a plaintiffs complaint. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557, 127 S.Ct. 1955, 167 L.Ed.2d 929, (2007); Kost v. Kozakiewicz, 1 F.3d 176, 183 (3d Cir.1993). To survive a motion to dismiss under Rule 12(b)(6), a plaintiffs complaint must contain sufficient “factual allegations” which, if true, would establish “plausible grounds” for a claim: “the threshold requirement ... [is] that the ‘plain statement’ possess enough heft to ‘sho[w] that the pleader is entitled to relief.’ ” Twombly, 550 U.S. at 557, 127 S.Ct. 1955. “To prevent dismissal, all civil complaints must now set out ‘sufficient factual matter’ to show that the claim is facially plausible. This then ‘allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.’ ” Fowler v. UPMC Shadyside, 578 F.3d 203, 210 (3d Cir.2009) (quoting Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1948-50). However, “labels and conclusions” or “formulaic recitation of the elements of a cause of action” are not sufficient. Twombly, 550 U.S. at 555, 127 S.Ct. 1955, 167 L.Ed.2d 929. Legal conclusions are not entitled to the presumption of truth. Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009). In deciding a motion to dismiss under Rule 12(b)(6), a court tests the sufficiency of the factual allegations and evaluates whether a plaintiff is “entitled to offer evidence to support the claims,” and “not whether a plaintiff will ultimately prevail.” Oatway v. Am. Int’l Group, Inc., 325 F.3d 184, 187 (3d Cir.2003). This is true even if “actual proof of those facts is improbable” and “a recovery is very remote and unlikely.” Twombly, 550 U.S. at 556, 127 S.Ct. 1955.
As discussed above, the Court must accept as true all allegations in the Amended Complaint and draw reasonable inferences in a light most favorable to the plaintiff. Phillips v. County of Allegheny, 515 F.3d 224, 231 (3d Cir.2008); Morse v. Lower Merion School District, 132 F.3d 902, 905 (3d Cir.1997). However, “a court need not credit a plaintiffs ‘bald assertions’ or ‘legal conclusions’ when deciding a motion to dismiss.” Sands v. McCormick, 502 F.3d 263, 267-68 (3d Cir.2007) (quoting Morse, 132 F.3d at 906).
As discussed in further detail infra, the Debtors have alleged sufficient facts which, if accepted as true, establish a plausible ground for a claim that there was a postpetition unlawful transfer of property of the estate that was not authorized under title 11 or by the Court. Therefore, the Defendants’ Motion to Dismiss for failure to state a claim is denied.
Defendants’ Barden and BDI’s Motion for Judgment on the Pleadings
Defendants Barden and BDI have filed a Motion for Judgment on the Pleadings under Fed.R.Civ.P. 12(c). The standard for a Rule 12(c) motion is the same as the standard for a Rule 12(b)(6) motion to dismiss for failure to state a claim upon which relief can be granted. In re Fedders North America, Inc., 422 B.R. 5 (Bankr.D.Del.2010) (citing In re G-I Holdings, Inc., 328 B.R. 691, 693-94 (D.N.J. 2005); Children’s Seashore House v. Waldman, 197 F.3d 654, 657 n. 1 (3d Cir.1999)). Defendants Barden and BDI argue that the Complaint should be dis*672missed because the Debtors have failed to identify any cognizable legal theory under which they would be entitled to relief under Sections 549, 550, or 362 of the Bankruptcy Code. First, the Defendants argue that under the IRC, a QSub has no separate tax existence and therefore the QSub has no cognizable property interest under tax law. Second, the Defendants argue that the ability to qualify as a QSub depends entirely on the elections made and tax status of the parent corporation. Therefore, the tax status of the QSub is solely a property right of the parent corporation. Finally, the Defendants argue that the cases holding that a debtor “S” Corporation has a property right in its “S” corporation status are inapposite because those cases did not involve a QSub. Moreover, the Debtors argue that none of those cases which avoid a debtor’s revocation of its status as an “S” corporation have been extended to restrict a non-debtor “S” corporation parent of the debtor QSub from exercising its authority to elect or revoke the election of its subsidiaries’ tax status.
For purposes of the Motion for Judgment on the Pleadings, the Debtors have alleged sufficient facts which if accepted as true, establish a plausible ground for a claim that there was a postpetition unlawful transfer of property of the estate that was not authorized under title 11 or by the Court. Therefore, Defendants Barden and BDI’s Motion for Judgment on the Pleadings is denied. The Defendants’ substantive arguments are discussed infra, in the Court’s Summary Judgment discussion.
Summary Judgment Standard
Pursuant to Federal Rule of Civil Procedure 56(a), made applicable to adversary proceedings by Federal Rule of Bankruptcy Procedure 7056, a court may grant summary judgment where “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). A material fact is one that “might affect the outcome of the suit under the governing law.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A dispute regarding a material fact is genuine “when reasonable minds could disagree on the result” Delta Mills, Inc. v. GMAC Comm. Fin., Inc. (In re Delta Mills, Inc.), 404 B.R. 95, 105 (Bankr.D.Del.2009). The moving party bears the burden of demonstrating an entitlement to summary judgment. McAnaney v. Astoria Fin. Corp., 665 F.Supp.2d 132, 141 (E.D.N.Y.2009).
Summary judgment serves to “isolate and dispose of factually unsupported claims or defenses” and avoid unnecessary trial where the facts are settled. Delta Mills, 404 B.R. at 104 (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986)). Thus, at the summary judgment stage, the court’s function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine issue for trial. Pearson v. Component Tech. Corp., 247 F.3d 471 (3d Cir.2001) (citing Celotex, 477 U.S. at 317, 106 S.Ct. 2548); see also Fed.R.Civ.P. 56(c). In making this determination, the court must view all facts in the light most favorable to the non-movant and must draw all reasonable inferences from the underlying facts in favor of the non-movant. McAnaney, 665 F.Supp.2d at 141; Pastore v. Bell Tel. Co. of Pa., 24 F.3d 508, 512 (3d Cir.1994). Any doubt must also be construed in the non-moving party’s favor. Delta Mills, 404 B.R. at 105.
Once the moving party provides sufficient evidence, the burden shifts to the nonmoving party to rebut the evidence. Delta Mills, 404 B.R. at 105. The non-moving party “must do more than simply show that there is some metaphysical doubt as to the material facts.” McAnaney, 665 F.Supp.2d at 141 (quoting Calda-*673rola v. Calabrese, 298 F.3d 156, 160 (2d Cir.2002)). “[T]he mere existence of some alleged factual dispute between the parties” cannot defeat a properly supported summary judgment motion. Anderson, 477 U.S. at 247-48, 106 S.Ct. 2505. The dispute must relate to a genuine issue of material fact. Delta Mills, 404 B.R. at 105. Thus, a non-moving party cannot defeat a summary judgment motion based on conclusory allegations and denials, but instead must provide supportive arguments or facts that show the necessity of a trial. McAnaney, 665 F.Supp.2d at 141.
Summary judgment should be granted if, after drawing all reasonable inferences from the underlying facts in the light most favorable to the non-moving party, the court concludes that there is no genuine issue of material fact to be resolved at trial and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a).
The parties’ submissions demonstrate that there are no genuine issues of material fact. The issue in this case solely involves issue of law. More specifically, the issue is whether a Debtors’ QSub status as a QSub is property of the estate? Under section 549 of the Bankruptcy Code, “the trustee may avoid a transfer of property of the estate that occurs after the commencement of the case; and ... that is not authorized under [title 11] or by the court.” 11 U.S.C. § 549(a); In re NJ Mobile Dental Practice, P.A., 2008 WL 1373706, at *4 (Bankr.D.N.J. Apr. 7, 2008) (section 549 also empowers debtor in possession to avoid post-petition transfers).
A. Was there an Avoidable Transfer of the Property of the Bankruptcy Estate?
1. Is the Debtors’ QSub Status Property of the Bankruptcy Estate?
A bankruptcy estate consists of the debtor’s property and it is created at the commencement of the case. See In re Irwin, 457 B.R. 413, 418 (Bankr.E.D.Pa. 2011); 11 U.S.C. § 541. Section 541 of the Bankruptcy Code broadly defines “property” to include “all legal or equitable interests of the debtor in property as of the commencement of the case.” See Begier v. I.R.S., 496 U.S. 53, 58, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990) (defining an interest of the debtor in property as “that property that would have been part of the estate had it not been transferred before the commencement of bankruptcy proceedings.”); United States v. Whiting Pools, 462 U.S. 198, 204, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983) (“Both the congressional goal of encouraging reorganizations and Congress’ choice of methods to protect secured creditors suggest that Congress intended a broad range of property to be included in the estate.”); Official Committee of Unsecured Creditors v. R.F. Lafferty & Co., Inc., 267 F.3d 340, 357 (3d Cir.2001); 11 U.S.C. § 541(a)(1). “The scope of [§ 541] is very broad and includes property of all descriptions, tangible and intangible.” In re Central Ark. Broadcasting Co., 68 F.3d 213, 214 (8th Cir.1995).
Nonetheless, section 541 of the Bankruptcy Code does not specifically define what constitutes an interest in property. “The legislative history of § 541(a) indicates that it is expansive and includes ‘all kinds of property, including tangible or intangible property, causes of action ... and all other forms of property specified in section 70(a) of the Bankruptcy Act.’ ” In re Forman Enters., Inc., 281 B.R. at 611 (citing U.S. v. Whiting Pools, 462 U.S. 198, 205 n. 9, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). “ ‘Generally, property belongs to the debtor ... if its transfer will deprive the bankruptcy estate of something which could otherwise be used to satisfy the *674claims of creditors.’ ” In re Feiler, 230 B.R. 164, 167 (9th Cir. BAP 1999) (quoting In re Bullion Reserve of N. Am.), 836 F.2d 1214, 1217 (9th Cir.1988)).
Non-debtor parent BDI’s subchapter “S” election under IRC § 1362 resulted in the Debtors’ treatment as a QSub under IRC § 1361(b)(3)(B). As a result of BDI’s subchapter “S” election under title 26 § 1362 of the United States Code, federal law will determine whether the Debtors hold a property interest in its QSub status. Numerous federal courts have previously held that a debtor’s prepetition status as an “S” corporation is property of the estate. See Parker v. Saunders (In re Bakersfield Westar), 226 B.R. 227, 233-34 (9th Cir. BAP 1998) (finding that debtor’s right to make or revoke its subchapter S status is property of the state); Halverson v. Funaro (In re Frank Funaro Inc.), 263 B.R. 892, 898 (8th Cir. BAP 2001) (adopting Bakersfield for proposition that debtor has property interest in “S” corporation status); Hanrahan v. Walterman (In re Walterman Implement Inc.), 2006 WL 1562401, *3 (Bankr.N.D.Iowa May 22, 2006) (same); Guinn v. Lines (In re Trans-Lines W., Inc.), 203 B.R. 653, 661-62 (Bankr.E.D.Tenn.1996) (finding that an “S” corporation’s tax status constitutes property interest under the Bankruptcy Code); In re Cumberland Farms, Inc., 162 B.R. 62, 66-67 (Bankr.D.Mass.1993) (finding that the debtor has a property interest in the tax savings that result from its “S” corporation status).
Additionally, some of those courts have held that the “S” corporation’s status is property of the estate because of the tax benefits that status confers on the debtor. See In re Feiler, 230 B.R. at 168 (holding that a debtor’s right to carry forward or carry back a net operating loss is property of the estate. The court noted that in addition to the ability to control the right to make or revoke a net operating loss election, the tax benefits resulting from the revocation of the election shifted “an obligation of the debtor-corporation’s principals, and payment of those tax liabilities would have diminished estate funds that would otherwise have been available to satisfy the claims of the debtor-corporation’s creditors.”); In re Bakersfield Westar, 226 B.R. at 233-34 (“The ability to not pay taxes has a value to the debtor-corporation in this case ... [as a result of the revocation of the debtor’s ‘S’ corporation status] [t]he debtor’s estate will be required to pay the capital gains taxes on an administrative expense priority basis, and its payment of the taxes will diminish the amount of monies that would otherwise be available to satisfy claims of the debtor’s remaining creditors.”); In re Cumberland Farms, Inc., 162 B.R; at 66-67 (finding that the debtor has a property interest in the tax savings that result from its “S” corporation status).
This Court agrees with other courts that have held that a debtor “S” corporation, or in this case its wholly-owned QSub, has a property interest in the benefits that status affords the debtor, most importantly the ability to pass-through tax liability and the net operating losses to its ultimate shareholders. Bakersfield, 226 B.R. at 233-34 (finding that the debtor had a property interest in its subchapter S status where revocation required estate to pay $400,000 in taxes oth erwise owed by shareholders). In In re Cumberland Farms, Inc., the court had to decide whether the debtor “S” corporation had a property interest in the tax savings that resulted from its “S” corporation status. Id. at 64-65. The court held that the Debtors’ “S” corporation had a property interest in the benefit of minimizing future tax payments. Id. at 66-67.
*675Similarly, the Court in Bakersfield in part premised its holding that a debtor’s “S” status is estate property on the ground that the revocation of that “S” status would require the debtor’s estate to pay taxes that it would otherwise not be required to pay and “diminish the amount of monies available to satisfy claims of the debtor’s remaining creditors.” 226 B.R. at 234. See also In re Feiler, 230 B.R. at 168 (“As a result of the revocation, the estate’s substantial capital gains tax liabilities became an obligation of the estate and its creditors, rather than remaining an obligation of the debtor-corporation’s principals, and payment of those tax liabilities would have diminished estate funds that would otherwise have been available to satisfy the claims of the debtor-corporation’s creditors.”) Id. at 168 (quoting In re Bakersfield Westar, 226 B.R. at 230, 233-34). Consequently, because the debt- or-corporation’s subchapter “S” status provided the debtor-corporation the ability to pass-through capital gains tax liabilities to its principals, the right to make or revoke its subchapter “S” status had value to the debtor and constituted property or an interest of the debtor in property. Id.
As established by the case law, a wholly-owned QSub, like an “S” corporation, has a property interest in the benefits that status affords the debtor, most notably the right of the estate to be free of a heavy tax burden that will “diminish estate funds that would otherwise have been available to satisfy the claims of the debtor-corporation’s creditors.” In re Feiler, 230 B.R. at 168; See also In re Bakersfield Westar, 226 B.R. at 230.
As a QSub, the Debtors enjoyed a special tax status that allowed them to pass-its taxable income and net operating losses to its shareholders. The significance of this benefit is not lost on the Court. Prior to the Revocation, all of the Debtors’ net operating losses flowed up from MSC II to BDI, and then ultimately to Defendant Barden. As the controlling shareholder of multiple pass-through “S” corporate entities (BDI and the Debtors), Barden received an enormous tax benefit. Barden, as the sole shareholder of BDI and CEO of BDI and each of the Debtors, elected to treat BDI as an “S” corporation in 2005. After this initial election, Barden, who controlled BDI, then had BDI elect to treat its wholly-owned subsidiary, MSC II, as a QSub under IRC § 1361(b)(3)(A). The net tax effect of these elections is that all of the income and losses of the underlying “S” corporations flowed up to Barden and allowed Barden to enjoy the benefits of the Debtors’ prepetition net operating losses to offset his personal income tax.
Conversely, once the Debtors filed for bankruptcy protection, BDI’s “S” corporation status and the QSub status no longer benefitted Barden. Postpetition, as a result of the “S” corporation election and QSub election, Barden was faced with the very real possibility of having to pay ordinary income taxes and capital gains taxes on the pass-through treatment of the Debtors’ income and potential sale of assets of his companies. The Revocation of BDI’s “S” status and, by operation of the IRC, the Debtors’ QSub’s status, helped Barden to avoid potentially negative tax consequences. By operation of the IRC and Treasury Regulations, the Revocation of BDI’s “S” status automatically terminated MSC II’s QSub status and converted both entities into “C” corporations. The result was the reversal of the beneficial prepetition flow-through treatment of net operating losses to the controlling shareholder, Barden. 26 U.S.C. §§ 1361(b)(3)(B) — (C), 1362(d); 26 C.F.R. §§ 1.1361-4(a), 1.1361-5(a)-(b), 1.1362-2(a).
*676The Court disagrees with the Defendants that the Revocation merely caused collateral change to MSC II. The Revocation was not a change without significance. The affect of the Revocation is that a potentially significant tax burden was shifted from Barden, as controlling shareholder of pass-through “S” corporation entities, back to the Debtors. As a result of the Revocation, potential tax liabilities became an obligation of the estate and its creditors, and the payment of those tax liabilities will diminish estate funds that would have been available to satisfy creditors’ claims.
The Bakersfield Court aptly addressed this type of attempted bankruptcy tax planning; “[t]hus, the decision to revoke the debtor’s sub-chapter S status appears to reflect careful tax planning, and the Revocation appears to represent an effort by the Saunders to manipulate the bankruptcy system to their personal advantage under the guise of professional tax planning.” Bakersfield, 226 B.R. at 236. Here, the Debtors as a wholly-owned QSub have a property interest in that status under § 541 of the Bankruptcy Code because of the significant tax benefits it provided them, namely, to pass-through income and loss to its sole shareholder, Barden. Defendant Barden enjoyed the benefits of the “S” corporation election and QSub election through his ability to utilize the Debtors’ net operating losses to offset his own personal income. Now he must also bear the burden of any post-petition tax liabilities attributable to the Debtors. After the Revocation of the Debtors’ QSub status, a potentially significant tax liability has been transferred back to the estate and will reduce the creditors’ recovery. The Debtors’ status as a QSub has very real and significant value and is property of the estate. Debtors were damaged by the Revocation under the guise of tax planning.
Defendants Barden, BDI, and the IRS argue that the QSub has no property interest in its tax status because the QSub has no separate for tax purposes from the “S” corporation. QSub status is dependent on an election of the “S” corporation parent. The Court disagrees that a QSub cannot have a property interest in its tax status because the decision to elect or revoke that tax status is held by a non-debtor. The Second Circuit has held that property interests include rights that may be intangible and/or contingent on a non-debtor’s actions. See e.g. Official Committee of Unsecured Creditors v. PSS Steamship Co. (In re Prudential Lines Inc.), 928 F.2d 565, 570 (2d Cir.1991) (rejecting the non-debtor parent’s argument that because the debtor was a subsidiary member of a consolidated group, the common parent of that group, and not the debtor, controlled the group’s use of the net operating losses. The Second Circuit affirmed the bankruptcy court’s order enjoining a non-debtor parent corporation from taking a stock deduction that would have prevented its debtor subsidiary from claiming its net operating losses.). The Third Circuit has also held that “[property of the estate ‘includes all interests, such as ... contingent interests and future interests, whether or not transferable by the debtor.’ ” Pension Transfer Corp. v. Beneficiaries Under Third Amendment to Fruehauf Trailer Corp. Ret. Plan (In re Fruehauf Trailer Corp.), 444 F.3d 203, 211 (3d Cir. 2006) (quoting Prudential, 928 F.2d at 572). Despite the fact that MSC II’s QSub status is dependent on an election of the non-debtor “S” corporation, BDI, MSC II has a property interest in its QSub status.
The IRS argues that the cases the Debtors cite for the proposition that an “S” corporation’s subchapter S status is property of the estate do not support the Debt*677ors’ arguments because the holdings in each of those cases were based on the rationale that an “S” corporation has the right to make or revoke its subchapter S status. IRS Reply Brief at 8-9 (D.I. 50). The IRS argues that unlike “S” corporations, QSubs do not have the right to make or revoke their QSub tax status, “[r]ather, the QSub’s status depends entirely on the actions of their parent corporation.” Id. at 9. The IRS asserts that the cases Debtors cite are inapposite.
The Court disagrees with the Defendant’s contention that because the QSub does not have the right to make or revoke its QSub status, that the QSub does not have a property interest in its tax status. IRC § 1362(a) provides that a small business corporation can elect to be treated as an “S” corporation and that the election is only valid if all of the shareholders consent to the “S” corporation election. See 26 U.S.C. § 1362(a)(l)-(2). In conjunction with IRC § 1362(a) governing “S” corporation election, IRC § 1361(b)(3)(B) defines what qualifies as a wholly-owned qualified subchapter “S” subsidiary. IRC § 1361(b)(3)(B) provides that the subsidiary will be treated as a QSub if (1) it is wholly-owned by an “S” corporation, and (2) the “S” corporation elects to treat the subsidiary as a qualified subchapter S subsidiary. IRC § 1361(b)(3)(B). Although MSC II’s QSub status was dependent on BDI’s election, Prudential established that a property interest may exist even if contingent on a non-debtor’s actions. MSC II’s interest in the QSub status was property of the estate.
Furthermore, regardless that the IRC provides that the “S” corporation or QSub elections are controlled by the “S” corporation, the reality is that both elections are controlled by the principal shareholders of the “S” corporation. In a corporate group such as the Debtors, with wholly-owned subsidiaries owned by a single principal shareholder, this reality becomes even more clear. Defendant Barden is the sole shareholder and principal of BDI, the “S” corporation. BDI in turn owns one hundred percent of MSC II, the QSub. Although BDI elected to treat MSC II as a QSub, in reality that decision was made by BDI’s sole shareholder, Defendant Barden. The same applies to the Revocation.
Finally, the Defendants’ argument that the Debtors’ “S” corporation cases are inapposite is not persuasive. The Defendants’ argument presumes that the holdings that an “S” corporation has a property interest in its “S” corporation status were based exclusively on the rationale that an “S” corporation has the right to make or revoke its subchapter “S” status, and those rights are what constituted an interest of the debtor in property. The Defendants argue that because a QSub does not have the right to make or revoke its QSub status, the holdings on the “S” corporation decisions are inapplicable.
The Court disagrees. The fact that the “S” corporation has the right to make or revoke its subchapter S status was not the only rationale and basis for the rulings that an “S” corporation has a property interest in its “S” corporation status. As expressed in the decisions, those courts also gave consideration to other factors such as the benefit that the status conferred on the estate. This includes minimizing tax liability and avoiding the shifting of a tax burden from the principal shareholder back onto the estate and the estate’s creditors. See In re Bakersfield Westar, 226 B.R. at 234; In re Cumberland Farms, Inc., 162 B.R. at 66-67; In re Feiler, 230 B.R. at 168 (holding that a debtor’s right to carry forward or carry back a net operating loss is property of the estate while also noting that in addition to *678the ability to control the right to make or revoke a net operating loss election, the tax benefits resulting from the revocation of the election shifted “an obligation of the debtor-corporation’s principals, and payment of those tax liabilities would have diminished estate funds that would otherwise have been available to satisfy the claims of the debtor-corporation’s creditors.”).
The cited cases which premise holdings on the tax benefits that the “S” corporation status conferred on the debtors, apply equally to both “S” corporations and QSubs. Like an “S” corporation, a QSub benefits from its status as a pass through entity. The primary benefit is that all income earned by the QSub is passed through and up to the “S” corporation and then further passed on to the “S” corporation shareholders. The ability to minimize or eliminate tax liability is a significant benefit to the estate and will help preserve a larger portion of estate funds to satisfy creditors’ claims. See In re Feiler, 230 B.R. at 168; See also In re Bakersfield Westar, 226 B.R. at 230. The fact that the QSub does not itself have the ability to make or revoke its QSub status is a statutory anomaly. As explained infra, the right to make or revoke the election to be treated as an “S” corporation is in reality controlled by the corporation’s shareholders and they equally control the right of the QSub to be treated as a QSub by having the “S” corporation make the § 1361(b)(3)(B) election for QSub treatment. Therefore, the case law that takes into consideration the benefits that the “S” corporation’s status conferred on the Debtors in determining that the status is property of the estate is equally applicable to QSubs. As a result, the Court holds that a wholly-owned QSub has a property interest in the tax benefits that status affords the debtor, most notably the right to be free from a heavy tax burden, and the right to prevent a shifting of tax liability from the shareholders to the QSub through a revocation of the “S” corporation’s status, that by operation of the IRC revokes the QSub’s status.
2. Was the Revocation of BDI’s “S” Corporation Status and Termination of the Debtors’ QSub Status a Transfer?
BDI’s revocation of its “S” corporation status automatically terminated MSC II’s QSub status by operation of 26 C.F.R. §§ 1.1361 — 5(a)(l)(ii), 1.1362-2(a). BDI and Barden do not dispute they revoked BDI’s status as an “S” corporation. The legal issue is whether this revocation and automatic termination resulted in a transfer under Bankruptcy Code § 549. The Bankruptcy Code broadly defines transfer to include “every mode, direct or indirect, absolute or conditional, voluntary or involuntary, of disposing of or parting with property or with an interest in property.” 11 U.S.C. § 101(54). The courts in Bakersfield and Trans-Lines both found that because the revocation of a debtor’s status as an “S” corporation is an irrevocable election under the IRC, the revocation is a transfer of the debtor’s property under the Bankruptcy Code. See e.g., Bakersfield, 226 B.R. at 233-36; Trans-Lines, 203 B.R. at 661-63. Similarly, in the present case the Defendants’ Revocation of BDI’s “S” corporation status, automatically and irrevocably terminated MSC IBs QSub status and as a result the Revocation caused a transfer of property from the bankruptcy estate.
3. Did the Transfer Occur Post-Petition?
Both BDI and Barden admit that they revoked BDI’s “S” corporation status after the petition date. BDI/Barden Answer at ¶ 21. Therefore there is no genuine dis*679pute that the revocation and the transfer occurred post-petition.
4. Was the Transfer Unauthorized?
Both BDI and Barden admit that they made the Revocation without seeking permission or notifying the Court or the Debtors. BDI/Barden Answer at ¶ 23. Additionally, the revocation was not authorized by any provision of the Bankruptcy Code. Therefore, the Revocation was unauthorized and avoidable pursuant to § 549 of the Bankruptcy Code.
B. Was The Revocation a Violation of the Automatic Stay?
The Court will grant the Debtors’ Motion for Summary Judgment as to Count II of the Complaint because the Revocation violated the automatic stay imposed by Section 362 of the Bankruptcy Code. Section 362 of the Bankruptcy Code prohibits any act “to exercise control over property of the estate,” including the post-petition transfer of the debtor’s property. 11 U.S.C. § 362(a)(3). Any act in violation of the stay is void and has no effect. See e.g., In re Hull, 2003 WL 22000599, at *1 (Bankr.D.Del.2003).
The automatic stay is violated “where a non-debtor’s action with respect to an interest that is intertwined with that of a bankrupt debtor would have the legal effect of diminishing or eliminating property of the bankrupt estate.” Prudential, 928 F.2d at 574. A wholly-owned QSub has a property interest in the tax benefits that status affords the debtor, most notably the right of the estate to be free of a heavy tax burden that will diminish creditors’ recovery, and any postpetition act that causes the debtor to lose this status is an act to exercise control over property of the estate. See Hanrahan v. Walterman (In re Walterman Implement Inc.), 2006 WL 1562401, at *3; In re Feiler, 230 B.R. at 168; Cumberland, 162 B.R. at 68.
The Defendants’ revocation of BDI’s “S” corporation status which automatically terminated the Debtors’ QSub status was an exercise of control over the Debtors’ property in violation of § 362.
IV. CONCLUSION
For the foregoing reasons the Court will GRANT the Debtors’ Summary Judgment Motion as to Counts I and II with the relief set forth in the accompanying Order.
In addition, Defendant IRS’s Motion to Dismiss is DENIED; and Defendants Barden and BDI’s Motion for Judgment on the Pleadings is DENIED.
ORDER
The Court has before it the following motions:
(1) Motion to Dismiss filed by United States of America on Behalf of Internal Revenue Service, filed on February 14, 2011 (D.I. 23) (the “IRS Motion to Dismiss”);
(2) Motion for Judgment on Pleadings of Barden Development, Inc. and Don H. Barden, filed on February 28, 2011 (D.I. 33) (the “BDI/Barden Motion”); and
(3) Motion for Summary Judgment of Debtor-Plaintiffs, filed on March 16, 2011 (D.I. 43).
For the reasons stated in the accompanying Memorandum Opinion, it is hereby ORDERED as follows:
1. Summary judgment in favor of the Debtor-Plaintiffs on Counts I and II of their Complaint is granted.
2. The revocation of Defendant Barden Development, Inc.’s status as a subchapter “S” corporation and the termination of MSC II’s status as a qualified subchapter “S” subsidiary are void and of no effect.
3. The Defendants shall take all actions necessary to restore the status of Debtor *680Majestic Star Casino II, Inc. (“MSC II”) as a qualified subchapter “S” subsidiary of Defendant Barden Development, Inc.
4. Defendant Indiana Department of Revenue shall return to the Debtors all monies paid as a result of the Defendant Barden Development, Inc. And Don Bar-den’s unauthorized post-petition termination of MSC II’s QSub status.
5. The IRS Motion to Dismiss is denied.
6. The BDI/Barden Motion is denied.
. For purposes of the Motion to Dismiss and motion for judgment on the pleadings, "The court is not required to state findings or conclusions when ruling on a motion under Rule 12....” Fed. R. Bankr.P. 7052(a)(3). Accordingly, the Court herein makes no findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure. With respect to the Motion for Summary Judgment, this Opinion constitutes the findings of fact and conclusions of law required by Federal Rule of Bankruptcy Procedure 7052. To the extent any of the following findings of fact are determined to be conclusions of law, they are adopted, and shall be construed and deemed, conclusions of law. To the extent any of the following conclusions of law are determined to be findings of fact, they are adopted, and shall be construed and deemed, as findings of fact.
. The operations of an "S” corporation are subject to only one level of taxation. Its income and losses are passed through to its shareholders and the corporation itself is generally exempt from the taxes imposed under chapter 1 of the IRC. The same is true of a QSub. A "C” corporation, by contrast, is subject to two levels of taxation. Its net income is subject to tax at the corporate level and any distributions made by the corporation to its shareholders are subject to a second level of tax.
. To qualify as a QSub, the entity must be a domestic corporation that is wholly-owned by an "S” corporation and one which the "S” corporation elects to treat as a QSub. See 26 U.S.C. § 1361(b)(3)(A). Although BDI owns the stock of MSC II through two intermediate entities — Majestic Holdco and The Majestic Casino, LLC (Bennett Affidavit at ¶¶ 5-7)these two entities are disregarded for federal income tax purposes, and BDI is treated as the direct owner of MSC II. 26 C.F.R. § 301.7701-3(b). Therefore, MSC II met the requirements for QSub status. (Bennett Affidavit at ¶¶ 3-8).
.The QSub’s status was automatically terminated pursuant to 26 U.S.C. § 1361(b)(3)(B) because it no longer met the statutory requirement of being wholly-owned by an "S” corporation. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494637/ | MEMORANDUM OPINION
THOMAS P. AGRESTI, Chief Judge.
Currently before the Court is a Motion for Summary Judgment (“Summary Judgment Motion”) filed at Adv. No. 09-1137, Document No. 10, by the Debtors, Brian K. Kasbee and Melanie K. Kasbee, (“Debtors”) in reference to their pending Complaint for Determination of Secured Status (“Complaint”).1 Defendant, Huntington National Bank (“Huntington”) opposes entry of the summary judgment. For the reasons that follow, the Court will deny the Summary Judgment Motion.
PROCEDURAL AND FACTUAL BACKGROUND
The material facts underlying the Summary Judgment Motion currently before the Court are not in dispute. The Debtors operate a family farm, which includes their residence, on land located at 136 Onion-town Road, Greenville, Pennsylvania (“Property”). On March 20, 2006, the Debtors entered into a loan agreement with Sky Bank, now by merger Huntington, in the face amount of $267,000. This obligation was secured by a mortgage on the Property dated March 20, 2006, also in the amount of $267,000 and recorded March 27, 2006. The Debtors filed a voluntary Petition under Chapter 12 of the Bankruptcy Code on August 31, 2009. In Schedule A of the Petition the Debtors valued the Property at $285,000. On November 8, 2009, Huntington filed a proof of claim concerning the above debt in the amount of $249,903.41, designating it as a secured claim.
Also on November 8, 2009, in the main bankruptcy case, Huntington filed a Motion for Relief from Automatic Stay (“Relief Motion”) at Document No. 17. In the Relief Motion, Huntington averred that its payoff was $252,272.45 and that “[t]he fair market value of the premises was $169,000 based on an appraisal/BPO dated November 4, 2009.” Id. at ¶ 12. Debtors filed a Response to the Relief Motion in which they agreed with the value that Huntington alleged, stating:
“Admitted. The Debtors accept the fair market value of the premises as $169,000.00 per the appraisal attached to the Relief Motion. Accordingly, they are in the process of filing a Complaint under Section 506 of the Bankruptcy Code for determination of the secured lien of the Movant Huntington.”
*722Id. at Document No. 23. Debtors then filed a Chapter 12 Plan in which they provided:
“Huntington Bank holds a mortgage on Debtor’s real estate which it has valued at $169,000.00 in a secured proof of claim (No. 6) of $249,903.41. Debtor’s will accept Huntington’s value and file a Complaint under § 506 to establish the secured portion of this claim, and the balance shall be unsecured.”
Id. at Document No. 26. Thereafter, on December 3, 2009, the Debtors filed the within Adversary Proceeding. The initial hearing on the Relief Motion was held on December 15, 2009. The following colloquy took place at the hearing:
Court: What is the equity situation?
Atty. Gaertner: We have the mortgage on the 48 acres and on the equity issue, first of all, a claim has been filed in this case listing total indebtedness of $249,900. With respect to the issue of equity, a broker’s price opinion was requested and attached to our motion and it shows a value of $169,000. My client has looked at it and has said, why in the world are we even using this because this farm has 48 acres and it is using comparables with one-third of an acre, I believe one has 4 acres. So my client has gone ahead and ordered a full interi- or appraisal and I will be contacting Mr. Hutzelman to basically request their cooperation so that we can get the appraisal done and get a good reliable figure on what the property is worth.
See Audio Transcript of Proceedings dated December 15, 2009, 1:38:25 to 1:39:36. After a discussion about the payments proposed under the Plan, the colloquy continued:
Court: Any objection to continuing this to the conciliation?
Atty. Gaertner: No, your honor. We will not object to continuing it to the conciliation conference.
Id. at 1:43:36 to 1:44:13.
The Complaint seeks a determination that the value of the Property is $169,000, the same value alleged by Huntington in its Relief Motion. On February 12, 2010, Debtors filed an Amended Schedule A in which the Debtors changed the value of the Property from the $285,000 value that they originally stated to a value of $169,000, indicating that they now agree with the value as alleged by Huntington in the Relief Motion. Huntington filed a withdrawal of its Relief Motion on May 31, 2010, which was granted by Order dated June 1, 2010. Document Nos. 72, 73. Huntington has now filed a full appraisal which asserts a value for the Property in the amount of $267,500. See Adversary Proceeding, Document No. 30.
SUMMARY JUDGMENT STANDARD
Summary judgment, made applicable to adversary proceedings pursuant to Fed.R.Bankr.P. 7056 which incorporates Fed.R. Civ.P. 56, is appropriate if the pleadings, depositions, supporting affidavits, answers to interrogatories and admissions that are part of the record demonstrate that there exists no genuine issue of material fact and that only a legal issue exists thereby entitling the moving party to judgment as a matter of law. Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986); Earth-Data Int’l of N.C., L.L.C. v. STV, Inc., 159 F.Supp.2d 844 (E.D.Pa.2001); In re Air Nail Co., 329 B.R. 512 (Bankr.W.D.Pa. 2005). Med. Protective Co. v. Watkins, 198 F.3d 100, 103 (3d Cir.1999) (quoting Armbruster v. Unisys Corp., 32 F.3d 768, 777 (3d Cir.1994)); Fed.R.Bankr.P. 56(c). Here, the Parties agree, and the record is clear, that no material facts are at issue.
*723
DISCUSSION
(a) Judicial Admission
In their Summary Judgment Motion, the Debtors ask that judgment be entered in their favor on the issue of whether Huntington is bound by the $169,000 value it originally alleged in the Relief Motion claiming that the allegation is a binding judicial admission. If the Court were to agree, the Debtors believe entry of summary judgment would effectively resolve the Complaint in their favor. Alternatively, the Debtors claim that Huntington is judicially estopped from asserting any other value. The Court disagrees with the Debtors’ position in both instances.
“Judicial admissions are concessions in pleadings or briefs that bind the party who makes them.” Berckeley Inv. Group, Ltd. v. Colkitt, 455 F.3d 195, 211 n. 20 (3d Cir.2006) citing Parilla v. IAP Worldwide Serv., VI, Inc., 368 F.3d 269, 275 (3d Cir.2004) (finding that the plaintiff was bound because she “expressly conceded those facts in her complaint.”), citing, inter alia, Soo Line R. Co. v. St. Louis Southwestern Ry., 125 F.3d 481, 483 (7th Cir.1997) (noting the “well-settled rule that a party is bound by what it states in its pleadings”); Glick v. White Motor Co., 458 F.2d 1287, 1291 (3d Cir.1972) (noting that unequivocal “judicial admissions are binding for the purpose of the case in which the admissions are made[,] including appeals”).
However, when a party making a judicial admission subsequently provides a timely explanation as to the error, the trial court must accord the explanation due weight. Sicor Ltd. v. Cetus Corp., 51 F.3d 848, 859-60 (9th Cir.1995); Schwartz v. Adams County, 2010 WL 2011582 at *4 (D.Idaho, May 20, 2010); In re LRP Mushrooms, Inc., 2010 WL 2772510 at *10 (Bankr.E.D.Pa., July 13, 2010); Adani Exports, Ltd. v. Amci (Export) Corp., 2009 WL 2485370 at *9 (W.D.Pa. August 7, 2009). Although factual assertions in a pleading can ultimately be considered judicial admissions, “admissions” made in su-perceded pleadings lose their binding force and have value only as evidentiary admissions. See Bank One, Tex., N.A. v. Prudential Ins. Co. of Am., 939 F.Supp. 533, 541 (N.D.Tex.1996). An unequivocal judicial admission is binding on the party who made it which is to be distinguished from an evidentiary admission which is admissible but not conclusive. In re Jordan, 403 B.R. 339, 351 (Bankr.W.D.Pa.2009). A party may introduce superceded admissions into evidence to be considered as adverse evidentiary admissions by the fact-finder. In re Gruppo Antico, Inc., 359 B.R. 578, 587-88 (Bankr.D.Del.2007) quoting In re C.F. Foods, L.P., 265 B.R. 71, 87 (Bankr.E.D.Pa.2001). Even the Debtors agree with the foregoing standard in their brief which summarizes how to apply the doctrine of judicial admissions, i.e., “statements contained in a party’s pleadings are binding on that party and are considered judicial admissions unless the statements are withdrawn or amended.” See Brief in Support of Motion for Summary Judgment, p. 3, Adversary Proceeding, Document No. 21.
As demonstrated by the prior reference to the record, Huntington timely repudiated its allegation of value at the initial hearing on the Relief Motion. It explained that the value of $169,000 was the result of a broker’s price opinion (“BPO”) and not a formal appraisal and that it had, by the time of the first hearing, realized that the comparables utilized in the BPO were inadequate and that as a result it was obtaining a full appraisal to determine the true value. Furthermore, it subsequently, although belatedly, with*724drew the Relief Motion in which the allegation of value was set forth.
The Court finds that Huntington’s timely explanation of the error at the first hearing and its subsequent withdrawal of the Relief Motion supercedes and warrants relief from the allegation of value relied upon by the Debtors in the Summary Judgment Motion. The Court did not make any determination based on the asserted value by Huntington. The Debtors were promptly made aware of Huntington’s position and have had or will have adequate opportunity to obtain their own appraisal to learn the true value of the Property for use at trial. Thus, the Court concludes that the allegation of value is not a binding judicial admission. It is an evi-dentiary admission which may be presented as evidence by the Debtors at trial and which may be controverted or explained by Huntington.
(b) Judicial Estoppel
Closely related to the doctrine of judicial admissions is the doctrine of judicial estoppel. Judicial estoppel “is a tool designed to protect the Court from parties who seek to gain advantage by ‘litigating on one theory and then subsequently seeking additional advantage by pursuing an irreconcilably inconsistent theory’.” Bosco v. C.F.G. Health Systems, LLC, 2007 WL 1791254 at *3 (D.N.J., June 19, 2007) quoting Ryan Operations G.P. v. Santiam-Midwest Lumber Co., 81 F.3d 355, 358 (3d Cir.1996). It is an extraordinary remedy to be invoked when a party’s inconsistent behavior will otherwise result in a miscarriage of justice. Oneida Motor Fght., Inc. v. United Jersey Bank, 848 F.2d 414, 424 (3d Cir.1988).
To find that the doctrine of judicial estoppel applies, cases emanating from the Court of Appeals for the Third Circuit require that: (1) the party to be estopped took two irreconcilably inconsistent positions; (2) the change of position was done in bad faith, in order to play “fast and loose” with the court; and (3) the sanction of estoppel is “tailored to address the harm” and cannot be remedied by a lesser sanction. Montrose Med. Group Participating Savings Plan v. Bulger, 243 F.3d 773, 779-80 (3d Cir.2001) quoting Klein v. Stahl GMBH & Co. Maschinefabrik, 185 F.3d 98, 108 (3d Cir.1999). The doctrine of judicial estoppel is to be applied sparingly and reserved for the most egregious case. Krystal Cadillac-Oldsmobile GMC Truck, Inc. v. GMC, 337 F.3d 314, 324 (3d Cir.2003). These factors need not necessarily be considered, in determining the existence of judicial estoppel where the party alleging the inconsistent positions did not ultimately convince the trial court to accept its earlier position. G-I Holdings, Inc. v. Reliance Ins. Co., 586 F.3d 247, 262 (3d Cir.2009) (citations omitted).
The Debtors direct our attention to United Bank/Seaboard Nat’l v. B. F. Saul Real Estate Inv. Trust, 641 F.2d 185 (4th Cir.1981) in support of the application of judicial estoppel here. In that case, Triangle Inn Associates (“Triangle”) owned and operated a Holiday Inn motel. It owed balances on a first mortgage to B.F. Saul Real Estate Investment Trust (“Saul”) and on second and third mortgages to two banks, United Virginia Bank and Virginia National Bank (collectively, the “Banks.”) Triangle filed a bankruptcy reorganization proceeding and Saul sought relief from stay. The Banks successfully opposed the relief, asserting that Saul was adequately protected because the value of the Holiday Inn property, including $650,000 in personal property, was far in excess of the amount of Triangle’s debt to Saul. The Banks also successfully obtained a “cramdown” of Triangle’s plan of reorganization because, as the court found, Saul was fully secured by virtue of the Inn’s *725value which included the personal property, which aggregate value, “handsomely” exceeded Saul’s debt. Only when Triangle defaulted on its plan and the bankruptcy court allowed Saul to revive its foreclosure proceeding, that had been suspended for two and one-half years by the bankruptcy proceeding, did the Banks assert the contrary position that Saul’s security interest did not include the personal property.
Unlike the situation before this Court, a finding of judicial estoppel was appropriate in the B. F. Saul Real Estate case since the Banks successfully argued one position to conclusion to obtain a desired result in their favor and, only when the situation changed and the Debtor failed, did they begin to argue a contrary position that could lead to an opposite result that would favor the Banks under the changed circumstances. Here, Huntington never obtained a favorable result. It alerted the Court of the problems with the BPO at the first hearing and is not now seeking to change its position only after successfully advancing a different position. Therefore, the B. F. Saul Real Estate case does not support the Debtors’ position under these facts.
The Debtor also directs the Court’s attention to In re Stroh, 34 Fed.Appx. 562 (9th Cir.2002), believing it too supports the Debtor’s position since it held that an individual who stated he had no partnerships interests in his prior bankruptcy, could not thereafter claim, in fact, that he possessed a partnership interest in a subsequent, non-bankruptcy matter. Stroh does not help the Debtor’s cause, either.
In Stroh, the Debtor filed a bankruptcy on June 15, 1995. In his bankruptcy schedules he stated that he owned no partnership interests. The case was closed as a no asset case on October 4, 1995. In 1998, Stroh sued an individual by the name of Grant in state court claiming that Grant owed him money from an alleged partnership between them. Stroh claimed in the subsequent action that the partnership began before the filing of his bankruptcy petition on June 15,1995. The court found that all three elements of judicial estoppel were met. First, Stroh’s later claim of a partnership was inconsistent with his bankruptcy schedule. Second, the bankruptcy court accepted Stroh’s earlier position when it closed Stroh’s bankruptcy case as a no-asset case. Third, “regardless of whether Stroh would now receive a benefit from his lawsuit against Grant, Stroh derived an unfair advantage when he deceived the bankruptcy court into closing his case.” Id. at 565. As a result, the court in Stroh concluded that the application of judicial estoppel “was necessary to preserve the integrity of the bankruptcy process.” Id. Here, Huntington has not deceived the Court into taking action. Nor did it obtain a result based on false statements that resulted in an unfair advantage.
The Debtors next reference In re Artha Mgmt., Inc., 174 B.R. 671 (Bankr.S.D.N.Y.1994) in support of summary judgment. This case involved a preference action where the Chapter 11 trustee sought to recover monies paid to a bank within a year of the February 15, 1990 bankruptcy filing. Previously, in December, 1990, the Bank sought relief from stay. In 1991, relief was granted by stipulation entered between the Chapter 11 trustee and the bank. In the stipulation it was agreed that liens against the debtor’s property exceeded the property’s value and that the debtor possessed no equity. The trustee sought to preclude the bank, on the basis of judicial estoppel, from introducing an appraisal to contest the company’s solvency. The court concluded that the bank’s statements in the stipulation regarding the property’s value — made in the context of a *726stay relief motion — did not preclude the bank from making a statement regarding the property’s value at the time of the alleged preferential transfers, two years earlier. Here, we have a similar situation. Even if there had been a stipulation or finding of value in regard to the Relief Motion, that value was asserted in the context of that motion. Such an event is not necessarily binding in a subsequent Section 506 action.
Finally, application of the doctrine of judicial estoppel as applied to estimates of value in a bankruptcy is considered with a different, more relaxed, view. “It is well settled that ‘estimates of value made during bankruptcy proceedings are binding only for the purpose of a specific hearing ... [do] not have a res judicata effect’ in subsequent hearings.” Suntrust Bank v. Blue Water Fiber, L.P., 93 F.Supp.2d 787, 796 (E.D.Mich.2000) quoting In re Snowshoe Co., 789 F.2d 1085, 1088-89 (4th Cir.1986). “Under Code § 506(a), valuation for one purpose in a case is not even binding for other papers in the same case.” In re Kouterick, 161 B.R. 755, 760 (Bankr.D.N.J.1993).
In In re Thomas 344 B.R. 386 (Bankr. W.D.Pa.2006), the Honorable Judith K. Fitzgerald of this District was faced with a factual situation very similar to the present case and she rendered an apt opinion which the Court finds to be instructive here. In Thomas, the mortgagee sought relief from stay, attaching to its motion a BPO that listed the fair market value of the property at $140,000. The motion was granted by default. The debtors subsequently filed a motion to reconsider and also converted the bankruptcy case from Chapter 7 to Chapter 13. Thereafter, the court vacated the default order and the debtors then filed a complaint for determination of secured status. In their complaint the debtors asserted that under the doctrine of judicial estoppel the mortgagee was precluded from asserting a property value different from the value asserted in the prior motion for relief from stay.
The court in Thomas found that the doctrine of judicial estoppel did not apply for two reasons. First, the order granting relief was vacated and was of no effect. Therefore, there was no finding of value. Second, the determination of value for purposes of a motion for relief from stay and for a valuation under Section 506(a) are made under differing standards. When considering a motion for relief from stay, a court need only determine that there is no equity; it need not determine an exact value. Under Section 506(a), the parties are bound to a specific value. “Full appraisals, not just the ‘drive by’ Broker’s Price Opinion are used for purposes of § 506(a) when the matter is contested.” Id. at 393.2 In this case, there was never an order, not even a default order on the Relief Motion. There was no finding of value. Judicial estoppel does not apply.
CONCLUSION
The original, $169,000 value for the Property as asserted by Huntington was *727promptly withdrawn and an adequate explanation of that withdrawal provided. The Debtors have suffered no prejudice by the withdrawal. As such, the doctrine of judicial admission is not applicable. Furthermore, the original value asserted by Huntington was never relied upon by the Court. The Court made no determination of value for any purpose. Nothing in the record indicates that Huntington’s actions were intended to take advantage of, or play “fast and loose,” with Court.3 Therefore, the doctrine of judicial estoppel does not apply. Finally, allowing the Parties to move forward in this fashion will allow the true value of the Property to be decided on the merits, with both Parties having the opportunity to seek full appraisals and to present all of their evidence to the Court.
For the foregoing reasons, the Summary Judgment Motion will be denied. An appropriate Order will be entered.
. The Court’s Jurisdiction to hear and determine the Motion for Summary Judgment on the Complaint for Determination of Secured Status arises under 28 U.S.C. §§ 1334 and 157. This is a core matter pursuant to 28 U.S.C. § 157(b)(2)(A), (K) and (O). This Opinion constitutes the Court's findings of fact and conclusions of law pursuant to Fed.R.Bankr.P. 7052 and 9014.
. At argument Huntington explained that it often submitted BPOs at the pleading stage of a relief from stay motion merely as a cost saving tactic both to Huntington and, ultimately, the debtor. A full blown appraisal can be very costly depending on the subject matter. Huntington takes the position that it is prudent not to incur these costs early on in the pleading stage, which costs will be borne by the debtor if the claim is ultimately cured, and pose an additional cost to Huntington, if not, if no issue as to value arises in the litigation. Depending on the course of the relief from stay litigation, unnecessary costs therefore can be avoided. This approach in financing relief from stay litigation is practical, reasonable and appropriate. It is supported by the Court’s decision in Thomas. This Court concurs and agrees with the reasoning behind taking such an approach.
. Huntington no more played "fast and loose” with the Court than did the Debtors, who alleged a value of $285,000 for the Property in their initial Schedule A, and once the faulty BPO was in hand, quickly changed its allegation of value to $169,000 and immediately filed a Plan and the within Complaint in an attempt to bind Huntington to the reduced value. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494638/ | MEMORANDUM OPINION
ROBERT G. MAYER, Bankruptcy Judge.
The question presented is whether money in the debtors’ bank account which is from registration and title fees and sales tax collected by the debtors on the sale of motor vehicles, are proceeds subject to the security interest of Automotive Finance Corporation.1
The lender had a blanket lien on all assets of the debtors. It asserts that all of the money in the debtors’ bank accounts is subject to its lien. The money in the bank accounts was derived primarily from the sale of motor vehicles subject to the lender’s lien. However, in connection with each sale, the debtors collected title and registration fees and sales taxes. They *803were separately itemized on each sales contract. The fees and taxes have not been paid to the state and the consumers cannot get titles or license plates without the payment of these fees and taxes. The question is whether these fees and taxes which were in the debtors’ bank accounts are subject to the lender’s security interest.
Section 8.9A-102(64) of the Code of Virginia (1950) defines proceeds as:
(A) whatever is acquired upon the sale, lease, license, exchange, or other disposition of collateral;
(B) whatever is collected on, or distributed on account of, collateral;
(C) rights arising out of collateral;
(D) to the extent of the value of collateral, claims arising out of the loss, nonconformity, or interference with the use of, defects or infringement of rights in, or damage to, the collateral; or
(E) to the extent of the value of collateral and to the extent payable to the debtor or the secured party, insurance payable by reason of the loss or nonconformity of, defects or infringement of rights in, or damage to, the collateral.
None of the fees or taxes are proceeds from the sale of the vehicles. They are in addition to, and are not a part of, the value of the vehicles. The debtors were obligated to use them to register the vehicles they sold. The fees and taxes are a necessary part of the transaction to sell a vehicle, but are not derived from the value of the vehicle itself.
The lender had no expectation that it would ever have a security interest in the fees or taxes. It knew, as a lender financing automobile dealerships, that upon the sale of most vehicles, the consumer borrows money from a new lender to finance the purchase. In order for the consumer’s lender to loan the money to purchase the vehicle to pay the debtors’ lender and obtain a release of the debtors’ lender’s lien, the consumer’s lender must receive a first lien on the vehicle. In order to receive a first lien, the vehicle must be registered with the appropriate Department of Motor Vehicles. In order for it to be registered, the title and registration fees and sales taxes must be paid. Only when the title and registration fees and sales taxes are paid, will the vehicle be registered, the title issued, a lien placed on the title in favor of the consumer’s lender, and the new loan proceeds disbursed to the debtors’ lender. This is made clear by each sales contract where the fees and taxes are separately itemized and are in addition to the sales price of the vehicle. The title and registration fees and the sales taxes are not proceeds from the sale of the motor vehicles and the debtors’ lender does not have a security interest in them.
. The issue is not whether the title and registration fees and sales taxes are property of the estate or whether the fees and taxes are subject to a trust, but the extent of the lender's security interest. See Begier v. Internal Revenue Service, 496 U.S. 53, 110 S.Ct. 2258, 110 L.Ed.2d 46 (1990). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494639/ | REASONS FOR ORDER DENYING TRUSTEE’S OBJECTIONS TO PLAN CONFIRMATION
ELIZABETH W. MAGNER, Bankruptcy Judge.
This matter came before the Court on an Objection to Confirmation (P-37) filed by S.J. Beaulieu, the standing Chapter 13 Trustee (“Trustee”). Trustee objected to confirmation of the Chapter 13 plan filed by Benjamin Ragos (“Mr. Ragos”) and Stella Ragos (“Mrs. Ragos”) (collectively “Debtors”) on the following grounds:
1) not all disposable income and not all social security income provided to plan. 2) Debtors have not committed all disposable and social security income to the repayment of creditors and that the plan was not proposed in good faith. 3) Does not pay Debtor’s liquidation analysis. 4) Louisiana has opted out of federal exemptions. Social Security not exempt under Louisiana law.
A hearing on the Amended Objection took place on June 7, 2011. Andrew Wie-belt, counsel for Trustee, and Mark Need-ham, counsel for Debtors, were present. At the hearing, Trustee withdrew his third and fourth objections.
11 U.S.C. § 1325(a)(3) and (a)(7) mandate that a Chapter 13 plan be proposed in good faith and not by any means forbidden by law and that the action of the debtor in filing the petition be in good faith. If a party in interest objects to a debtor’s good faith, the court must take evidence and make a factual determination on the issue based on the totality of the circumstances. Goeb v. Heid, 675 F.2d 1386, 1391 (9th Cir.1982); Smyrnos v. Padilla, 213 B.R. 349, 352 (9th Cir. BAP 1997).
Once a party raises an objection to a debtor’s good faith, the debtor bears the burden of proving good faith by a preponderance of the evidence. Padilla, 213 B.R. at 352; In re Lavilla, 425 B.R. 572, 576, 580-81 (Bankr.E.D.Cal.2010). The parties stipulated Debtors have met their burden of establishing good faith and that Trustee now bears the burden of refuting same.
After hearing arguments and taking judicial notice of all pleadings filed in the record, including the proofs of claim and schedules, this Court took the matter under advisement on June 7, 2011.
After considering the briefs, evidence submitted, arguments of counsel, and the relevant law, the Court makes the following findings of fact and conclusions of law.
*806I. JURISDICTION
This Court has jurisdiction pursuant to 28 U.S.C. §§ 157(b)(2)(L) and 1334. Venue is appropriate under 28 U.S.C. § 1408(Z).
II. FACTS
Mr. Ragos receives $1,300.00 per month and Mrs. Ragos receives $554.00 per month in social security benefits. There have been no changes in the amount of social security benefits received prior to and after the filing of the bankruptcy petition. In addition, Debtors have income of $2,859.00 from retirement benefits and a VA disability. Schedule I also lists Mr. Ragos’ monthly take home pay at $2,599.65.
Debtors filed their proposed plan on February 22, 2011, and amended it on May 21, 2011. Debtors’ amended plan provides for payments of $526.00 for the first month and $576.00 for the following fifty-nine (59) months of the plan. The liquidation value of Debtors’ estate over and above payments to secured, administrative and priority claimants is $8,990.00. Debtors propose to pay $9,002.38 to unsecured creditors over the life of the plan.
Monthly expenses, as reflected on Debtors’ amended Schedule J, total $4,106.00. Trustee deemed the expenses reasonable and within federal guidelines. Debtors’ amended Schedule I provides a voluntary contribution of $200.00 in social security benefits toward their required plan contribution. The remaining social security benefits received by Debtors are retained.
Debtors scheduled unsecured debts of $51,153.68. The last day to file proofs of claim was July 5, 2011, and as of July 6, 2011, $23,389.87 in unsecured proofs of claim were on file.1
III.FINDINGS
A. Exempt Nature of Social Security Benefits Under The Social Security Act and the Bankruptcy Code In the Calculation of Plan Payments
Since April 20,1983, Congress specifically exempted social security benefits from “the operation of any bankruptcy or insolvency law.” Specifically, Section 407 of the Social Security Act provides:
The right of any person to any future payment under this title shall not be transferable or assignable, at law or in equity, and none of the moneys paid or payable or rights existing under this title shall be subject to execution, levy, attachment, garnishment, or other legal process, or to the operation of any bankruptcy or insolvency law.
No other provision of law, enacted before, on, or after the date of the enactment of this section may be construed to limit, supersede, or otherwise modify the provisions of this section except to the extent that it does so by express reference to this section.
Nothing in this section shall be construed to prohibit withholding taxes from any benefit under this title, if such withholding is done pursuant to a request made in accordance with section 3402(p)(l) of the Internal Revenue Code of 1986 by the person entitled to such benefit or such person’s representative payee, (emphasis added)2
While the language of 42 U.S.C.A. § 407(a) is broad, it does have two (2) *807important exceptions. 26 U.S.C.A. § 3402(p)(l) provides that federal payroll taxes incurred as a result of social security benefits may be paid from those benefits. Additionally, 42 U.S.C.A. § 405(j) allows the Social Security Administration to pay benefits directly to a representative payee if provided for the benefit of the individual recipient. Typical examples of this exception allow the payment of benefits to a hospital caring for the individual. As a result, while the benefits attributable to social security may be excluded from the calculation of disposable income, both payroll taxes incurred as a result of their receipt, as well as debtor’s actual medical expenses are susceptible to objection by Trustee as an unnecessary or unreasonable deduction from current monthly income.3
Although social security benefits were generally exempt from “operation of any bankruptcy law,” prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”), some courts included social security income as part of the estate available to pay creditors. See In re Hagel, 184 B.R. 793 (9th Cir. BAP 1995). Perhaps in response to these cases, in 2005, Congress revised the Bankruptcy Code to specifically and unambiguously exclude amounts received as social security benefits from the definition of the income subject to claims of creditors (“current monthly income” or “CMI”).4 Section 101(10A) under BAPC-PA. Under BAPCPA, CMI is utilized to calculate disposable income (“DI”), which is the starting point for determining a debtor’s required plan payment.
In Devilliers, this Court held that social security benefits are excluded from calculations of CMI and DI for purposes of funding a Chapter 13 plan. Devilliers, *808supra. Devilliers found that it was reasonable to assume that Congress placed a high priority on allowing seniors to retain social security benefits, even if it resulted in lower distribution to creditors. As a result, the decision to exempt social security benefits from seizure by creditors and from inclusion in the definition of CMI and DI was a policy decision by Congress.
In Devilliers, Trustee argued, as he does here, that Congress’ chosen definition of CMI places a significant stream of income beyond the reach of creditors in Chapter 13 cases. The Court continues to acknowledge this as true. But the Court also finds that Congress, in plain and unambiguous language, specifically excluded social security benefits from CMI.
As noted in Devilliers, Congress is presumed to know the effect of its acts. Cannon v. University of Chicago, 441 U.S. 677, 99 S.Ct. 1946, 60 L.Ed.2d 560 (1979). For above the means test debtors, social security income may reach $24,636.00 for individuals and $49,272.00 for married couples. Unlike an unknown or unanticipated post-petition change in income, social security benefits are both predictable and certain.
The exclusion of social security benefits from DI might appear counter intuitive at first. However, because creditors had no right to seize these benefits pre-petition, their exclusion from DI post-petition is not a drastic change in a creditor’s position. Decisions regarding credit advances could not, or perhaps should not, have been based on the existence of social security income. As a result, their exclusion leaves creditors in no worse a position than existed pre-petition. It appears that Congress, through BAPCPA and the Social Security Act, effected a policy decision that regardless of income level, a debtor’s social security benefits would be protected from creditor interests. The rationale for this treatment lies in the exempt nature of the benefits themselves.
B. Are Social Security Benefits Included in the Calculations of Projected Disposable Income?
Trustee argues that even if social security income is statutorily excluded from both the calculation of CMI and DI, the United States Supreme Court’s recent decision in Hamilton v. Canning, — U.S. -, 130 S.Ct. 2464, 177 L.Ed.2d 23 (2010), supports including social security benefits in calculating Debtors’ “projected disposable income” (“PDI”).
In Canning, the Supreme Court concluded that CMI and DI calculations are different from the calculation of PDI. Section 1325(b)(1)(B). DI is calculated by mechanically plugging into a formula the debtor’s income from the six-month period prior to a bankruptcy filing. PDI, however, is a forward-looking analysis that takes into consideration a debtor’s actual post-petition financial situation. Lanning, — U.S.-, 130 S.Ct. 2464 (2010).
In the great majority of cases, the forward-looking analysis begins and ends with the calculation of DI. However, courts may go “further” and take into account other known or virtually certain changes in a debtor’s future income. The Supreme Court stated, “[i]n cases in which a debt- or’s disposable income during the 6-month look-back period is either substantially lower or higher than the debtor’s disposable income during the plan period, the mechanical approach would produce senseless results that we do not think Congress intended.” Lanning, 130 S.Ct. at 2476.
Trustee argues that excluding Debtors’ post-petition social security benefits from the calculation of Debtors’ PDI leads to a “senseless result.” He argues that Debtors’ CMI from the six-month look back *809period is significantly lower than their PDI because the Debtors’ pre-petition social security benefits are not included in the CMI. Trustee argues it would be a “senseless result” if the social security benefits are not included in PDI because by doing so, Debtors may retain excess PDI (i.e. the social security benefits) that should be committed to plan payments. Trustee avers that this is the unusual case the Supreme Court contemplated in Lanning. The Court disagrees and finds Lanning distinguishable.
The question presented in Lanning was “whether in calculating the debtor’s ‘projected disposable income’ during the plan period, the bankruptcy court may consider evidence suggesting that the debtor’s income or expenses during that period are likely to be different from her income or expenses during the pre-filing period.” Id., (emphasis added). In responding in the affirmative, the Supreme Court held that courts are allowed to take into consideration known or virtually certain changes in the debtor’s disposable income at the time of confirmation.
In Lanning, the debtor received a onetime buy-out from her former employer within the six-month look back period. While this raised Lanning’s income during the six months preceding bankruptcy, it was evident at confirmation that the increase was due to a single non-repeating event. According to Lanning, the calculation of PDI allowed the court to adjust debtor’s required plan payment downward because it was both certain and predictable that the debtor’s PDI post filing would be less.
The facts of this case are not analogous. There is no difference between Debtors’ income in the six months preceding bankruptcy and today. There has been no allegation that Debtors received a one-time payment prior to filing bankruptcy, or that they will receive any new, additional income during the plan period. Furthermore, there is no allegation that the social security benefits will be any different post-petition than they were pre-petition.
Social security benefits are specifically excluded from the calculation CMI and DI by virtue of 11 U.S.C. §§ 101(10A) and § 1325(b). A “senseless result” will not flow from the exclusion of Debtors’ exempt social security benefits when determining the appropriate and mandatory plan payments. The “senseless result” referred to by Trustee is simply one created by the intended application of the governing statutes, excluding social security benefits from a creditor’s reach.
Trustee cites other courts holding that social security income should be included in PDI. See In re Schnabel, 153 B.R. 809 (Bankr.N.D.Ill.1993), and In re Timothy, 2009 WL 1349741 (Bankr.D.Utah, May 12, 2009).5 With respect to my brethren, the rationale used is these cases is simply unsustainable in light of BAPCPA’s clear directive.
The recent case of Baud v. Carroll, 634 F.3d 327 (6th Cir.2011), is true to the plain language of the governing statutes. In Baud, the United States Court of Appeals for the Sixth Circuit concluded that benefits received under the Social Security Act are not to be included in the calculation of PDI. The Baud Court found no support for the view:
[T]hat a court may disregard the Code’s definition of disposable income (which *810incorporates the income exclusions of Sect. 101(10A)) simply because there is a disparity between the amount calculated using that definition and the debtor’s actual available income as set forth on Schedule I. In other words, the discretion Lanning affords does not permit bankruptcy courts to alter BAPCPA’s formula for calculating disposable income (ie., does not permit the court to alter the items to be included in and excluded from income). Permitting the bankruptcy court ... to include Social Security benefits in the calculation of the Appellee’s [debtor’s] projected disposable income essentially would read out of the Code BAPCPA’s revisions to the definition of disposable income.” Baud at 345.
This Court also agrees with a similar ruling in In re Barfknecht, 378 B.R. 154 (Bankr.W.D.Tex.2007). “The sounder conclusion is that, in calculating projected disposable income, we are constrained to begin with the debtor’s disposable income as that term is defined for us by Congress in the statute. Thus, we conclude that benefits received under the Social Security Act are not income for the purposes of calculating projected disposable income and cannot be considered as part of the ‘ability to pay test’ of section 1325(b)(1)(B).” Barfknecht, 378 B.R. at 162.
This Court finds that the “clear indication by Congress that social security benefits are to be treated differently post-BAPCPA must override BAPCPA’s purpose of ensuring that debtors ‘repay creditors the maximum they can afford’ ... because any application of that purpose must be ‘consistent with the statutory text.’ ” Baud at 347. As pointed out in Barfknecht, “an exclusion is an exclusion, whether looking backward or forward looking.” Barfknecht, 378 B.R. at 162.
C. Does the Exclusion of Social Security Benefits, In Whole or In Part, from Plan Payments Constitute Bad Faith?
Having concluded that Debtors’ plan is in technical compliance with Section 1325 and that the social security benefits are not included in the PDI calculation, this Court must now decide if the “plan was proposed in good faith and not by any means prohibited by law.”
Debtors urge that they are in good faith because they have met the requirements of 11 U.S.C. §§ 1325(b) and 707(b)(2) and have proposed a plan which commits all disposable income for a term of sixty (60) months. The Court disagrees with Debtors’ assertion that strict, technical compliance with the means test necessarily satisfies a debtor’s burden of good faith. Stitt, 403 B.R. 694, 702, 703 (Bankr.D.Idaho, 2008); In re Westing, 2010 WL 2774829 (Bankr.D.Idaho 2010). Determining whether a plan is proposed in good faith is a separate undertaking requiring an analysis of the totality of the circumstances. Deans v. O’Donnell, 692 F.2d 968 (4th Cir.1982) and In re McLaughlin, 217 B.R. 772 (Bankr. N.D.Tex.1998). Nevertheless, the Court acknowledges that it should be a rare case that finds a debtor in technical compliance with the terms of the Bankruptcy Code and yet in bad faith. Devilliers, 358 B.R. at 863.
Trustee views Debtors’ decision to exclude all but a portion of their social security benefits as evidence of a lack of good faith. Trustee argues that Debtors’ decision to include only $200.00 of their $1,854.00 per month in social security benefits is an indicia of bad faith under Section 1325(a)(3). In re Allawas, 2008 WL 6069662, 5-6 (Bankr.D.S.C.2008); In re Upton, 363 B.R. 528, 536 (Bankr.S.D.Ohio, 2007). Trustee argues that Debtors’ social *811security benefits render them capable of making higher payments to unsecured creditors.
Debtors have committed $34,510.00 in social security benefits to the plan.6 Trustee asserts that the $1,854.00 per month available to Debtors from their social security benefits will entitle Debtors, over the life of the plan, to accumulate a surplus of $76,680.00 over and above payments they have committed. Although it appears Debtors’ plan will now pay a sizeable dividend, Debtors arguably are capable of satisfying claimants in full.
Trustee argues that “the insufficiency of assets devoted to a plan may be a basis for a finding of lack of good faith under Section 1325(a)(3) should this court find that debtors were attempting to manipulate the statutory scheme for their own benefit at the expense of creditors.” Memorandum in Support of Trustee’s Objection to Confirmation at page 3 (P-43).
Trustee obviously believes that Debtors are manipulating the Bankruptcy Code. It vexes him that Debtors’ plan provides less than full payment to unsecured creditors while permitting Debtors to retain the majority of their social security benefits. Trustee argues that Debtors have failed to demonstrate how excluding 90% of their social security benefits, enabling the accumulation of a $76,680.00 surplus over the life of the plan, while committing a negligible percentage of benefits to monthly living expenses demonstrates good faith.
At the outset it must be conceded that the exclusion of social security benefits from funds available to pay creditors cannot constitute bad faith per se. As previously explained, Congress provided for this result in explicit and unequivocal language involving the calculation of CMI and DI.
Trustee has conceded that Debtors’ expenses are reasonable and necessary to their support and maintenance. Thus, the only question that remains is whether Debtors’ refusal to commit a greater share of exempt income to their proposed plan is evidence of bad faith.
Prior to 2005, some courts found that the act of not contributing the entirety of one’s social security benefits to repay one’s debts through a Chapter 13 plan necessarily branded the plan as not being filed in good faith. See, Hagel v. Drummond, supra.
The provisions of BAPCPA altered this analysis by including specific language excluding social security benefits from DI. Several courts have held that when the Bankruptcy Code specifically addresses a particular issue, the good faith standard should not be expanded to alter the statutory treatment of that issue. See Matter of Smith, 848 F.2d 813, 820-21 (7th Cir.1988) (“Since Congress has now dealt with the issue quite specifically in the ability-to-pay provisions there is no longer any reason for the amount of a debtor’s payments to be considered as even part of the good faith standard.”); In re Alexander, 344 B.R. 742, 752 (Bankr.E.D.N.C.2006) (“[T]he debtor’s disposable income must be determined under Sect. 1325(b) and not as an element of good faith under Sect. 1325(a)(3)”).
A similar result was reached in Barfknecht, 378 B.R. at 164 The Court found that:
Social Security benefits are excluded as income of the debtor for purposes of satisfying the debtor’s ability to pay *812test. The good faith test in section 1325(a)(3) serves as salutary purpose to be sure — cutting off abuse. But it strikes this court at least as an odd reading of the Code indeed to conclude that a debtor’s following the Code, without more, could constitute abuse of the bankruptcy process. That sort of over-reading of the good faith standard would allow a court, in the name of good faith, to ignore or overrule whole sections of the Code, an irresponsible approach to statutory constructions if ever there was one. See Nat’l Labor Relations Bd. [v. Health Care & Retirement Corp. of America], 511 U.S. [571] at579-80, 114 S.Ct. 1778 [128 L.Ed.2d 586] (1999) ... Needless to say, the court declines the trustee’s invitation to do so in this case. As there is no other evidence indicating that the Debtor’s plans have not been proposed in good faith, and the Debtors otherwise have been honest and forthcoming with the court, this court concludes that the plans have been proposed in good faith.”
The Barfknecht Court also noted that:
We return then to the ‘totality of the circumstances’ as traditionally applied in this circuit. In re Chaffin II, 836 F.2d at 216 (reversing the bankruptcy court’s denial of confirmation and the district court’s affirmation “[b]ecause the bankruptcy court in effect found that [a few] factors per se constituted bad faith”). The trustee here has not directed the court to any peculiar circumstances in either of these cases demonstrating a lack of good faith. The trustee points only to the issue of the Debtors’ retention of some or all of their Social security benefits. Even before BAPCPA, such an argument would have failed in the Fifth Circuit. See id. The trustee has not demonstrated — or even argued — that the Debtors do not propose these plans with an intent not to effectuate them. Nor has the Trustee demonstrated or argued that the Debtors have proposed this plan for any purpose not permitted by the Bankruptcy Code. After considering the totality of the circumstances with respect to the Debtors there is no basis for concluding that either of these plans were not proposed in good faith. According the trustee’s reading of good faith in these two matters would amount to adopting a per se rule. This is not permitted in this circuit. See In re Chaffin II, 836 F.2d at 216. Id. at 164.
In this case, Trustee urges the Court to temper Congress’ explicit prohibition against including social security benefits in the calculation of CMI and DI by arguing a lack of good faith when the proposed Chapter 13 plan pays less than 100% to unsecured creditors. The Court finds Trustee’s arguments regarding Debtors’ lack of good faith unpersuasive. Congress specifically mandated the exclusion of social security benefits from the calculation of CMI. Unlike expenses, which must be reasonable and necessary to the support and maintenance of Debtors and their dependents, there is no ultimate modifier on this exclusion. Any holding that alters that scheme would place it in direct contravention with the statutory language.
Like the court in Barfknecht, this Court finds that retaining all or part of these benefits while paying less than 100% of general unsecured creditors’ claims does not constitute bad faith in proposing the plan per se. Instead, Debtors’ good faith must be examined under a totality of the circumstances analysis.
Trustee has not met his burden of proof under a totality of circumstances test. Trustee’s only factor in support of his conclusion is a logical consequence of excluding social security benefits from the CMI *813and DI calculations. Basic mathematics result in a smaller distribution to unsecured creditors if Debtors fail to contribute their entire social security benefit to the plan. That outcome, however, is based solely on the law of logical consequences, not bad faith intent.
The logical consequence of Congress’ decision to exclude social security benefits from the amount Debtors must contribute to a Chapter 13 plan, is that a lesser amount will be available to pay unsecured creditors. Conversely, if Congress had included social security benefits in the calculation of income, the logical consequence would be increased payments to unsecured creditors. Logical consequences cannot be an indicia of bad faith, they are simply a by-product of Congress’ express statute.
The natural consequence of Congress’ specific exclusion of social security benefits cannot be seen as lack of good faith by Debtors. Debtors have taken no deductions for medical expenses or taxes incurred because of social security benefits. Nor is this the rare debtor whose proposed plan is technically in compliance with Section 1325(b), but proposed in bad faith. Instead, this is a relatively typical fact pattern which follows the natural consequences of Congressional intent.
This Court understands the emotional tug that can lead to a finding that social security benefits must be included in PDI or that to exclude them is an act of bad faith. It also struggles with a holding that allows debtors to keep substantial social security benefits when creditors could be paid in full from those benefits. But Congress has spoken.
The Court declines to find that, standing alone, Debtors’ exclusion of the majority of their social security benefits from the proposed plan is an indicia of lack of good faith. There is no suggestion that the plan was proposed without an intent to effeetuate, or that the plan was proposed for any purpose not permitted by the Bankruptcy Code.
IV. RULING
Through the passage of BAPCPA, Congress attempted to balance the competing interests of a fresh start while curtailing the perceived abuses of Chapter 7. By requiring certain debtors to participate in Chapter 13, Congress decided to exclude social security benefits from the amounts Debtors were required to commit to Chapter 13 plans. As such, it will not force Debtors to include their social security benefits in PDI for purposes of 11 U.S.C. § 1325(b).
This Court also finds that the exclusion of social security benefits from Schedule I and the proposed plan payments does not constitute a per se finding of lack of good faith, without more. Doing so would eviscerate Congress’s statutory scheme.
The Court finds that Debtors’ plan has been proposed with an intent to effectuate and for purposes permitted by the Bankruptcy Code. There is no evidence of concealment of assets or prior bankruptcy cases. Furthermore, Debtors are current in their proposed plan payments and are paying unsecured creditors more than they would receive in a Chapter 7 liquidation and amounts greater than Debtors’ disposable income as calculated on Form B22C. Therefore, this Court finds that the Chapter 13 plan has been proposed in good faith. Trustee’s Objection to Confirmation is overruled, and the Debtors’ plan is CONFIRMED.
. Claim number 3 for $3,957.00 was filed as unknown as to priority or security. This claim has been included in the calculation of unsecured claims.
. The bankruptcy court for the Northern District of New York set out the history of Section 407 as follows:
"Prior to the passage of the Bankruptcy Reform Act of 1978, which introduced the current chapter 13 of the Code, the former *807Bankruptcy Act of 1898, as amended, allowed for a 'wage earner’ plan under then chapter XIII. The Code expanded the class of individuals eligible to seek chapter 13 protection to include individuals whose only source of income was from social security benefits. See 11 U.S.C. sect. 109(e) (allowing ‘individuals with regular income’ to file for relief under chapter 13.) As a result of this change, some early cases held that social security benefits were included as property of the estate under Code Sect. 541 and that the anti-assignment provision of the Social Security Act had been impliedly modified by the code. In swift reaction to those cases, Congress amended the anti-assignment provision in 1983 to provide as follows:
No other provision of law, enacted before, on, or about April 20, 1983, may be construed to limit, supersede, or otherwise modify the provisions of this section except to the extent that it does so by express reference to this section. 42 U.S.C. Sect. 407(b).
The explicit language of the above amendment evinces Congress’ clear intent that the anti-assignment provision is not to be deemed amended unless Congress specifically refer-
enees the statute in the previous or subsequent legislation, absent which, social security income remains outside ‘the operation of any bankruptcy ... law.' ”
In re Burnett, 2011 WL 204907 (Bkrtcy, N.D.N.Y.2011, Jan. 21, 2011).
. “Because social security income is both available and answerable to pay these expenses, debtor will bear the burden of establishing the reasonableness of any requested deduction from current monthly income for this purpose.” In re Devilliers, 358 B.R. 849, 865 (Bankr.E.D.La.2007). In this case, the Debtors purposefully excluded deductions for medical expenses and for taxes incurred as a result of social security payments.
. As concluded in the Burnett decision, "contrary to any reference to the provision of section 407(a) of Title 42 to indicate an intent to modify the anti-assignment provision, Congress made clear in the BAPCPA amendments to the Code that social security benefits were not part of a debtor's disposable income.” In re Burnett, 2011 WL 204907 (Bankr.N.D.N.Y., Jan. 21, 2011).
. This Court finds that all cases decided under the pre-BAPCPA revisions are distinguishable from all post-BAPCPA cases on the topic of PDI. Quite simply, the law was arguably different pre-BAPCPA. The Court must look to the plain language of the applicable statutes as enacted in 2005, and the cases interpreting them.
. Based on the claims on file, estimated distribution to unsecured claimants will be $9,002.38 or roughly 38%. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494640/ | OPINION
DAVID W. HOUSTON, III, Bankruptcy Judge.
On consideration before the court are the following, to-wit:
1. Motion by Questex Media Group, LLC, (“Questex”), to determine whether a motion filed by the debt- or, Oxford Expositions, LLC, (“Oxford Expo”), to conduct certain trade show activities is a non-core proceeding; a response to said motion having been filed by Oxford Expo.
2. Request by Questex to determine the statutory and constitutional limits of bankruptcy court jurisdiction regarding the above captioned adversary proceeding; a response to said request having been filed by Oxford Expo with a joinder in said response by Edwin E. Meek (“Meek”) and Jennifer Robinson (“Robinson”).
And the court, having heard argument and considered the memoranda submitted by the parties, hereby finds as follows:
I.
The court has jurisdiction of the subject matter of and the parties to this proceeding pursuant to 28 U.S.C. § 1334 and 28 U.S.C. § 157, in addition to the orders of reference of bankruptcy cases and proceedings to the United States Bankruptcy Judge, nunc pro tunc, dated July 27, 1984 and August 13,1984, executed by the United States District Court for the Northern District of Mississippi. Whether the motion to conduct certain trade show activities and the related adversary proceeding, captioned hereinabove, both of which are practically identical, are core or non-core proceedings will be determined through this opinion.
II.
FACTUAL SUMMARY
On April 15, 2007, pursuant to a Stock Purchase Agreement, (“SPA”), Questex Media Group, Inc., (“Old Questex”), purchased all of the shares of stock of Oxford Publishing, Inc., (“Oxford Publishing”), and Oxford Communication, Inc., (“Oxford Communication”), from Meek and others for the total consideration of *821$40,000,000.00. Oxford Publishing and Oxford Communication were engaged in the business of publishing magazines related to the hospitality industry, as well as, the promotion and management of trade shows related to this same industry throughout the United States. As a part of the SPA, Meek expressly agreed not to engage directly or indirectly in businesses like those conducted by Oxford Publishing or Oxford Communication, as well as, businesses proposed to be conducted by Oxford Publishing or Oxford Communication for a period of five years from the closing date of the SPA. The non-competition and non-solicitation provision is found in paragraph 6.6 of the SPA, and the definition of “Business” is found in the definition section on page 2. To understand the scope of the non-compete, both of these provisions must be read together.
The non-compete provision in the SPA reads as follows:
6.6 Noncompetition and Nonsolici-tation. For a period of five years from and after the Closing Date, other than as an employee or agent of an Acquired Company, none of the Sellers will, and will cause each of their Affiliates not to, engage directly or indirectly in all or any portion of the Business as conducted as of the Closing Date; provided, however, that no owner of less than 5% of the outstanding stock of any publicly-traded corporation will be deemed to be so engaged solely by reason thereof in the Businesses. For a period of five years from and after the Closing Date, the Sellers will not, and will cause each of their Affiliates not to, recruit, offer employment, employ, engage as a consultant, lure or entice away, or in any other manner persuade or attempt to persuade, any Person who is an employee of any of the Acquired Companies to leave the employ of the Acquired Companies. If the final judgment of a court of competent jurisdiction declares that any term or provision of this Section 6.12 is invalid or unenforceable, the parties hereto agree that the court making the determination of invalidity or unen-forceability will have the power to reduce the scope, duration, or area of the term or provision, to delete specific words or phrases, or to replace any invalid or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision, and this Agreement will be enforceable as so modified after the expiration of the time within which the judgment may be appealed.
Succinctly stated, the aforesaid provision prohibits each of the sellers, which includes Meek, his wife and daughter, as well as, two trusts established for the benefit of his grandchildren, from engaging directly or indirectly “in all or any portion of the Business as conducted as of the closing date; ...” “Business” is defined in the SPA as “the business conducted by the Acquired Companies and proposed to be conducted by the Acquired Companies.”
The business activities of Oxford Publishing were described in the Employment Agreement entered into by Oxford Publishing and Jennifer Robinson. That document indicates that Oxford Publishing was engaged in the business of publishing magazines related to the hospitality, nightclub, bar, and food and beverage industries throughout the United States, as well as, the promotion, conduct, and management of trade shows related to the same.
On October 9, 2009, QMG Acquisition, LLC, (“QMG Acquisition”), entered into an Asset Purchase Agreement, (“APA”), with Old Questex, Oxford Publishing, Oxford Communication, and others, through which *822QMG Acquisition proposed to purchase predominantly all of the assets of the selling entities. On that same date, Old Ques-tex, Oxford Publishing, Oxford Communication, and the other selling entities filed voluntary Chapter 11 bankruptcy petitions in the United States Bankruptcy Court for the District of Delaware. Thereafter, on November 24, 2009, the bankruptcy court entered an order approving the APA.
At an earlier hearing, Oxford Expo questioned whether the APA actually included the SPA by which Old Questex had acquired the stock of Oxford Publishing and Oxford Communication. Questex responded by introducing into evidence Schedule 1.1(b), which it asserts was attached to the APA, thus indicating that the SPA was indeed included in the asset sale. The attorneys representing Oxford Expo and Meek indicated that Schedule 1.1(b) did not appear electronically in the Delaware bankruptcy court file. Regardless, if this schedule was attached to the APA, then the SPA was likely included in the transaction. On December 16, 2009, a Bill of Sale Assignment and Assumption Agreement was executed which effectively consummated the APA by conveying the assets from Old Questex, Oxford Publishing, Oxford Communication, and the other selling entities to QMG Acquisition.
On December 17, 2009, QMG Acquisition changed its corporate name through the Office of the Delaware Secretary of State to Questex Media Group, LLC, the party now involved in these proceedings. In January, 2010, Old Questex, Oxford Publication, and Oxford Communication changed their corporate names respectively to QMG Winddown, Inc., OPI Wind-down, Inc., and OCI Winddown, Inc.
An event, which caused a significant amount of confusion regarding the efficacy of the APA, particularly whether it included the SPA, occurred on June 21, 2010, approximately seven months after the entry of the aforementioned order by the Delaware bankruptcy court approving the APA. This involved the filing of a motion in the bankruptcy court by QMG Winddown, OPI Winddown, OCI Wind-down, and the other debtor entities requesting the entry of an order authorizing the rejection of thirteen executory contracts. This motion specifically included the SPA even though it had already been purportedly transferred out of the bankruptcy estates pursuant to the APA. An order rejecting these executory contracts, specifically listing the SPA, was entered by the Delaware bankruptcy court on July 25, 2010. The attorneys representing Questex contend that this was simply a mistake since the SPA had already been conveyed and thus removed from the bankruptcy estates.
Meek testified at the hearing that when he saw the order rejecting the SPA, he thought, with good reason, that the non-compete provision in the SPA was no longer effective. Of course, if the SPA had previously been properly transferred from the bankruptcy estates, there would have been no SPA executory contract to reject.
On August 16, 2010, after their corporate names had been changed, the bankruptcy cases of Old Questex, Oxford Publishing, and Oxford Communication were dismissed.
III.
FACTUAL BACKGROUND REGARDING
JENNIFER ROBINSON’S OBLIGATIONS UNDER THE NON-COMPETE PROVISIONS IN HER EMPLOYMENT AGREEMENT, AS WELL AS, HER CONSULTING AGREEMENT
Jennifer Robinson, who had been employed by Oxford Publishing for a number *823of years, entered into an Employment Agreement with Oxford Publishing on January 1, 2006. Coincidentally, in this Employment Agreement there is the description, mentioned above, of the business activities conducted by Oxford Publishing.
The provision in the agreement addressing Robinson’s non-compete obligation was paragraph 12(e)(1), which provides as follows:
(e) Non-Competition: Non-solicitation.
(1) During the Employment Term and for three (3) years thereafter (the “Non-Competition Period”), Executive will not, directly, or indirectly, own, manage, operate, join control, finance or participate in the ownership, management, operation, control or financing of, or be connected as an officer, director, employee, partner, principal, agent, representative, consultant or otherwise with, or use or permit Executive’s name to be used in connection with, any business or enterprise within the Territory that competes with the Corporation or its affiliates, including, without limitation, any engagement in any publishing or trade show business directed at the hospitality, nightclub, bar and food and beverage industries or any other such business that Corporation may conduct or start publishing or trade show activities while Executive is employed with the Corporation (the “Business”). The term “Territory” means all states in which the Corporation currently, or at the time of termination of employment, operates or has discussed or considered expanding. Executive acknowledges and agrees that the Territory identified in this § 12(e) is the geographic area in or as to which she is expected to have supervisory responsibilities and/or otherwise to perform services for the Corporation, by being actively engaged as a member of the Corporation’s management team as Chief Operating Officer during her employment with the Corporation. The provisions of this section shall survive the termination or expiration of this Employment Agreement and remain binding upon Executive for the period herein set forth. Further, this covenant, on the part of Executive, shall be construed as a separate agreement, independent of any other provision herein set forth; and the existence of any claim or cause of action by Executive against Corporation, whether predicated on this Employment Agreement or any other provision hereof, or otherwise, shall not constitute a defense to the specific enforcement by Corporation of this covenant. Executive acknowledges and agrees that the restrictive covenant set forth in this Employment Agreement is reasonable, that Executive has been adequately compensated under this Employment Agreement for the future financial hardship that compliance with this covenant might otherwise have created, and that Executive has available other suitable employment opportunities (outside the Business and otherwise) which eliminate the need for or desirability of employment within the Business.
Following the closing of the SPA, Robinson continued her employment with Oxford Publishing until she voluntarily terminated the Employment Agreement on September 28, 2008. On October 27, 2008, she entered into a Consulting Agreement with Oxford Publishing which apparently modified the scope of her employment. A revised non-compete provision was inserted in the Consulting Agreement at paragraph 1.2, which provided as follows:
1.2 The parties further acknowledge and agree that, the Consultant’s resignation of employment and resulting termination of the Employ*824ment Agreement notwithstanding, the provisions of Section 12 of said Employment Agreement shall survive, and the covenants of the Consultant therein are hereby re-made by, and will apply to the Consultant during the Consulting Period and thereafter, as therein provided, mutatis mutandis; provided, (a) the “Non-Competition Period” defined in Section 12(e)(1) thereof shall expire on the later to occur of (I) October 31, 2011, or (ii) the second anniversary of the termination of this Agreement, however occasioned; and (b) the “Territory” defined in Section 12(e)(1) thereof shall mean that geographic area where the Company conducts business as of the date of termination; and (c) the competitive activities which the Consultant agrees to refrain from engaging as provided in Section 12(e)(1) thereof shall also include any other business in which the Consultant provides services to the Company under this Agreement. The Consultant reaffirms the reasonableness and necessity of such restrictions continuing following her resignation and during the Consulting Period and thereafter, as provided.
Questex ceased paying Robinson’s monthly retainer of $14,166.66 in January, 2009, just two months following the execution of the Consulting Agreement. Contrary to paragraph 4 of the Consulting Agreement, Robinson was not given a thirty day written notice of termination. Robinson made inquiry about the non-payment and was sent a letter by Attorney David Amidon with the law firm of Burns and Levinson, LLP, advising that she had violated her contractual obligations with Oxford Publishing by soliciting Oxford Publishing customers and/or interfering with Oxford Publishing’s business relations. Robinson denied the accusations, but took no further action to enforce her rights under the agreement.
Questex pointed out that the non-compete provision in the Employment Agreement was “remade” and incorporated into the Consulting Agreement. The initial agreement included a three year non-compete period following Robinson’s termination of employment. However, the Consulting Agreement redefined the non-compete peñod as follows:
(a) the “Non-Competition Period” defined in Section 12(e)(1) thereof shall expire on the later to occur of (I) October 31, 2011, or (ii) the second anniversary of the termination of this Agreement, however occasioned;
Consequently, insofar as the non-compete period is concerned, the provision in the Consulting Agreement specifically su-percedes the provision in the Employment Agreement.
rv.
OTHER FACTUAL EVENTS AFFECTING THE DETERMINATION OF WHETHER THESE PROCEEDINGS ARE CORE OR NON-CORE
After Meek learned that the SPA had been rejected by the order of the Delaware Bankruptcy Court, as set forth here-inabove, he believed that he had been relieved of his non-compete obligation. Therefore, with the assistance of Robinson, he incorporated Oxford Expo and announced that it would be putting on a “Wine Summit” and a “Hospitality Summit.” Shortly thereafter, Questex sent cease and desist letters to Meek and Robinson on June 11, 2010, advising them to terminate any business activities that would violate the non-compete provisions. *825This prompted Oxford Expo, Meek, and Robinson to file a complaint for injunctive and declaratory relief in the Chancery Court of Lafayette County, Mississippi. Questex removed this proceeding to the United States District Court for the Northern District of Mississippi and filed an answer and counterclaim against Oxford Expo, Meek, and Robinson.
Following the Chapter 11 bankruptcy filing by Oxford Expo, coupled with the filing of the above captioned adversary proceeding which, for all practical purposes, mirrored the cause of action pending in the United States District Court, the district court transferred its proceeding to the bankruptcy court. This court acknowledged in a previous decision that if certain parts or aspects of the transferred cause of action required adjudication in the district court, such as a Constitutional right to a jury trial in the absence of unanimous consent for this court to conduct said trial, the cause of action would be referred to the district court for disposition.
Questex has filed a proof of claim in the Oxford Expo bankruptcy case which is directly related to its counterclaim against Oxford Expo. Additionally, Questex’s proof of claim also seeks administrative expenses from the bankruptcy estate for any perceived accruing damages. The objection filed by Oxford Expo to the Questex proof of claim raises the same issues that are asserted in the adversary proceeding. See Fed. R. Bankr.P. 3007(b).
V.
DISCUSSION
Section 157(b)(2) of Title 28 of the United States Code1 (28 U.S.C. § 157(b)(2)) provides the following non-inclusive list of core proceedings:
(b)(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 11,12 or 13 or 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 dis-chargeability 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 *826against 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 personal injury tort or wrongful death claims; and
(P) recognition of foreign proceedings and other matters under chapter 15 of title 11.
Subsections (A), (B), and (0) are specifically applicable to this proceeding. Section 157(b)(3) provides that “[t]he bankruptcy judge shall determine, on the judge’s own motion or on timely motion of a party, whether a proceeding is a core proceeding ... or is a proceeding that is otherwise related to a case under title 11,” i.e., a non-core proceeding. The section further provides that “[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.” § 157(b)(3) (emphasis added).
A recent case decided by the United States Supreme Court, Stern v. Marshall, — U.S.-, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011), has caused a great deal of consternation among bankruptcy professionals, particularly concerning the extent of its impact on bankruptcy court jurisdiction. The underpinnings of the decision can be briefly summarized. Vickie Lynn Marshall (“Vickie”), also known as Anna Nicole Smith, married J. Howard Marshall, II (“Howard”), approximately a year before his death. 131 S.Ct. at 2601. Shortly before Howard died, Vickie filed a cause of action against his son, E. Pierce Marshall (“Pierce”), in a Texas probate court, asserting that Pierce had tortiously interfered with the establishment of a trust that Howard intended to provide for her. Id. After Howard’s death, Vickie filed for bankruptcy relief in the Central District of California. Id. Pierce filed a proof of claim in her bankruptcy case, asserting that he was entitled to recover damages from Vickie’s bankruptcy estate because she had defamed him by inducing her lawyers to tell the press that he had engaged in fraud in controlling his father’s assets. Id. Pierce also asserted that his claim against Vickie was a nondischargeable debt. Id. Vickie responded by filing a counterclaim against Pierce for tortious interference, similar to the complaint that she had asserted earlier in the Texas probate court. Id. The bankruptcy court initially denied Pierce’s claims for defamation and nondischargeability. Id. Almost a year later, the bankruptcy court considered Vickie’s tortious interference counterclaim and awarded her compensatory damages exceeding $400 million, as well as, punitive damages in the sum of $25 million. Id. Overruling Pierce’s objection that the bankruptcy court lacked jurisdiction to consider Vickie’s counterclaim, the bankruptcy court concluded that Vickie’s counterclaim was a core proceeding pursuant to § 157(b)(2)(C) and entered a final judgment for the aforementioned damages. Id. At 2602.
The district court reversed, relying primarily on an earlier decision of the United States Supreme Court, Northern Pipeline Constr. Co. v. Marathon Pipe Line Co., 458 U.S. 50, 102 S.Ct. 2858, 73 L.Ed.2d 598 (1982), and concluding that it was unconstitutional to hold that any and all counterclaims were core proceedings. 131 S.Ct. at 2602. The district court then treated the bankruptcy court’s final judgment as if it were proposed findings of fact and conclusions of law and entered a judgment in Vickie’s favor for compensatory and punitive damages, each in the amount of $44,292,767.33. Id. However, before the district court entered its judgment, the Texas probate court conducted a jury trial *827on the merits of the parties’ dispute and entered a judgment in Pierce’s favor. Id. The district court declined to give the Texas judgment preclusive effect. Id.
The Ninth Circuit Court of Appeals reversed the district court for different reasons and the matter journeyed on its first trip to the United States Supreme Court. Id. The Supreme Court reversed the decision of the Ninth Circuit and remanded. Id. On its second opportunity, the Ninth Circuit concluded that a counterclaim under § 157(b)(2)(C) was a core proceeding only if the counterclaim was so closely related to the creditor’s proof of claim that the resolution of the counterclaim was necessary to resolve the allowance or disallowance of the proof of claim. Id. The Ninth Circuit held that Vickie’s counterclaim did not meet that test. Id. The court then concluded that, since the Texas state court judgment was the earliest final judgment entered in the matter, that the district court should have given preclusive effect to the Texas court’s determination. Id. at 2602-03. That decision was again appealed to the United States Supreme Court which granted certiorari. Id. at 2603. Succinctly stated, the Supreme Court concluded in a five to four decision that while a counterclaim, filed by the bankruptcy estate against a creditor who has filed a claim against the estate, is statutorily defined as a core proceeding, under the circumstances existing in this case, the entry of the final judgment by the bankruptcy court was constitutionally impermissible. See id. at 2620.
There are some students of bankruptcy lore who are concerned that Stem impacts the subject matter jurisdiction of the bankruptcy courts. This court does not believe that is the case at all. After expressly agreeing that the bankruptcy court could litigate his defamation claim, Pierce, on appeal raised § 157(b)(5) of the Bankruptcy Code for the first time, asserting that his claim was a personal injury tort claim, and, consequently, that it should have been litigated in the district court. See id. at 2607-08. Justice Roberts, writing for the majority, specifically found that § 157(b)(5) was not jurisdictional, to-wit:
We need not determine what constitutes a “personal injury tort” in this case because we agree with Vickie that § 157(b)(5) is not jurisdictional, and that Pierce consented to the Bankruptcy Court’s resolution of his defamation claim. Because “[bjranding a rule as going to a court’s subject-matter jurisdiction alters the normal operation of our adversarial system,” Henderson v. Shinseki, 562 U.S.-,-, 131 S.Ct. 1197, 1201-03, 179 L.Ed.2d 159 (2011), we are not inclined to interpret statutes as creating a jurisdictional bar when they are not framed as such. See generally Arbaugh v. Y & H Corp., 546 U.S. 500, 516, 126 S.Ct. 1235, 163 L.Ed.2d 1097 (2006) (“when Congress does not rank a statutory limitation on coverage as jurisdictional, courts should treat the restriction as nonjurisdictional in character”).
Section 157(b)(5) does not have the hallmarks of a jurisdictional decree. To begin, the statutory text does not refer to either district court or bankruptcy court “jurisdiction,” instead addressing only where personal injury tort claims “shall be tried.”
The statutory context also belies Pierce’s jurisdictional claim. Section 157 allocates the authority to enter final judgment between the bankruptcy court and the district court. See § 157(b)(1). (c)(1). That allocation does not implicate questions of subject matter jurisdiction. See § 157(c)(2) (parties may consent to entry of final judgment by bankruptcy judge in non-core case). By *828the same token, § 157(b)(5) simply specifies where a particular category of cases should be tried. Pierce does not explain why that statutory limitation may not be similarly waived.
Id. at 2606-07 (emphasis added) (footnote omitted).
Not only does the aforementioned language indicate that the bankruptcy court’s subject matter jurisdiction is not adversely impacted by the Stem decision, it also confirms that a party can consent to the bankruptcy court’s entering a final judgment in a non-core matter as contemplated by § 157(c)(2). In the absence of consent, the bankruptcy court has subject matter jurisdiction to consider a non-core proceeding, but must only make proposed findings of fact and conclusions of law which are to be submitted to the district court for the entry of a final order after reviewing de novo those matters to which a party has timely and specifically objected.
In the factual scenario presented by Stem, Vickie’s counterclaim for tortious interference had clearly lost its flavor as a counterclaim when it was ultimately considered and decided by the bankruptcy court. See id. at 2617-18. Since Pierce’s defamation claim had already been adjudicated and denied months earlier, Vickie’s counterclaim had transitioned into merely a claim based exclusively on state law. See id. This claim was obviously not necessary or inextricably related to the determination of Pierce’s claim which had already been disallowed. See id.
Insofar as consent is concerned, by way of analogy, this court would look to another recent Supreme Court decision, AT&T Mobility, LLC v. Concepcion, — U.S. -, 131 S.Ct. 1740, 179 L.Ed.2d 742 (2011), where the court effectively held that if parties to a contract had contractually agreed to binding arbitration, a final decision could be rendered by an arbitration panel even though the arbitrators might not enjoy the attributes of Article III judges. See 131 S.Ct. at 1753. Indeed, many arbitrators are not licensed attorneys, and unlike United States Bankruptcy Judges, they are not appointed to fourteen year terms by an Article III Court of Appeals, nor do they have their compensation statutorily linked to the compensation of Article III district judges. Certainly if non-judges can enter binding decisions with the contractual consent of the parties, then bankruptcy judges ought to be able to enter final judgments in non-core bankruptcy proceedings where the parties have consented to their doing so. As noted hereinabove, that is expressly acknowledged by the Supreme Court’s majority in Stem.
In this context, the court would point to a section in the Stem opinion which discusses Commodity Futures Trading Comm’n v. Schor, 478 U.S. 833, 836, 106 S.Ct. 3245, 92 L.Ed.2d 675 (1986), as follows:
A customer filed such a claim to recover a debit balance in his account, while the broker filed a lawsuit in Federal District Court to recover the same amount as lawfully due from the customer. The broker later submitted its claim to the CFTC, but after that agency ruled against the customer, the customer argued that agency jurisdiction over the broker’s counterclaim violated Article III. This Court disagreed, but only after observing that (1) the claim and the counterclaim concerned a “single dispute” — the same account balance; (2) the CFTC’s assertion of authority involved only “a narrow class of common law claims” in a “ ‘particularized area of law1 (3) the area of law in question was governed by “a specific and limited federal regulatory scheme” as to which *829the agency had “obvious expertise”; (tí the parties had freely elected to resolve their differences before the CFTC: and (5) CFTC orders were “enforceable only by order of the district court.” (quoting Northern Pipeline, 458 U.S. at 85, 102 S.Ct. 2858); see 478 U.S., at 843-844, 849-857, 106 S.Ct. 3245. Most significantly, given that the customer’s reparations claim before the agency and the broker’s counterclaim were competing claims to the same amount, the Court repeatedly emphasized that it was “necessary” to allow the agency to exercise jurisdiction over the broker’s claim, or else “the reparations procedure would have been confounded.”
Stern, 131 S.Ct. at 2613-14 (emphasis added) (citations omitted).
The court then went on to point out the following:
And in contrast to the objecting party in Schor, id., at 855-856, 106 S.Ct. 3245, Pierce did not truly consent to the resolution of Vickie’s claim in the bankruptcy court proceedings.
Id. at 2614.
In summary, the holding in Stem was limited, and the majority, in the opinion of this court, did not intend to obliterate the subject matter jurisdiction of the bankruptcy courts. The following comments are insightful:
We do not think the removal of counterclaims such as Vickie’s from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute; we agree with the United States that the question presented here is a “narrow” one.
Id. at 2620.
The Supreme Court has now instructed that state law counterclaims, which would not necessarily have to be resolved in the process of ruling on a creditor’s proof of claim, are no longer core proceedings simply by virtue of being statutorily listed in § 157(b)(2)(C). See id. By implication, the converse should also be true: The Stem opinion does not abrogate the authority of a bankruptcy court to enter a judgment on a state law counterclaim that by necessity must be resolved in the process of ruling on the creditor’s proof of claim. Consequently, where the two are inextricably tied, the counterclaim could conceivably still be a core proceeding. One bankruptcy court has already examined this issue in In re Salander O’Reilly Galleries, 453 B.R. 106 (Bankr.S.D.N.Y.2011), where the court offered the following comments:
Stem is replete with language emphasizing that the ruling should be limited to the unique circumstances of that case, and the ruling does not remove from the bankruptcy court its jurisdiction over matters directly related to the estate that can be finally decided in connection with restructuring debtor and creditor relations....
Salander, at 115.
Nowhere in Marathon, Granfinanciera, or Stem does the Supreme Court rule that the bankruptcy court may not rule with respect to state law when determining a proof of claim in the bankruptcy, or when deciding a matter directly and conclusively related to the bankruptcy. As noted, Stem repeatedly emphasizes that it addresses only the constitutionality of the bankruptcy court making a final ruling on a state-law counterclaim that would not be finally resolved in the process of allowing or disallowing a proof of claim.
Id. at 116. (emphasis added).
*830The thread that binds these cases is the concept that when the jurisdiction of the bankruptcy court is at issue, the adjudication of a proof of claim—a request for payment from the estate—is of paramount concern.
Id.
It is clear from the foregoing that the Bankruptcy Court is empowered to apply state law when so doing would finally resolve a claim
Id. at 117.
In addition, two other recent decisions have reached the identical conclusion: In re: Olde Prairie Block Owner, LLC, 457 B.R. 692 (Bankr.N.D.Ill.2011), and In re: Safety Harbor Resort and Spa a/k/a S.H.S. Resort, LLC, 456 B.R. 703 (Bankr. M.D.Fla.).
Consequently, if a state law counterclaim must be determined in the process of ruling on a creditor’s proof of claim, pursuant to §§ 501 and 502 of the Bankruptcy Code, and Rule 3007, Federal Rules of Bankruptcy Procedure, then it arises both under the Bankruptcy Code and in the bankruptcy case. If the state law counterclaim does not need to be determined in the process of ruling on a creditor’s claim, as in the case of Stem, it does not.
As set forth hereinabove, the Ques-tex claims in this case are based on the allegations set forth in the counterclaim filed against Oxford Expo, Meek, and Robinson. Additionally, the proof of claim indicates that Questex seeks post-petition administrative expenses based upon Oxford Expo’s alleged continuing breach of the SPA and the non-compete agreements. These claims against Oxford Expo are for pre-petition and post-petition damages in addition to the remedial claim for injunc-tive relief which would effectively terminate Oxford Expo’s ability to operate as a going concern. As such, they are core proceeding claims as defined in § 157(b)(2)(A), (B), and (O). The court will, therefore, enter a final judgment resolving these claims between Questex and Oxford Expo.
The next issue for determination was not addressed at all in the Stem opinion. It involves the other parties to the cause of action, Meek and Robinson, who are both plaintiffs and counter-defendants, but who are not debtors in bankruptcy. This is not a novel factual scenario. On many occasions, contested and adversary proceedings involving multiple parties are filed in a bankruptcy case, and, frequently only one of the parties is a debtor in bankruptcy. While the primary thrust of this litigation is a core bankruptcy proceeding, that is, whether the debtor, Oxford Expo, can continue as a viable business, the other parties, Meek and Robinson, on one side, and Questex on the other side, are non-debtor entities. These latter parties would not be in the bankruptcy court at all, but for the Chapter 11 filing of Oxford Expo. Although there is little guidance to resolve this question, the court is of the opinion that while the causes of action between Meek, Robinson, and Questex are inextricably related to the Oxford Expo bankruptcy case, in an abundance of caution, they must be construed as non-core proceedings. Absent the consent of Questex for this court to enter final orders and judgments, pursuant to 28 U.S.C. § 157(c)(1), the court will consider the issues between these parties as non-core proceedings and submit proposed findings of fact and conclusions of law to the district court for the entry of any final order or judgment. While this is not an ideal approach, it does comport with the framework established by Congress when enacting the *831Bankruptcy Amendments and Federal Judgeship Act of 1984. This approach will also promote judicial economy by not having separate lawsuits proceeding simultaneously in separate forums which could lead to inconsistent judicial results.
A separate order will be entered consistent with this opinion contemporaneously herewith.
. Hereinafter, all cited Code sections will be considered as sections of Title 28 of the United States Code unless specifically denoted otherwise. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494641/ | MEMORANDUM OPINION AND ORDER DENYING MOTION FOR ORDER REQUIRING TURNOVER OF PROPERTY OR ALTERNATIVELY FOR CONTEMPT AND DENYING MOTION OF QUICKCASH TO ALLOW SALE OF COLLATERAL
KATHARINE M. SAMSON, Bankruptcy Judge.
This matter came on for hearing on November 17, 2011, (the “Hearing”) on the Motion for Order Requiring Turnover of Property or Alternatively for Contempt (the “Complaint”)1 (Adv. Dkt. No. 1) filed by debtor Princess Bolton and the Answer to Complaint and Memorandum in Opposition to Motion for an Order Requiring Turnover of Property or Alternatively for Contempt and Motion of Quick Cash to Allow Sale of Collateral (Adv. Dkt. No. 6) filed by Creditor Quick Cash Title Loans. At the Hearing, John Anderson represented Princess Bolton (“Bolton”) and David M. Ott appeared on behalf of Quick Cash Title Loans (“Quick Cash”). Counsel for both parties presented arguments. At the conclusion of the Hearing, the Court took the matter under advisement and ordered the attorneys to submit briefs on the relevant legal standards. In sum, the Adversary requires the Court to determine whether Bolton’s vehicle is property of the estate, subject to turnover, and whether redemption is exercisable through her Chapter 13 plan. For the reasons set forth below, the Court finds that only Bolton’s right of redemption is property of the estate; Bolton must redeem the vehicle by paying the required amount in lump sum no later than January 30, 2012, for the vehicle to be subject to turnover.
I. JURISDICTION
The Court has jurisdiction of the parties to and the subject matter of this proceeding pursuant to 28 U.S.C. §§ 157 and 1334. This matter is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A), (E).
II. FINDINGS OF FACT
On February 28, 2008, Princess Bolton (“Bolton”) executed a Mississippi Title Pledge Agreement (“Agreement”) in favor of Quick Cash Title Loans (“Quick Cash”), pledging her 2006 Nissan Maxima vehicle as collateral for a loan in the amount of $2,500.00.2 (Adv. Dkt. No. 6, Ex. A). According to the Agreement, the loan would mature on March 29, 2008, with a total amount due of $3,125.00. Id. The Agreement further provided that if Bolton did not pay the amount due on or before the maturity date, Quick Cash “may take possession of the titled personal property to which the certificate of title relates” and if Bolton “did not redeem the pledged property within thirty days of the maturity *834date by paying all outstanding principal, interest, and other fees, then [Bolton] forfeits all right, title and interest in and to the titled personal property and the pledged property to [Quick Cash], who shall thereby acquire an absolute right of title and ownership to the titled personal property.” Id. The Agreement also stated that the titled personal property is subject to sale at any time after repossession and a statutory, three-business day redemption period has expired, unless the property is deemed to be salvage by the title pledge lender, in which case the property may be sold or otherwise disposed of immediately.3 Id.
Bolton failed to make any payment on or before maturity on March 29, 2008. (Adv. Dkt. No. 6, Ex. C). On March 31, 2008, Bolton incurred a service charge of $562.50. Id. On April 1, 2008, Quick Cash granted an extension4 and Bolton made a payment of $593.75. Id. On April 29, 2008, Quick Cash charged a service charge of $500.00 and granted a second extension, and Bolton made a second payment of $593.75. Id.
On May 1, 2008, Bolton filed a Chapter 13 bankruptcy case, which was dismissed on February 25, 2009.5 In re Bolton, No. 08-50782-NPO (Bankr.S.D.Miss. Feb. 25, 2009) (Dkt. No. 1, 44). During the bankruptcy, Quick Cash received no payments; however, between May 28, 2008, and November 25, 2008, Bolton’s account was charged a total of seven service charges.6 (Adv. Dkt. No. 6, Ex. C).
On June 3, 2009, Bolton filed another Chapter 13 bankruptcy case, which was dismissed on September 27, 2011.7 In re Bolton, No. 09-51131-KMS (Bankr.5.D.Miss. Sept. 27, 2011) (Dkt. No. 1, 75). During the bankruptcy, Bolton made three payments to Quick Cash: $36.50 on June 15, 2011; $85.07 on July 12, 2011; and $53.19 on September 13, 2011.
On October 10, 2011, Quick Cash repossessed Bolton’s vehicle.8 (Adv. Dkt. No. 1; No. 6, Ex. C). On October 11, 2011, Bolton filed the pending Chapter 13 bankruptcy. In re Bolton, No. 11-52339-KMS (Bankr.S.D. Miss, filed Oct. 11, 2011) (Dkt. No. 1). On this same date, Bolton’s counsel faxed notice to Quick Cash of the instant bankruptcy along with proof of insurance.9 (Adv. Dkt. No. 1). On October 25, 2011, this Court entered an Order granting a continuation of the automatic stay. (Dkt. No. 22). On October 26, 2011, Bolton filed the instant Adversary seeking turnover of her vehicle and sanctions against Quick Cash.
III. CONCLUSIONS OF LAW
At the outset, this Court notes that this issue is one of first impression in the Fifth Circuit and Mississippi. There is no re*835ported case law interpreting the Mississippi Title Pledge Act, as amended in 2000, or binding case law interpreting 11 U.S.C. § 541(b)(8), regarding whether pledged property is property of the estate.
A. Positions of the Parties
Bolton contends that Quick Cash is listed on the Certificate of Title as lien holder 10 and has Power of Attorney to sell the vehicle after repossession, the same as a traditional lender, and that ownership does not pass until the Power of Attorney is utilized. Bolton further argues that, under the Agreement, Quick Cash could not exercise its Power of Attorney until three days after repossession; however, the instant bankruptcy was filed the day after repossession, within the three-day redemption period. In sum, Bolton contends that the vehicle is property of the estate because title remains in her name, the filing of bankruptcy extended the redemption period, and that she may redeem her vehicle through her Chapter 13 plan.
Quick Cash contends that turnover is not automatically required because: (1) the pledged property is not property of the estate under 11 U.S.C. § 541 and, thus, not subject to the automatic stay; (2) “at best, the bankruptcy estate has retained only a right to redeem the vehicle, (in exchange for payment in full pursuant to the contractual terms), rather than to compel turnover without payment;” and (3) alternatively, that Bolton is abusing the bankruptcy system and attempting to deprive Quick Cash of adequate protection. (Adv. Dkt. No. 6 at 3).
B. Turnover
To warrant turnover under § 542, the repossessed property must be property of the bankruptcy estate and the debtor must demonstrate either that the repossessed property may be used, sold, or leased by the debtor, or that the debtor may exempt the property under § 522. (emphasis added). If the secured creditor repossesses the debtor’s property prepetition, that property may be included in the estate. Mitchell v. BankIllinois, 316 B.R. 891, 895 (S.D.Tex.2004) (citing United States v. Whiting Pools, Inc., 462 U.S. 198, 204-05, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983)). However, § 542 may not apply if repossession of the property transferred ownership. Id.
C.Right to Redeem is Property of the Estate
Section 541(a) of the Bankruptcy Code, made applicable by § 1306, provides:
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.
11 U.S.C. § 541(a)(1) (emphasis added). The United States Supreme Court observed that Congress broadly defined property of the estate to include all tangible and intangible property interests of the debtor. Whiting Pools, Inc., 462 U.S. at 204-05, 103 S.Ct. 2309. Property of the estate includes all interests of the debtor, including property in which the debtor does not have the right of possession. Id. In determining the scope of property of *836the estate, the Court must look to property-rights as defined by state law. Butner v. United States, 440 U.S. 48, 54, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979).
The parties dispute the extent of Bolton’s interest in the repossessed vehicle. Bolton contends that repossession did not change ownership; ownership would only change when Quick Cash utilized its Power of Attorney. (Adv. Dkt. No. 13). Quick Cash contends that the only interest Bolton has in the vehicle, and, thus, the only interest that “might be” property of the estate is the right of redemption.11 (Adv. Dkt. No. 6 at 3, 7).
The Mississippi Title Pledge Act provides in pertinent part:
(1) A pledgor shall have no obligation to redeem pledged property or make any payment on a title pledge transaction. Upon the pledgor’s failure to redeem the pledged property on or before the maturity date of the title pledge agreement or any extension or continuation thereof, the title pledge lender has the right to take possession of the titled personal property and to exercise a power of attorney to transfer title to the pledged property. In taking possession, the title pledge lender or his agent may proceed without judicial process if this can be done without breach of the peace; or, if necessary, may proceed by action to obtain judicial process.
(2) If, within thirty (30) days after the maturity date, the pledgor redeems the pledged property by paying all outstanding principal, interest and other customary fees, the pledgor shall be given possession of the titled personal property and the pledged property without further charge.
(3) If the pledgor fails to redeem the pledged property during the thirty-day period provided in subsection (2) of this section, then the pledgor shall thereby forfeit all right, title and interest in and to the titled personal property12 and the pledged property13 to the title pledge lender who shall thereby acquire an absolute right of title and ownership to the titled personal property. The title pledge lender shall then have the sole right and authority to sell or dispose of the titled personal property.
(4) Notwithstanding anything in the preceding subsections of this section, the pledgor shall have three (3) business days after the title pledge lender has taken possession of the titled personal property to redeem the property by paying the amount of the unpaid principal balance, the delinquent service charge and the actual cost of the repossession. The cost of repossession shall include towing charges, storage charges paid to a third party and repairs made to the property to render it operable.
(5) If the property is sold after the three-business-day period, the title pledge lender shall return to the pledgor eighty-five percent (85%) of the amount received from the sale above the amount of the unpaid principal balance, the de*837linquent service charge, the actual cost of the repossession and a sales fee of One Hundred Dollars ($100.00). However, any titled personal property that is deemed to be salvage by the title pledge lender may be sold or otherwise disposed of immediately upon repossession. (6) The title pledge transaction form shall contain a provision written in boldface type of at least fourteen (14) point size that notifies the pledgor that the titled personal property is subject to sale at any time after the three-business-day period has expired, unless the property is deemed to be salvage by the title pledge lender, in which case the property may be sold or otherwise disposed of immediately. The transaction form shall have a space located near that provision that the pledgor must initial.
Miss.Code Ann. § 75-67-411.
Pursuant to the Mississippi Title Pledge Act, upon Bolton’s failure to redeem within thirty days after the loan maturity date, she forfeited all right, title, and interest in and to the vehicle and the Certificate of Title, and Quick Cash acquired absolute right of title and ownership to the vehicle. See Miss.Code Ann. § 75-67-411(3). Bolton argues that she retains ownership of the vehicle because the Certificate of Title remains in her name and that ownership does not change until Quick Cash exercises its Power of Attorney. However, this argument is contrary to the Mississippi Title Pledge Act provisions. Under the statute, while transfer of ownership and possession upon a pledgor’s failure to redeem the pledged property on or before the maturity date requires an affirmative act of the title lender, such as exercising a power of attorney, failure to redeem within thirty days after the maturity date transfers ownership by operation of law. Miss.Code Ann. § 75-67-411(1), (3) (emphasis added). Because Bolton failed to redeem within thirty days after the maturity date, ownership transferred by operation of law, without need of a power of attorney.14 Notwithstanding the cessation of Bolton’s interest in the vehicle and Certificate of Title, the statute grants Bolton the right to redeem the property within three-business days of repossession “by paying the amount of the unpaid principal balance, the delinquent service charge and the actual cost of the repossession.” See Miss.Code Ann. § 75-67-411(4).
In sum, although the statute grants absolute ownership to the title pledge lender upon the pledgor’s failure to redeem within thirty days after maturity, it also grants the pledgor a right to redeem the property within three-business days of repossession. Thus, any potential ownership interest Bolton could gain in the vehicle arises only if she timely exercises her right to redeem within the statutory period. Should Bolton fail to redeem the vehicle within the requisite time period, she forfeits any potential right to an ownership interest.15 See Greenpoint Credit, LLC v. Isom (In re Isom), 342 B.R. 743, 745-46 (Bankr.N.D.Miss.2006) (debtor’s right to *838redeem property sold at tax sale not exercised timely, thus, property not asset of estate).
In In re Isom, the Bankruptcy Court for the Northern District of Mississippi addressed a debtor’s right to redeem property holding that “if a petition is filed while the redemption right is unexpired, the equitable right of redemption becomes part of the bankruptcy estate.” 342 B.R. at 745 (internal citations omitted) (“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.”). The mere existence of the debtor’s ability to redeem the automobile does not render the vehicle property of the estate such that it should be turned over to the debtor pursuant to § 542. Oglesby v. Title Max (In re Oglesby), No. 01-4072, 2001 WL 34047880, at *2 (Bankr.S.D.Ga.2001) (citing In re Lewis, 137 F.3d 1280, 1285 (11th Cir.1998)). Thus, Bolton’s unexpired right to redeem the vehicle, not the vehicle itself, is property of the estate and Quick Cash’s refusal to turn over the vehicle was not a violation of the automatic stay.
Quick Cash argues that § 541(b)(8) specifically excludes the instant transaction from property of the estate. However, not all elements of this section are met.
Section 541(b)(8) provides:
Property of the estate does not include—
Subject to subchapter III of chapter 5,16 any interest of the debtor in property where the debtor pledged or sold tangible personal property (other than securities or written or printed evidences of indebtedness or title) as collateral for a loan or advance of money given by a person licensed under law to make such loans or advances, where—
(A) the tangible personal property is in the possession of the pledgee or transferee;
(B) the debtor has no obligation to repay the money, redeem the collateral, or buy back the property at a stipulated price; and
(C) neither the debtor nor the trustee have exercised any right to redeem provided under the contract or State law, in a timely manner as provided under State law and section 108(b).
11 U.S.C. § 541(b)(8).17
Section 541(b)(8) does not exclude Bolton’s interest because, as of the date of filing the instant Complaint, Bolton’s right to redeem had not expired. The applicability of § 541(b)(8) requires that the debt- or and trustee fail to exercise any right to redeem under the contract or State law, in a timely manner as provided under State law and § 108(b). (emphasis added). Under the Mississippi Title Pledge Act, the pledgor has three business days after the title pledge lender takes possession of the vehicle to redeem the property by paying the amount of the unpaid principal balance, delinquent service charge and actual cost of repossession. Miss.Code Ann. § 75-67-411(4).18 Section 108(b) of the Bankruptcy Code provides:
Except as provided in subsection (a) of this section, if applicable nonbankruptcy law, an order entered in a nonbankrupt-*839cy proceeding, or an agreement fixes a period within which the debtor or an individual protected under section 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.
11 U.S.C. § 108(b). Thus, § 108(b) extends the redemption period, at a minimum, to sixty days after filing bankruptcy.
Quick Cash repossessed Bolton’s vehicle on October 10, 2011. Pursuant to Mississippi law, Bolton had three-business days from this date to redeem the vehicle; however, the next day, October 11, 2011, Bolton filed the instant Chapter 13 bankruptcy case. Because the statutory redemption period had not expired on the date of filing, § 108(b) extends the redemption period until sixty days19 after the date of filing.20 Thus, because all of the elements are not met, § 541(b)(8) does not operate to specifically exclude Bolton’s interest from property of the estate.21
D. Right to Redeem Requires Immediate Payment, Not Payment Through Plan
Quick Cash urges that Bolton must exercise her right to redeem by payment in full in accordance with the Agreement, not through her Chapter 13 plan, because unlike most secured creditors, its only remedy, pursuant to state law, is against the vehicle itself and the deterioration of the collateral puts its claim at risk. Bolton argues that payment under the plan is permissible pursuant to 11 U.S.C. § 1322(b)(2), (b)(5), which allow curing of default over the life of a plan.
If Bolton wishes to exercise her right of redemption, she must do so by immediate payment of the entire amount due within the statutory redemption period, as extended by § 108(b), not by payment through her Chapter 13 plan. Although § 1322(b)(2) and (3) permit modification of secured claim holders’ rights to “provide for the curing or waiving of any default,” allowing payments over the life of a plan would impermissibly create a property right that did not exist prepetition and effectively operate as a suspension of the redemption period. See e.g. In re Hatman, No. 309-05764, 2009 WL 2855771, at *2 (Bankr.M.D.Tenn. Sept. 1, 2009) (full redemption price for pawned items must be paid in full within sixty-day extension as provided in § 108(b)(2); redemption cannot be spread out over life of plan); In *840re Oglesby, 2001 WL 34047880, at *3; Charles R. Hall Motors, Inc. v. Lewis (In re Lewis), 137 F.3d 1280, 1284 (11th Cir.1998). The automatic stay does not toll the redemption period. In re Isom, 342 B.R. at 745-46; Cash Am. Advance, Inc. v. Prado, 413 B.R. 599, 605-06 (S.D.Tex. 2008) (adopting majority view that § 362 does not toll the redemption period); Cash Am. Pawn v. Murph, 209 B.R. 419, 422-23 (E.D.Tex.1997). Allowing payment through the plan would effectively suspend the redemption period beyond the statutory time period, rendering §§ 541(b)(8) and 108(b) useless.
Furthermore, Bolton’s reliance on § 1322(b)(5) is unfounded. Section 1322(b)(5) does not apply to debts, such as the instant title loan, already due and payable before filing a Chapter 13 bankruptcy case. See Pierrotti v. IRS (In re Pierrotti), 645 F.3d 277, 279 (5th Cir. June 22, 2011) (citing Grubbs v. Houston First Am. Sav. Ass’n, 730 F.2d 236, 244-45 (5th Cir. 1984) (en banc)).
In sum, Bolton’s estate is comprised of her unexpired right to redeem, not the vehicle itself, exercisable by immediate payment in full in accordance with the Agreement no later than the statutory time period extended by § 108(b) and by this court to account for time in which this matter was under advisement. See In re Hatman, 2009 WL 2855771, at *2 (court extended the redemption period to account for days in which matter was under advisement). Accordingly, if Bolton redeems her vehicle by payment in full on or before January 30, 2012,22 Quick Cash will be required to return possession to Bolton. If Bolton fails to redeem her vehicle by payment in full on or before January 30, 2012, she forfeits her right to redeem and any potential ownership interest in the vehicle, and Quick Cash will retain its absolute legal interest and ownership in the vehicle, subject to Miss.Code Ann. § 75-67-411(5), if applicable.
E. Quick Cash’s Request for Relief of the Automatic Stay
In accordance with the reasons set forth on the record at the Hearing, Quick Cash’s request for relief from the automatic stay, contained in its Answer to Bolton’s Complaint, is denied. To request relief from the stay, the moving party must follow the procedures set forth in Federal Rule of Bankruptcy Procedure 4001 and Miss. Bankr.L.R. 4001-1, including payment of a filing fee. Pursuant to Rule 9014, incorporated by Rule 4001, such motion is a contested matter subject to notice and service requirements of Rule 7004. Filing such a Motion combined in the Answer to a Complaint requesting turnover does not conform with said provisions. For the same reasons, Quick Cash’s request for sale of collateral is denied.
Although the vehicle itself is not property of the estate, Quick Cash cannot sell, transfer, or otherwise dispose of the vehicle until and unless Bolton fails to exercise her right to redeem, no later than January 30, 2012.
IV. CONCLUSION
The Court concludes that ownership of Bolton’s vehicle transferred by operation of law such that only Bolton’s right to redeem, not the vehicle itself, is included in property of the estate. Hence, the vehi*841cle is not subject to turnover and Quick Cash did not violate the stay by refusing to return the vehicle to Bolton. The Court further finds that Bolton’s right to redeem is exercisable only by payment in full on or before January 30, 2012, not through her Chapter 13 plan. Should Bolton fail to timely redeem, she will forfeit her right to redeem and any potential interest in the vehicle, and Quick Cash will retain its absolute ownership interest in the vehicle, subject to Miss.Code Ann. § 75-67-411(5), if applicable. Accordingly, the Complaint should be, and is hereby denied in that the right to redeem has not been exercised.
Furthermore, Quick Cash’s Motion to allow the sale of the vehicle is denied, as not properly filed in accordance with Rule 4001.
A separate final judgment will be entered in accordance with Federal Rule of Bankruptcy Procedure 7058.
SO ORDERED.
. The Complaint in this adversary proceeding ("Adversary”) was improperly identified by Princess Bolton as a “Motion."
. The parties do not dispute the applicability of the Mississippi Title Pledge Act, Miss. Code Ann. § 75-67-401 etseq. (2011).
. The Agreement also contains a power of attorney authorizing Quick Cash to sell the vehicle.
. Miss.Code Ann. § 75-67-413 states "[a]ll extensions or continuations of the title pledge transaction shall be in writing.” There is no evidence of the extension other than the "Title Pledge” account summary. Bolton does not raise this as an issue.
. The case was dismissed for failure to keep plan payments current pursuant to an agreed order. (Dkt. No. 44).
. The last service charge appearing on Bolton's account, as of October 12, 2011, was incurred on November 25, 2008.
. The case was dismissed for failure to make payment into the Confirmed Plan and failure to respond to the Trustee’s Motion to Dismiss.
. Neither party disputes the lawfulness of the repossession.
. Quick Cash admits that Bolton requested return of the vehicle. (Adv. Dkt. No. 6 at 3).
. The Certificate of Title lists Bolton as the title holder and Quick Cash as first lien holder. (Adv. Dkt. No. 6, Ex. B).
. Quick Cash alleges that redemption may only be exercised by payment in full in accordance with its contractual and statutory rights. See infra.
. "Titled personal property” is defined as "any personal property the ownership of which is evidenced and delineated by a state-issued certificate of title.” Miss.Code Ann. § 75-67-403(m).
.“Pledged property” is defined as "any personal property certificate of title that is deposited with a title pledge lender in the course of the title pledge lender’s business and is the subject of a title pledge agreement.” Miss. Code Ann. § 75-67-411(f).
. Bolton’s name appearing on the Certificate of Title is not indicative of ownership because transfer by operation of law is governed by Miss.Code Ann. § 63-21-35, which provides, among other things, that if the lienholder holds the vehicle for resale, he need not secure a new certificate of title but upon transfer to another person must deliver title to the transferee.
. It is important to note that even if Bolton fails to timely redeem and the vehicle is sold, she is still entitled to "eighty-five percent of the amount received above the amount of unpaid principal balance, the delinquent service charge, the actual costs of repossession and a sales fee of one hundred dollars, see Miss.Code Ann. § 75-67-411(5).
. This encompasses sections 541 to 562, exposing pledges of property to attack under various avoiding powers.
. Section 541(b)(8) was added to the Bankruptcy Code as part of the 2005 BAPCPA amendments.
. This sub-section was added to the current Mississippi Code by amendment in 2000.
. Sixty days from the date of filing ended on December 11, 2011. The Motion was under advisement on that date.
. It is important to note that the automatic stay does not toll the redemption period. Only § 108(b) extends the state law redemption period where the redemption period had not expired prior to filing bankruptcy. In re Isom, 342 B.R. at 745-46 (automatic stay does not toll the redemption period); Cash Am. Advance, Inc. v. Prado, 413 B.R. 599, 605-06 (S.D.Tex.2008) (adopting majority position that § 362 does not toll the redemption period; § 108(b) provides only extension for such period); Cash Am. Pawn v. Murph, 209 B.R. 419, 422-23 (E.D.Tex.1997).
. Cf. In re Isom, 342 B.R. at 746 (property sold at tax sale was not property of the estate where debtor failed to redeem property within the sixty day extension under § 108(b)); In re Martin, 418 B.R. 710 (Bankr.S.D.Ohio 2009) (debtor’s vehicle not property of estate because he failed to redeem within 60 day extension under § 108(b)).
. Bolton filed her bankruptcy petition on October 11, 2011, so the due date for redemption was December 11, 2011. This matter was heard on November 17, 2011, and taken under advisement allowing the parties to submit briefs on the issue. Thus, the Court finds that the debtor should be allowed an additional 25 days from the date of this Opinion to redeem the property by paying Quick Cash in full. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494643/ | MEMORANDUM OPINION AND ORDER
BARBARA J. HOUSER, Bankruptcy Judge.
This adversary proceeding has an extensive procedural and substantive history, little of which bears repeating as it has been set forth at length in several prior Memorandum Opinions, see Docket Nos. 83, 480, 582, 738 and 806, and in the pleadings underlying over eighty motions that have been filed either by the plaintiff or by whom the Court has come to refer to in its prior opinions as the “Kornman Defendants” or the “Judgment Debtors.”1 Briefly, on May 11, 2009, this Court entered its Memorandum Opinion after trial on the merits of the claims filed by Dennis Faulkner (the “Trustee”) in the above-captioned adversary proceeding (the “2009 Memorandum Opinion”). After a subse*865quent dispute about the Trustee’s entitlement to pre-judgment interest was resolved, this Court entered, on July 13, 2009, what was styled and titled as a “Final Judgment” (the “Judgment”) against certain of the defendants, all of whom are affiliated in some fashion with Gary Korn-man (“Kornman”) (those entities will be referred to here as the “Judgment Defendants”).2 The Judgment awarded the Trustee a substantial monetary recovery against the Judgment Defendants, which they have been fighting ever since and which the Trustee has been trying (without much success) to collect ever since.
Specifically, ten days after entry of the Judgment, the Judgment Defendants filed “Defendants’ Motions for New Trial, or to Amend or Make Additional Findings of Fact, to Alter or Amend Judgment, or for Relief from Judgment, and Supporting Brief.” See Docket No. 612. On August 25, 2009, the Judgment Defendants filed “Defendants’ Supplemental Motion for New Trial, or for Relief From Judgment, and Supporting Brief.” See Docket No. 620. Both of those motions relied upon, inter alia, Federal Rule of Civil Procedure 60(b), and both were ultimately denied. See Docket No. 624. On September 11, 2009, the Judgment Defendants filed a notice of appeal, which stated that they were appealing “the Final Judgment entered on July 13, 2009.”3 See Docket No. 626. On May 27, 2010, the Judgment Defendants filed an “Emergency Motion and Supporting Brief for Order Requiring Clients [sic] with Notice and Due Process Requirement,” see Docket No. 708, in which they alleged that this Court had “signed and entered its Final Judgment dated July 13, 2010. Such Final Judgment has not been appealed and is therefore valid and subsisting.” Docket No. 708, ¶ 1. The Judgment Defendants asserted that the Trustee had improperly commenced enforcement proceedings in the United States Bankruptcy Court for the Southern District of Texas and certain pleadings had been improperly sealed, and thus the Judgment Defendants asked this Court for certain relief.4 That motion was thereafter withdrawn. See Docket No. 710. On August 8, 2011, the Judgment Defendants filed “Certain Defendants’ Motion to Vacate Final Judgment Pursuant to Fed.R.Civ.P. 60(b)(4) and Fed. R. Bankr.P. 9024.” See Docket No. 790 (the “Stem Motion”).
None of the foregoing pleadings filed by the Judgment Defendants assert that the Judgment, which was drafted by their attorney and titled “Final Judgment,” is not, *866and never was, final. In fact, the pleadings which do not expressly concede the Judgment’s finality rely upon its finality implicitly, either by virtue of an appeal or a citation to Fed. R. Civ. Pro. 60(b) which, by its terms, applies only to final judgments. The Judgment Defendants’ recent Stem Motion asserted that the Judgment is void and must be vacated on the ground that this Court lacked Constitutional authority to enter it under the recent decision of the United States Supreme Court in Stern v. Marshall, — U.S. -, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011). The Stern Motion itself relied upon Rule 60(b).
On the morning of the hearing on the Stem Motion, Judgment Defendants’ current counsel concocted a clever concept— and raised for the first time an issue that he “noticed last night” when preparing for the hearing — i.e., that the Judgment may not be final because it may not have disposed of all pled claims in the adversary proceeding against all named defendants. At that hearing, he was unable to provide any specifics beyond this vague statement. Therefore, the Court declined to address what it characterized as a hypothetical issue because it was neither raised in the Stem Motion nor was the Judgment Defendants’ counsel prepared to address it any further than simply raising its specter.
On October 3, 2011, this Court entered its Memorandum Opinion and Order (the “October Opinion”) denying the Stern Motion filed under Rule 60(b)(4). This Court held, for the reasons set forth therein, that its prior determination of jurisdiction was res judicata such that the Judgment Defendants could not challenge it on Stem grounds by way of a motion under Rule 60(b)(4) where the Court’s prior Judgment was not a “clear usurpation of power” or rendered notwithstanding a “total want of jurisdiction.” Faulkner v. Kornman (In re The Heritage Organization, L.L.C.), 459 B.R. 911 (Bankr.N.D.Tex.2011).5
*867Undaunted, the Judgment Defendants have now filed several motions. First, the Judgment Defendants have filed a “Motion to Amend or Modify the Court’s Memorandum Opinion and Order Denying their Motion to Vacate” pursuant to Fed.R.Civ.P. 52 (the “Motion for Amended Findings”). See Docket No. 810. In essence, the Judgment Defendants argue that the Judgment is not, and has never been, “final” and thus the Court’s analysis in its October Opinion was flawed as such finality is a necessary predicate to the application of the doctrine of res judicata or claim preclusion. The Judgment Defendants ask this Court to amend its October Opinion and expressly find that
(i) no final judgment has been entered in the above-captioned matter; (ii) the “Final Judgment” entered by the Court on July 13, 2009 is not a final judgment; (iii) Stem is fully applicable to the jurisdictional analysis that must be applied to this case; and (iv) under Article III of the Constitution of the United States, as interpreted by the Supreme Court in Stem, this Court has no subject matter jurisdiction to adjudicate the claims that it purported to adjudicate in the proceedings that culminated in its entry of the “Final Judgment” on July 13, 2009.
Motion for Amended Findings, p. 4. The Judgment Defendants further request that after making these findings, the Court amend its October Opinion to vacate the Judgment and its 2009 Memorandum Opinion containing the findings and conclusions supporting the Judgment.
Second, the Judgment Defendants have filed an “Emergency Motion to Stay Enforcement of Alleged ‘Final Judgment’ and Brief in Support Thereof’ (the “Stay Motion”). See Docket No. 814. The Judgment Defendants argue that the Judgment is not final, and therefore the Trustee’s registration of the Judgment in the Southern District of Texas was improper, and his efforts to enforce the Judgment violate due process under the 14th Amendment to the United States Constitution and should be stayed pending this Court’s disposition of the Motion for Amended Findings.6
Third, the Judgment Defendants have filed a “Motion to Dismiss Pursuant to Rules 12(b)(1) and 12(h)(3) of the Federal Rules of Civil Procedure and Rule 7012(b) of the Federal Rules of Bankruptcy Procedure” (the “Dismissal Motion”). See Docket No. 818. The Judgment Defendants assert that the Trustee’s claims in this adversary proceeding are “private right claims that must be adjudicated by a court established pursuant to Article III of the Constitution of the United States” under Stem, see Dismissal Motion, p. 2, and this Court accordingly lacks subject matter jurisdiction to adjudicate such claims and enter a final judgment. They further assert that since no final judgment has been entered, this Court retains jurisdiction to determine its jurisdiction, and they ask that this Court enter an order dismissing the adversary proceeding for lack of subject matter jurisdiction.
The Trustee has opposed all three motions. The Court heard the motions on *868November 22, 2011 and took them under advisement.
I. LEGAL ANALYSIS
A. The Motion for Amended Findings
The Judgment Defendants argue the Judgment was not, in fact, a final judgment because the record shows that (i) all of the claims against all of the parties were not finally disposed of, (ii) there was no order of severance respecting the Court’s separate rulings as to claims against individual defendants, and (iii) there was never any certification under Fed.R.Civ.P. 54(b) rendering any ruling of the Court a final judgment. As the Fifth Circuit has noted, the purpose of a motion for amended or additional findings under Rule 52(b) is to correct manifest errors of law or fact — “that is not to say, however, that a motion to amend should be employed to introduce evidence that was available at trial but was not proffered, to relitigate old issues, to advance new theories, or to secure a rehearing on the merits.” Fontenot v. Mesa Petroleum Co., 791 F.2d 1207, 1219 (5th Cir.1986).
The Court will address the disposition of claims argument first, because only if the Judgment did not dispose of all claims against all parties need the Court address the requirement of an order of severance or the parties’ arguments under Rule 54. The Court will address the Judgment Defendants’ arguments regarding the disposition of claims against various other defendants in turn.
(i) The Oak Group, L.P. (the “Oak Group”)
First, the Judgment Defendants argue that although the Trustee originally named the Oak Group as a defendant, any claims against the Oak Group were never disposed of by an order of the Court or by the Judgment; nor was the Oak Group mentioned in the pre-trial order or the parties’ stipulation, entered on the docket on December 18, 2008, which described the claims remaining for trial.
Some background will be helpful to the Court’s analysis of this argument. The Trustee’s original complaint, filed on May 16, 2006, named the Oak Group as a defendant. Similarly, the Trustee’s first amended complaint, filed on October 16, 2006, named the Oak Group as a defendant. Thereafter, the Trustee settled with or dismissed claims against certain parties and the Court ruled on the admissibility of certain expert reports — both of which effectively narrowed the claims for trial. At a September 10, 2008 hearing, the Court directed the parties to confer regarding the claims in the case that remained for trial. On September 22, 2008, the parties filed a “Joint Status Report” which advised the Court which claims they believed remained for determination. See Docket No. 437. At hearings in November, 2008, the Court directed the Trustee to provide a copy of a proposed second amended complaint which would then, if an agreement could be reached, become the operative complaint upon which the parties would go to trial. The Trustee did not timely do so, and therefore on December 8, 2008, counsel for certain of the defendants filed a motion to compel the Trustee to provide them with the proposed second amended complaint and to confer to finalize an agreed trial scheduling order. See Docket No. 469. In response, the Trustee filed “Trustee’s Amended Motion for Leave to File Second Amended Adversary Complaint, and Brief in Support” (“Amended Motion for Leave”). See Docket No. 473. The Amended Motion for Leave noted:
Attached hereto as Exhibit A is the Trustee’s proposed Second Amended Adversary Complaint. The Second Amended Adversary Complaint is gen*869erally similar to the First Amended Adversary Complaint. However, it revises, eliminates and/or consolidates certain claims and causes of action. There are also more specific factual allegations in accordance with the facts learned in the discovery process. For example, the Sixth Cause of Action alleging breaches of fiduciary and other duties now includes closely related allegations of aiding and abetting breaches of such duties. Further, the Second Amended Adversary Complaint does the following:
A. Eliminates all claims against former defendants who have been dismissed from this proceeding after settlements approved by the Court;
B. Eliminates all claims against Defendant The Oak Group, Ltd.;
C. Eliminates causes of action for damages to Heritage creditors related to deepening insolvency; for civil conspiracy; and for constructive fraud;
D. Substantially narrows and makes more specific the fraudulent transfer claims; and
E. Eliminates claims related to the payments made by Heritage to various Defendants pursuant to covenants not to compete.
The Trustee believes that he could make the modifications to his claims set forth in the proposed Second Amended Adversary Complaint in connection with the upcoming Pretrial Order in this case, and this would effectively amend his pleadings without the necessity of any formal amendment. However, the Trustee seeks leave to file his Second Amended Adversary Complaint now so as to make clear to the Court and opposing parties the claims that the Trustee intends to take to trial.
Amended Motion for Leave, ¶¶ 4, 5 and 7. The defendants opposed the Amended Motion for Leave, but only to the extent that the Trustee sought to add a new claim for aiding and abetting breaches of fiduciary duties; the defendants did not otherwise oppose the Amended Motion for Leave. See Docket No. 475. Before the Amended Motion for Leave was heard, this Court issued its Memorandum Opinion and Order with respect to certain summary judgment motions, see Docket No. 480, which further narrowed the claims remaining for trial.
On December 18, 2008, the parties filed an “Agreed Stipulation Regarding Second Amended Complaint and Claims Remaining for Trial” (the “Stipulation”), see Docket. No. 486, which the Court “So Ordered” on December 18, 2008. See Docket No. 488. By that Stipulation, the parties agreed that the Trustee’s Amended Motion for Leave should be granted; the parties further stipulated as to which claims remained for trial. Then-counsel for the Judgment Defendants signed that Stipulation. Pursuant to that Stipulation, the Trustee filed his second amended complaint on December 22, 2008 (the “Second Amended Complaint”). See Docket No. 493.
Consistent with the Trustee’s Amended Motion for Leave and the parties’ Stipulation that the Amended Motion for Leave should be granted, and consistent with the parties’ Stipulation respecting the claims remaining for trial, the Second Amended Complaint no longer named the Oak Group as a defendant.
Having stipulated to the Trustee’s abandonment of any claims against the Oak Group, which Stipulation was approved by the Court, the Judgment Defendants will not now be heard to complain that the Judgment lacked finality because it failed to dispose of claims against the Oak *870Group — which claims were clearly abandoned with their express consent.7
Moreover, it is well-settled that an amended complaint “supercedes the original complaint and renders it of no legal effect unless the amended complaint specifically refers to and adopts or incorporates by reference the earlier pleading.” Canal Ins. Co. v. Coleman, 625 F.3d 244, 246 n. 2 (5th Cir.2010) (citing King v. Dogan, 31 F.3d 344, 346 (5th Cir.1994)); Ross v. Hutchins Police Dept., No. 3:09-CV-0168-M, 2009 WL 1514364 (N.D.Tex. May 29, 2009). Here, the Second Amend ed Complaint did not refer to, adopt, or incorporate either the original complaint or the first amended complaint. See Second Amended Compl., Docket No. 493. Accordingly, the original and first amended complaints were superceded and rendered void of legal effect upon the filing of the Second Amended Complaint. The Second Amended Complaint contained no claims against the Oak Group, and thus the Judgment after trial of the causes of action in the Second Amended Complaint is not deprived of finality by its failure to address non-existent claims against the Oak Group. Vaughn v. Mobil Oil Exploration and Producing Southeast, Inc., 891 F.2d 1195, 1198 (5th Cir.1990) (“Rule 54 does not reach out to preserve claims that the parties do not actively pursue ... an order that effectively ends the litigation on the merits is an appealable final judgment even if the district court does not formally include judgment on a claim that has been abandoned”) (quoting Jones v. Celotex Corp., 867 F.2d 1503, 1503-04 (5th Cir.989)).
(ii) Claims against Michael, Grant and Martha Komman and Claudia McEl-wee (the “McElwee Defendants”)
The Judgment Defendants next argue that the Judgment is not final because the Trustee’s claims against the McElwee Defendants were never finally adjudicated. The Trustee settled his claims against the McElwee Defendants pursuant to a settlement agreement (the “McElwee Settlement Agreement”) which this Court approved by order entered on November 17, 2008. See Docket No. 1383 in Case No. 04-35574-BJH. The Judgment Defendants point out that pursuant to the McEl-wee Settlement Agreement, the McElwee Defendants were to pay $90,000.00 to the Trustee, and “[e]ffective subject to and upon payment” of that amount, the Trustee released the McElwee Defendants as provided in the McElwee Settlement Agreement. See Docket No. 1367 in Case No. 04-35574-BJH, Ex. A. The Judgment Defendants further point out that the McElwee Settlement Agreement stated: “Promptly after receipt of the Settlement Payment, the Trustee shall cause the filing of a motion and order for dismissal with prejudice of all claims asserted in the Lawsuit and in the Subordination Proceeding against the Settling Defendants, and the *871Settling Defendants who have filed Proofs of Claim shall cause the filing of a Notice of Withdrawals [sic] of each such Proofs [sic] of Claim, evidencing their irrevocable withdrawal of each such Proof of Claim.” See Docket No. 1367 in Case No. 04-35574-BJH, Ex. A. The Judgment Defendants lastly point out that the docket reflects that the Trustee never moved to dismiss any of his claims against the McEl-wee Defendants, and therefore argue that the Judgment is not final because the Trustee’s claims against the McElwee Defendants were never adjudicated, as there is no order, stipulation of dismissal or other indication in the record that the claims against the McElwee Defendants were ever dismissed.8
In response, the Trustee argues that with the consent of the Judgment Defendants as noted above, the Trustee filed his Second Amended Complaint, which did not name the McElwee Defendants as defendants. He therefore argues that all claims against them were “otherwise resolved or abandoned, since the Final Pre-Trial Order and Second Amended Complaint superseded all prior pleadings.” Trustee’s Br. In Supp. Of Opp. To Defs’ Mot. To Amend or Modify the Court’s Mem. Op. And Order Denying their Mot. To Vacate (“Trustee’s Br.”), p. 13.
The Judgment Defendants reply with several arguments. They assert, citing Exxon Corp. v. Maryland Cas. Co., 599 F.2d 659 (5th Cir.1979) and Klay v. United Healthgroup, Inc., 376 F.3d 1092 (11th Cir.2004), that when a plaintiff seeks to dismiss all claims against one of several defendants, the plaintiff must comply with Fed.R.Civ.P. 41(a).9 They assert that the filing of the Second Amended Complaint did not comply with the requirements of Rule 41, because the McElwee Defendants, who had each filed an answer, were not parties to the Stipulation which permitted the Trustee to file the Second Amended Complaint and thus did not consent to such dismissal; in fact, according to the Judgment Defendants, the McElwee Defendants were not even served with either the Trustee’s Amended Motion for Leave or with the Stipulation. The Judgment Defendants further assert that in the absence of the McElwee Defendants’ consent, dismissal of the claims against them had to be by court order under Rule 41(a)(2). The Judgment Defendants also point out that the order approving the Stipulation did not dismiss any claims, and it cannot be viewed as tantamount to such a dismissal, because under the McElwee Settlement Agreement, the Trustee agreed to dismiss the claims against the McElwee Defendants “with prejudice,” yet a dismissal under either Rule 41 or by virtue of an amendment under Fed.R.Civ.P. 15 operates without prejudice unless the Court orders otherwise. Therefore, the Judgment Defendants assert that if this Court’s approval of the Stipulation permitting the Trustee to file his Second Amended Complaint is viewed as the functional equivalent of an order dismissing the claims against the McElwee Defendants, then the Trustee failed to comply with the McElwee Settlement Agreement, which required dismissal with prejudice. Instead, the Judgment Defendants assert that the grant of the Amended Motion for Leave *872was, in reality, a motion for a separate trial of the “remaining” claims under Fed. R.Civ.P. 42 — and the claims against the McElwee Defendants were therefore never dismissed, never abandoned, and “remain to be adjudicated.” See Moving Defs’ Reply to Trustee’s Opp. To Defs.’ Mot. To Amend or Modify the Court’s Mem. Op. And Order Denying their Mot. To Vacate (“Judgment Defs.’ Reply”), p. 10.
The Federal Rules of Civil Procedure relevant to these issues are Rules 15 and 41.10 Rule 41(a) provides:
(a) Voluntary Dismissal.
(1) By the Plaintiff.
(A) Without a Court Order. Subject to Rules 28(e), 23.1(c), 23.2, and 66 and any applicable federal statute, the plaintiff may dismiss an action without a court order by filing:
(i) a notice of dismissal before the opposing party serves either an answer or a motion for summary judgment; or
(ii) a stipulation of dismissal signed by all parties who have appeared.
(B) Effect. Unless the notice or stipulation states otherwise, the dismissal is without prejudice. But if the plaintiff previously dismissed any federal — or state — court action based on or including the same claim, a notice of dismissal operates as an adjudication on the merits.
(2) By Court Order; Effect. Except as provided in Rule 41(a)(1), an action may be dismissed at the plaintiffs request only by court order, on terms that the court considers proper. If a defendant has pleaded a counterclaim before being served with the plaintiffs motion to dismiss, the action may be dismissed over the defendant’s objection only if the counterclaim can remain pending for independent adjudication. Unless the order states otherwise, a dismissal under this paragraph (2) is without prejudice.
Rule 15(a) provides:
(a) Amendments Before Trial.
(1) Amending as a Matter of Course. A party may amend its pleading once as a matter of course within:
(A) 21 days after serving it, or
(B) if the pleading is one to which a responsive pleading is required, 21 days after service of a responsive pleading or 21 days after service of a motion under Rule 12(b), (e), or (f), whichever is earlier.
(2) Other Amendments. In all other cases, a party may amend its pleading only with the opposing party’s written consent or the court’s leave. The court should freely give leave when justice so requires.
Here, it is undisputed that after the Court approved the McElwee Settlement Agreement, the Trustee never filed a motion to dismiss the McElwee Defendants under Rule 41, as he had undertaken to do in that agreement. Instead, the Trustee filed the Second Amended Complaint which dropped all claims against the McElwee Defendants.11
*873The Judgment Defendants assert that this procedural misstep is fatal to the Judgment’s finality. The Court disagrees for the following reasons.
Numerous courts have considered the interplay between Rules 15 and 41. Neither of the cases cited by the Judgment Defendants, however, stand precisely for the proposition for which they are cited— that is, that when a plaintiff seeks to dismiss all claims against one of several defendants, that plaintiff must file a motion under Rule 41. In Exxon Corp. v. Maryland Cas. Co., 599 F.2d 659 (5th Cir.1979), the Fifth Circuit had before it a lawsuit by Exxon Corporation (“Exxon”) against the surety (“Maryland Casualty”) of one of its customers with unpaid bills, seeking to hold Maryland Casualty liable for those bills through two separate claims: the first under a quasi-contract theory, and the second on a contractual theory based on performance bonds Maryland Casualty had issued. Maryland Casualty filed a motion to dismiss both claims for failure to state a claim, but withdrew the motion as it related to the contractual (second) claim before the motion was heard. The lower court heard and granted Maryland Casualty’s motion as it related to the first claim. Exxon sought a Rule 54(b) certification so it could appeal, but the lower court denied that motion. Exxon then moved for reconsideration of both rulings, which the lower court also denied. Exxon then voluntarily dismissed its contractual(second) claim against Maryland Casualty under Rule 41(a)(1)(A)®, and filed a notice of appeal from the lower court’s denial of reconsideration. Maryland Casualty defended the appeal at the Fifth Circuit by moving to dismiss the appeal as premature, arguing that Rule 41 didn’t permit Exxon to unilaterally dismiss Exxon’s contractual (second) claim after Maryland Casualty had filed its motion to dismiss for failure to state a claim, which Maryland Casualty argued was tantamount to a motion for summary judgment since the trial court had considered evidence outside the pleadings. Maryland Casualty farther argued that Rule 41(a) does not permit dismissal of claims, but only of an “action.” In this context, the Fifth Circuit noted that the purpose of allowing a unilateral notice of dismissal only prior to the filing of an answer or motion for summary judgment is that once a defendant has become actively involved in its defense, the defendant is entitled to have the case adjudicated and it cannot therefore be dismissed “without either his consent, permission of the court, or a dismissal with prejudice that assures him against the renewal of hostilities.” Exxon, 599 F.2d at 661. The Fifth Circuit agreed that the lower court had treated Maryland Casualty’s motion as one for summary judgment, and thus the filing of that motion had “cut off’ Exxon’s right to unilaterally dismiss its contractual (second) claim. The Fifth Circuit then addressed Maryland Casualty’s second argument — ie., whether Rule 41(a)(1)(A)® permits dismissal of claims rather than an entire action, and held that it did not, because Rule 41 and the rules in general distinguish between the terms “action” and “claim.” The Fifth Circuit also distinguished its prior ruling in Plains Growers, Inc. v. Ickes-Braun Glasshouses, Inc., 474 F.2d 250 (5th Cir.1973). Plains Growers had permitted a plaintiff to file a notice of voluntary dismissal under Rule 41 of all of its claims against one defendant, despite the fact that the case would remain pending against another defendant, because dismissing all claims against one of several defendants completely removes a party from the case when it has not filed a responsive pleading. The Fifth Circuit in Exxon noted that the situation in Exxon was quite different:
*874Allowing dismissal of the one remaining claim will not relieve Maryland Casualty of its obligation to appear in court; this appeal would still be pending. Thus Maryland Casualty would face the possibility of defending overlapping claims in two forums if we were to reverse the summary dismissal of the first claim. At this stage of the proceedings, we cannot allow Exxon to decide unilaterally to put Maryland Casualty to this risk.
Exxon, 599 F.2d at 662-663.
Thus, the Exxon case does not support the proposition that a plaintiff seeking to dismiss all claims against one of several defendants must file a motion under Rule 41 rather than seek leave to amend the complaint under Rule 15. Exxon involved a situation where a plaintiff sought to dismiss one of two claims against a single defendant. Its holding did not address Rule 15 at all, and the factual context in which it was decided differs from the present adversary proceeding.
The Judgment Defendants, however, cite to footnote 10 in the Exxon decision, in which the Fifth Circuit cited with approval In re Smith, Kline & French Laboratories v. A.H. Robins Co., 61 F.R.D. 24 (E.D.Pa.1973). The Smith, Kline court held that amendment of a complaint under Rule 15(a) is the proper procedure to use where a plaintiff seeks to dismiss one claim against several defendants but does not seek to dismiss all claims as to any one of them. By negative implication, then (and not by explicit holding), footnote 10 arguably stands for the proposition that Rule 41, rather than Rule 15, is the proper vehicle to dismiss all claims against one of several defendants.12
This Court does not so hold, however, for several reasons. First, the Fifth Circuit’s statements in footnote 10 of Exxon were dictum. Second, the Fifth Circuit went on in footnote 10 to note that it could not deny the motion to dismiss the appeal on the ground that the dismissal of the claim would have been proper under Rule 15, “because none of the conditions for amending a complaint under that rule have been met. Exxon did not obtain either leave of court or the written consent of Maryland Casualty to amend the complaint.” Exxon, 599 F.2d at 662, n. 10. Here, however, the conditions for amending a complaint under Rule 15 were satisfied. The Trustee sought and received Court leave to file the Second Amended Complaint, and his Amended Motion for Leave disclosed that he sought to amend for the purpose, inter alia, of dropping parties where his claims against those parties had been settled or dismissed. In fact, the Trustee filed the Amended Motion for Leave in response to the Judgment Defendants’ motion to compel the Trustee to file one. See Docket No. 469. Thereafter, the Judgment Defendants expressly consented to the grant of the Amended Motion for Leave, and did not complain that the Trustee was using an incorrect procedure to remove parties from the lawsuit.
Arguably, the filing of the Second Amended Complaint that dropped the McElwee Defendants as parties, rather than the filing of a motion to dismiss the McElwee Defendants as parties, did not comply with the McElwee Settlement Agreement. However, the Judgment Defendants are not the appropriate parties to lodge that complaint and they lack standing to assert any breach of the McElwee *875Settlement Agreement.13 Moreover, it is clear that the McElwee Defendants viewed themselves as dismissed from the litigation. Some further factual context is required.
On September 10, 2010, two of the McElwee Defendants filed a “Motion to Enforce Settlement Agreement and Enjoin Further Litigation” (“Motion to Enforce”). See Docket No. 740 in Case No. 04-35574-BJH. The Motion to Enforce alleged that the Trustee had entered into the McElwee Settlement Agreement in 2008 that was subsequently approved by this Court, and that the McElwee Defendants had (i) paid $90,000 in cash to the Trustee, (ii) given up over $280,000 in proofs of claim and (iii), in exchange, had been released. It further alleged that in July, 2010, the Trustee filed a “Complaint” against two of them, seeking to assert claims under 11 U.S.C. § 550 and Texas’s Uniform Fraudulent Transfer Act, which they argued had been released by the McElwee Settlement Agreement.14 They asserted that the Trustee should be enjoined from further litigation against them, because “they have a valid release, approved by this Court, as well as a final judgment dismissing the claims against them.” Motion to Enforce, p. 10. They further argued that such an injunction would be in the public interest because “the Trustee now seeks to deprive [them] of the hard-won protections of the Courts Approved Settlement, which they obtained at considerable cost in both cash and forgone claims. Allowing the Trustee to manipulate the process in this fashion — obtaining settlement payments and later suing on the same claims — undermines the bankruptcy process, harms the public interest, and for both reasons, justifies injunctive relief.” Id. at p. 11. The *876Motion to Enforce was set for hearing on October 18, 2010, but was never heard because it was withdrawn on October 14, 2010, the day following the Trustee’s filing in the Southern District of Texas of a “Notice of Partial Dismissal” of the claims asserted against the two McElwee Defendants. See Docket No. 216 in S.D. Tex. Misc. Pro. No. 10-301.15 From these facts, it should be clear that the McElwee Defendants viewed themselves as out of the case, and certainly consented to their dismissal.
The Judgment Defendants also cite Klay v. United Healthgroup, Inc., 376 F.3d 1092 (11th Cir.2004) for the proposition that when a plaintiff seeks to dismiss all claims against one of several defendants, the plaintiff must comply with Rule 41. But like the Exxon case, the Klay case addressed whether Rule 41 could be used to voluntarily dismiss only some, but not all, claims against a defendant. The Klay court concluded that it could not, because of the distinction in the rule between the term “claim” and the term “action.” In the course of its discussion, the Eleventh Circuit noted, however, that the plaintiff had filed a notice of voluntary dismissal and the district court had entered an injunction order against the prosecution of the claims purportedly dismissed. While the Eleventh Circuit concluded that the use of Rule 41 rather than Rule 15 was technically improper, it also noted that “[w]e could overlook this flaw and construe both the notice and the order as being brought under Rule 15 rather than Rule 41; we could further assume that, under this rule, the court was correct in allowing plaintiffs to amend,” but noted that even if it had done so, the lower court’s ruling that there was therefore no justiciable controversy for an arbitration panel to resolve was legally incorrect. Therefore, the Klay case supports the notion that where there has been a technical error in using the wrong rule to dispose of claims against a defendant, the court may overlook it and construe the motion as being brought under the correct rule.
The Federal Rules of Bankruptcy Procedure, like the Federal Rules of Civil Procedure, “shall be construed to secure the just, speedy, and inexpensive determination of every case and proceeding.” Fed. R. Bankr.P. 1001; In re Cano, 410 B.R. 506 (Bankr.S.D.Tex.2009). Other courts have noted that a faulty Rule 15 motion may be construed instead as a motion to dismiss under Rule 41. Southcrest, L.L.C. v. Bovis Lend Lease, Inc., No. 10-CV-0362-CVE-FHM, 2011 WL 1793388 (N.D.Okla. May 11, 2011). In fact, several courts have noted that there is little difference in practical effect between the use of Rule 41 versus the use of Rule 15 to drop parties. See, e.g., In re Legal Xtranet, Inc., No. 11-51042-LMC, 2011 WL 3652756 (Bankr.W.D.Tex. Aug. 19, 2011) (and cases cited therein). Here, even assuming the Trustee’s decision to drop all claims against the McElwee Defendants by amendment to the complaint under Rule 15 rather than by motion to voluntarily dismiss under Rule 41 was a procedural misstep, the Court may construe the Trustee’s Amended Motion for Leave as a motion under Rule 41. As noted above, in either case, dismissal of the claims against the McElwee Defendants was done with leave of Court, which was sufficient to comply with either rule.
There is no support in the record for the Judgment Defendants’ current stance that *877the Trustee’s Amended Motion for Leave was, in reality, a motion for separate trial, and their assertion that the Trustee’s claims against the McElwee Defendants “remain to be adjudicated” is simply preposterous in light of, among other things, the release contained in the McElwee Settlement Agreement. Therefore, the Court declines to conclude that the Judgment lacks finality because it failed to dispose of the Trustee’s claims against the McElwee Defendants.
Moreover, as noted earlier, an amended complaint “supercedes the original complaint and renders it of no legal effect unless the amended complaint specifically refers to and adopts or incorporates by reference the earlier pleading.” Canal Ins. Co. v. Coleman, 625 F.3d 244, 246 n. 2 (5th Cir.2010) (citing King v. Dogan, 31 F.3d 344, 346 (5th Cir.1994)); Ross v. Hutchins Police Dept., No. 3:09-CV-0168-M, 2009 WL 1514364 (N.D.Tex. May 29, 2009). Here, the Second Amended Complaint did not refer to, adopt, or incorporate either the original complaint or the first amended complaint. See Second Amended Compl., Docket No. 493. Its filing was with Court approval and the Judgment Defendants’ express consent. Accordingly, the original and first amended complaints were superceded and rendered void of legal effect upon the filing of the Second Amended Complaint. The Second Amended Complaint contained no claims against the McElwee Defendants, and thus the Judgment after trial of the causes of action in the Second Amended Complaint is not deprived of finality by its failure to address non-existent claims against the McElwee Defendants.
(iii) Claims against Kroney-Mincey, Inc. and Robert Kroney
The Judgment Defendants also contend that the Judgment lacks finality because it failed to dispose of claims against Robert H. Kroney and Kroney-Mincey, Inc., a law firm and one of its partners which represented Heritage at one point. The following facts are relevant here.
The Trustee’s original and first amended complaints asserted certain claims against these two defendants. On June 12, 2007, the Trustee filed a “Motion for Approval of Compromise and Settlement with Kroney-Mincey, Inc.” (the “Kroney Compromise Motion”). See Docket No. 1184 in Case No. 04-35574-BJH. The two defendants were collectively defined in that motion, and in the settlement agreement attached to the motion (the “Kroney Settlement Agreement”), as the “Kroney Defendants.” The terms of the Kroney Settlement Agreement relevant to the present dispute are: Kroney-Mincey Inc.’s insurance carrier was to make a $300,000 payment to the Trustee16 no later than the next business day following the settlement’s “Effective Date,” which was essentially defined as the first business day after this Court entered an order approving the Kroney Settlement Agreement and such order became final. It further provided that “Effective as of the Effective Date, and expressly subject to receipt of the Payment by the Trustee,” the Trustee released the Kroney Defendants. The Trustee agreed to immediately, upon execution of the Kro-ney Settlement Agreement, file a notice of dismissal without prejudice of the Trustee’s claims against Robert H. Kroney pursuant to “Rule 41(a)(l)(i)” [sic] with a temporary tolling of the statute of limitations on those claims. See Ex. A to the Kroney *878Compromise Motion, p. 2. It further provided that by no later than the next business day following the Effective Date, the Trustee would file, “pursuant to Rule 41(a)(l)(i),” [sic] notices of dismissal with prejudice of the claims against both defendants, with the form to be entered as to Robert H. Kroney attached to the Kroney Settlement Agreement. -See Ex. A to the Kroney Compromise Motion, p. 3. Therefore, the Trustee essentially agreed to dismiss, without prejudice, his claims against Robert H. Kroney immediately upon execution of the Kroney Settlement Agreement, and to dismiss his claims against both of the Kroney Defendants with prejudice the day following the Effective Date, subject to receipt of the $800,000 payment.
The Kroney Compromise Motion was served on, among others, then-counsel for the Judgment Defendants, and they were given the opportunity to object by July 2, 2007. No objections were forthcoming, see Docket No. 1225 in Case No. 04-35574-BJH, and the docket reflects that this Court entered an order granting the Kro-ney Compromise Motion on July 12, 2007. See Docket No. 1234 in Case No. 04-35574-BJH. On the same date that the Kroney Compromise Motion was filed, the Trustee filed a “Notice of Dismissal Without Prejudice of Claims Against Defendant Robert H. Kroney,” in the form which had been attached to the Kroney Settlement Agreement. See Docket No. 152. As the Judgment Defendants point out, this notice is signed only by counsel for the Trustee and is not signed by either of the Kroney Defendants.
On July 25, 2007, the Trustee filed a “Notice of Dismissal with Prejudice of Claims Against the Kroney Defendants.” See Docket No. 154. This notice too is signed only by counsel for the Trustee and is not signed by either of the Kroney Defendants.
The Judgment Defendants argue that these notice of dismissal were “ineffective” because they were signed only by the Trustee and not by all parties who had appeared in the adversary proceeding as required by Rule 41 (a)(1)(A)(ii).17 The Judgment Defendants further argue that even if it had been signed by counsel for the Kroney Defendants, it still may have been ineffective because Rule 41 “speaks of dismissal of an action, and the plaintiffs elimination of a fragment of an action ... is more appropriately considered to be an amendment to the complaint under Rule 15.” Judgment Defs. ’ Br., p. 8, n. 9 (quoting Ryan v. Occidental Petroleum Corp., 577 F.2d 298, 302, n. 2 (5th Cir.1978)). Lastly, the Judgment Defendants assert that although the Fifth Circuit has not demanded strict compliance with the signed writing requirement in Rule 41(a)(l)(A)(ii), it has demanded something “unequivocal and in the record” in order to demonstrate that the dismissal was agreeable to all parties who have appeared in the action. Id. at p. 8 (citing Ocean Drilling & Exploration Co. v. Mont Boat Rental Services, Inc., 799 F.2d 213, 218 (5th Cir.1986)). The Court will address these arguments together.
First, the Court notes that the Trustee and the Kroney Defendants agreed to this procedure — i.e., the filing by the Trustee of a notice of dismissal under Rule 41(a)(l)(A)(i), not Rule 41(a)(l)(A)(ii), in the Kroney Settlement Agreement. Thus, it appears in the record that the Kroney Defendants waived their rights to be signatories to a stipulation of dismissal *879under Rule 41 (a) (1) (A) (ii), and their consent to this procedure and to their dismissal from the lawsuit is “unequivocal and in the record.” Ocean Drilling, 799 F.2d at 218; see also Chiles v. Stephens, No. 87-1942, 1994 WL 150733 (E.D.La. Apr. 8, 1994) (stating that courts have not insisted on a writing when it is clear that the parties have in fact entered into the contemplated dismissal, and finding that an unopposed, jointly-prepared motion to dismiss was sufficient evidence of a stipulation).
Second, the Kroney Compromise Motion was served on then-counsel for the Judgment Defendants, who were given the opportunity to object to this procedure or to the dismissal of the Kroney Defendants, but they failed to lodge such objections. Their implicit consent to this procedure and to the dismissal of the Kroney Defendants is therefore also “unequivocal and in the record.” See Docket No. 1225 in Case No. 04-35574-BJH (Certificate of No Objection filed pursuant to N.D. Tx. L.B.R. 9019.1, permitting the use of “negative notice language”). The same is true with respect to every other defendant in this adversary proceeding.18
Third, as noted earlier, the Judgment Defendants stipulated', and the Court “So Ordered” the Stipulation, that the Trustee’s Amended Motion for Leave (to file his Second Amended Complaint) be granted, and therefore that no claims against the Kroney Defendants remained for trial (because the Second Amended Complaint asserted none). That Stipulation is tantamount to a consent to dismissal of the claims against the Kroney Defendants, and it too is “unequivocal and in the record.” Ocean Drilling, 799 F.2d at 218. The facts of Ocean Drilling, where the Fifth Circuit refused to recognize that a plaintiff had successfully voluntarily dismissed certain claims, are clearly distinguishable. There, the stipulation was purely an off-the-record, oral stipulation.
Fourth, for the same reasons discussed above in the Court’s analysis of the interplay between Rules 15 and 41 in connection with its discussion of the claims against the McElwee Defendants, the Court believes that the Fifth Circuit would permit the use of Rule 41 to dismiss all claims against the Kroney Defendants, despite the fact that Rule 41 speaks in terms of dismissal of an “action” and not dismissal of “claims.” Plains Growers, Inc. v. Ickes-Braun Glasshouses, Inc., 474 F.2d 250 (5th Cir.1973). Further, even to the extent that the Judgment Defendants cite to Ryan v. Occidental Petroleum Corp., 577 F.2d 298 (5th Cir.1978) for the proposition that dismissal of a fragment of an action requires the use of Rule 15 and *880not Rule 41, the Court notes that the Trustee also used Rule 15 here, to drop any claims against the Kroney Defendants, with the Judgment Defendants’ express consent. And as further noted above, the Second Amended Complaint, which contained no claims against the Kroney Defendants, superceded the original and amended complaints and rendered them of no legal effect, because the Second Amended Complaint did not refer to or adopt either of its two predecessors. Canal Ins. Co. v. Coleman, 625 F.3d 244, 246 n. 2 (5th Cir.2010). For all of these reasons, the Court declines to conclude that the Judgment lacks finality for its failure to dispose of claims against the Kroney Defendants.
(iv) Claims against GMK Corp., Komman & Associates, Inc. And Leasecorp Inc.
The Judgment Defendants next assert that the Judgment lacks finality because there was no adjudication of any of the claims under 11 U.S.C. § 550 against GMK Corp. (“GMK”), Kornman & Associates, Inc. (“K & A”) or Leasecorp, Inc. (“Leasecorp”). The Stipulation respecting claims remaining for trial and the parties’ Joint Pre-Trial Order indicated that the Trustee was pursuing those claims, yet the Judgment Defendants assert that they are not addressed in either the Judgment or the 2009 Memorandum Opinion.
The Trustee concedes that these three entities were (i) named as defendants in the Second Amended Complaint, (ii) included in the Joint Pre-Trial Order, and (Hi) listed in the Stipulation as “live” defendants with respect to claims under Section 550 with respect to any transfers which the Court found avoidable under Count 1 of the Second Amended Complaint. Initially, the Trustee argued that the 2009 Memorandum Opinion “made clear” that the Trustee did not prevail on these claims, and that once the Judgment was entered, “this Court’s decisions incorporated in the ... Memorandum Opinion ... were also final and appealable.” Trustee’s Br., pp. 14-15.19 By the time of the hearing on the Motion for Amended Findings, however, the Trustee switched gears and argued that his claims under Section 550 against these entities had been abandoned at trial, as is evidenced by the filing of the “Trustee’s Amended Proposed Findings of Fact and Conclusions of Law” (“Trustee’s Posh-Trial Proposed Findings”). See Docket No. 563. In the section of the Trustee’s Post-Trial Proposed Findings addressing this Section 550 claim, the Trustee states:
Because the [transfers] are avoided, the Trustee may recover the value of all such transfers from the initial transferees. 11 U.S.C. § 550(a). Defendants have established no defenses under Section 550 of the Bankruptcy Code. Judgment therefore will be awarded to the *881Trustee in the full amount of the [transfers] against Defendants Steadfast, GMK Family and Tikchik, and to Korn-man as the person for whose benefit such transfers were made.... The Trustee has further proven certain subsequent transfers of such property to mediate or immediate transferees of such initial transferees, which may be avoided and recovered under Section 550(a)(2) of the Bankruptcy Code. These are: (a) the transfer of $10,440,000 by Steadfast to Kornman on or about July 19, 2001; (b) the transfer of $600,000 from GMK Family to Kornman on or about July 20, 2001; and (c) the transfer of cash and other property worth $4,000,000 from Steadfast to Ettman on or about July 26, 2002. Defendants have established no defenses under Section 550 of the Bankruptcy Code. The Trustee is entitled to judgment avoiding these transfers and for the amount thereof. Id. at p. 54-55.
The Trustee argued at the hearing on the Motion for Amended Findings that this filing evidences the fact that the Trustee knew he had not proven Section 550 claims against GMK, K & A or Leasecorp, and therefore abandoned any such claims.
Courts routinely find claims abandoned when they are not pressed at trial or in post-trial briefing. See, e.g., Thermalon Indus., Ltd. v. United States, 51 Fed. Cl. 464 (Fed.Cl.2002) (plaintiff abandoned claim for consequential damages by presenting no evidence of such damages at trial and failing to mention them in post-trial briefing); Harbison v. Little, 723 F.Supp.2d 1032, 1038 (M.D.Tenn.2010) (“Although this court’s decision did not explicitly address Count Seven, this was because Harbison abandoned the claim after trial. If a plaintiff fails to include arguments regarding a claim in a post-trial brief, the court is justified in finding that the plaintiff has abandoned that claim”); United States v. Livecchi, 605 F.Supp.2d 437 (W.D.N.Y.2009) (finding a counterclaim abandoned where it was not discussed in post-trial brief); In re Henderson, 134 B.R. 147 (Bankr.E.D.Pa. 1991). In most — but not all — of these cases, there is a finding by the trial court in its opinion that claims have been abandoned, but that is not the case here. The 2009 Memorandum Opinion is silent as to the abandonment of the Section 550 claims.
However, not all courts have found such silence dispositive. In Harbison v. Little, 723 F.Supp.2d 1032 (M.D.Tenn.2010), an inmate brought an action under 42 U.S.C. § 1983 challenging Tennessee’s lethal injection protocol. The district court held the protocol unconstitutional and enjoined the state from executing the inmate pursuant to that protocol. The state appealed to the Sixth Circuit. Before that appeal was decided, the United States Supreme Court upheld the constitutionality of Kentucky’s lethal injection protocol, which was substantially similar, and thus the Sixth Circuit vacated the district court’s decision and remanded the case to the district court. On remand, the inmate filed a motion for leave to amend his complaint. He argued that count 7 of his complaint, which had alleged a claim under the federal Controlled Substances Act, was still pending and could be amended. The district court disagreed and found that count 7 had been abandoned after trial. The district court noted:
Although this court’s decision did not explicitly address Count Seven, this was because [the plaintiff] abandoned the claim after trial ... the evidentiary hearing in this case was not limited to only a subset of [the plaintiffs] claims, and the plaintiff was free to present evidence regarding his federal drug law claim. After the evidentiary hearing, both parties filed Proposed Findings of *882Fact and Conclusions of Law, detailing the conclusions they argued were warranted by the evidence. [The plaintiffs] 98-page filing did not propose a finding that Tennessee’s protocol violates the Controlled Substances Act. Because his post-trial brief completely ignored Count Seven, the court finds that [the plaintiff] abandoned the claim and that he cannot now revive it.
Harbison, 723 F.Supp.2d at 1038 (internal citations omitted). The Harbison case is on all fours with the present case. The Trustee was free at trial to present evidence respecting the Section 550 claims against GMK, K & A and Leasecorp. The Trustee did not do so, did not include any proposed findings on these claims in his Post-Trial Proposed Findings, and did not, post-trial, brief the application of Section 550 to these entities. This Court reaches the same conclusion as the Harbison court: although the 2009 Memorandum Opinion did not mention the Section 550 claims, it did not do so because they had been abandoned. The failure to include an express finding of abandonment in the 2009 Memorandum Opinion does not mean that the Section 550 claims remain to be adjudicated. As the Judgment Defendants concede, a judgment is final when it “ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” Judgment Defs.’ Br., p. 2 (quoting Riley v. Kennedy, 553 U.S. 406, 419, 128 S.Ct. 1970, 170 L.Ed.2d 837 (2008)). There was nothing for the Court to do further here with respect to the Section 550 claims, because the Trustee had failed to prove them at trial and had failed to address them in his Posh-Trial Proposed Findings and thus they had been abandoned.
The case cited by the Judgment Defendants does not require a different result. The Judgment Defendants cite Adams v. Travelers Indem. Co. Of Connecticut, 465 F.3d 156, 167 (5th Cir.2006) for the proposition that a court will not infer that a claim has been adjudicated where a memorandum opinion makes no mention of it. See Judgment Defs. ’ Reply, p. 4, n. 12. The factual context in which the Fifth Circuit made that statement in Adams, however, differs significantly from that in the present adversary proceeding. In Adams, the plaintiff Adams was employed by Goodyear Tire and Rubber Company (“Goodyear”). Goodyear maintained insurance with Travelers Indemnity Company of Connecticut (“Travelers”). Adams was involved in a car accident while driving Goodyear’s vehicle, which injured Patrick Mayes (“Mayes”). Mayes sued Adams and Goodyear, but Travelers refused to cover Adams, arguing that Adams was not defined as an insured under Goodyear’s policy, because he had not had Goodyear’s permission to drive the vehicle at the time of the accident which injured Mayes. Adams then sued Travelers, alleging violations of the Texas Insurance Code, the Texas Deceptive Trade Practices Act, common-law bad faith and fraud and breach of contract for refusal to provide coverage. Travelers moved for summary judgment, arguing that the claims failed because Adams was not an insured under the policy. The district court granted Traveler’s motion and Adams appealed. The Fifth Circuit reversed and remanded, because it found that there was a genuine issue of material fact with respect to whether Adams had Goodyear’s permission to drive the vehicle and therefore whether Adams qualified as an insured. The Fifth Circuit noted that Adams had also alleged non-contractual claims depending on the “yet unresolved coverage question.” Adams, 465 F.3d at 167. It therefore noted that summary judgment on the claims pursuant to the Texas Insurance Code, the Texas Deceptive Trade Practices Act and com*883mon-law bad faith was inappropriate. It further stated that “Travelers gave only cursory attention to the allegation of fraud in its motion for summary judgment, and the District Court’s memorandum opinion accompanying its order made no mention of it. This claim remains to be adjudicated.” Adams, 465 F.3d at 167-68. The Fifth Circuit was there reversing a summary judgment in favor of Travelers which had rendered adjudication of Adams’ other claims unnecessary, because the district court had found, erroneously, that Adams had failed to raise a genuine issue of material fact with respect to coverage under the policy, and his other claims depended on the “yet unresolved coverage question.” Adams, 465 F.3d at 167. Therefore, the case was going back to the district court for another resolution on the merits, and the Fifth Circuit simply stated that the fraud claim remained for adjudication because it had not been mentioned in the memorandum opinion. On these facts it is apparent that it had not been mentioned because the district court’s erroneous grant of summary judgment on the coverage question had rendered consideration of the claim unnecessary. There is no suggestion that the fraud claim had been abandoned, as there is in the present adversary proceeding. Here, the Trustee did not include any proposed findings or conclusions as to these Section 550 claims in the Trustee’s Proposed Post-Trial Findings. The Trustee did not brief the application of Section 550 in his post-trial brief. The Trustee agreed to a form of judgment, and in fact proposed his own form of judgment, which was titled “Final Judgment” and which included no mention of the Section 550 claims against GMK, K & A and Leasecorp. The Trustee clearly abandoned these claims.
Moreover, as counsel for the Judgment Defendants conceded at the hearing on the Motion for Amended Findings, everyone, including this Court, believed that the Judgment was final. The Fifth Circuit has quite clearly pronounced that the intention of the judge is crucial in determining finality. Vaughn v. Mobil Oil Exploration & Producing Southeast, Inc., 891 F.2d 1195, 1197 (5th Cir.1990). The Vaughn case is instructive. The plaintiff Vaughn worked for Mobil Oil Exploration and Producing Southeast, Inc. (“Mobil”) on a barge owned by Elevating Boats, Inc. (“EBI”) and chartered by Mobil. Vaughn was injured at work. Mobil paid workers’ compensation benefits to Vaughn. Vaughn then sued both Mobil and EBI. EBI cross-claimed against Mobil for indemnity, and Mobil cross-claimed against EBI for contractual indemnity. Vaughn settled with both defendants, such that only the cross-claims remained. The district court ordered Mobil and EBI to submit the remaining claims to the court for a merits determination on the briefs and evidence in the record. Mobil filed a motion for summary judgment, which EBI opposed, but EBI did not pursue its cross-claim. The district court denied Mobil’s motion and set a pretrial conference, which EBI failed to attend. Mobil then re-urged its summary judgment, which the district court granted as unopposed. The district court entered judgment in favor of Mobil and against EBI and closed the case. Some six months later, EBI moved to vacate the judgment under Rule 60(b)(6). The district court denied that motion on the grounds that the judgment was not final, because it had left open EBI’s cross-claim. The district court then withdrew the judgment and ordered a merits determination of the cross-claims. On appeal, Mobil argued that the judgment had been final and therefore the district court lacked authority to withdraw it and rule on the merits.
*884The Fifth Circuit first noted that the intention of the judge is “crucial” in determining finality. Vaughn, 891 F.2d at 1197. Next, the Fifth Circuit noted that “a practical rather than a technical construction best serves the policies underlying the purposes of the finality requirement,” id., (internal citations omitted) and “we are inclined to fasten finality upon a judgment that reflects the intention of the judge to dispose of all business before him or her.” Id. The Fifth Circuit noted that the judgment before it was “couched in language calculated to conclude all claims ... the language was specific and heavy with conclusion. Nothing in the district court’s disposition suggested that the judgment was incomplete.” Id. It further noted that “When, after the passage of nine months, EBI reurged its long-abandoned cross-claim, it did so via a motion to set aside judgment pursuant to rule 60(b) ... [t]hus, even when it was contrary to its interests, EBI treated the ... judgment as final.” The Fifth Circuit concluded that in these circumstances, the district court erred in later treating the judgment as interlocutory. The Fifth Circuit rejected EBI’s arguments under Rule 54(b) that because the judgment had not included an express determination that there was no reason for delay in taking an appeal, it was not a final judgment, noting that “Rule 54 does not reach out to preserve claims that the parties do not actively pursue.” Id. at 1198. Because the Fifth Circuit concluded that EBI had abandoned its cross-claims, that abandonment “removed the suit from rule 54(b).” Id. Since EBI had abandoned its cross-claims, the judgment “did in fact dispose of all the live issues” before the district court. Id. (citing Jones v. Celotex Corp., 867 F.2d 1503, 1503-04 (5th Cir.1989) (“an order that effectively ends the litigation on the merits is an appealable final judgment even if the district court does not formally include judgment on a claim that has been abandoned”)).
Numerous Fifth Circuit cases decided since Vaughn have followed its pronouncements: DIRECTV, Inc. v. Budden, 420 F.3d 521 (5th Cir.2005) (finding finality where district court’s judgment only expressly disposed of one of plaintiffs claims against the defendant but did not expressly determine that there was no just reason for delay under Rule 54(b), where plaintiff had abandoned its other claims against the defendant and the district court had intended to dispose of all claims before it); Moreau v. Harris County, 158 F.3d 241, 243 (5th Cir.1998), aff'd on other grounds, 529 U.S. 576, 120 S.Ct. 1655, 146 L.Ed.2d 621 (2000) (“If a party abandons one of its claims, a judgment that disposes of all remaining theories is final and appealable so long as it is apparent that the district judgment intended the judgment to dispose of all claims”).
The Judgment Defendants assert, however, that the Court’s intent is relevant only “when it is clear from the record that all claims were, in fact, adjudicated.” Judgment Defs.’ Reply, p. 2. The Judgment Defendants quote from two Fifth Circuit cases which state:
in circumstances in which a court order is ambiguous as to what parties and claims are being disposed of and the district court intended to effect a final dismissal of a claim, we will construe its order accordingly, despite ambiguous language that might indicate otherwise. However, when the record clearly indicates that the district court failed to adjudicate the rights and liabilities of all parties, the order is not and cannot be presumed to be final, irrespective of the district court’s intent.
Witherspoon v. White, 111 F.3d 399, 401-02 (5th Cir.1997); Gibbs v. Grimmette, 254 F.3d 545 (5th Cir.2001) (quoting Wither-*885spoon ).20 In other words, where a judgment is ambiguous, the court’s intent is considered, but where the record clearly indicates that the judgment fails to adjudicate the rights and liabilities of all parties, it is not. The Judgment Defendants argue that the Judgment clearly fails to adjudicate the claims against GMK, K & A and Leasecorp, and thus the Court’s intent is irrelevant.
What the Judgment Defendants overlook is that the Fifth Circuit looks not only to the face of the judgment at issue, but also to the record to determine whether the judgment adjudicates the rights and liabilities of all parties. See, e.g. Vaughn, 891 F.2d at 1198 (“EBI having abandoned its cross-claim, the judgment of the district court did in fact dispose of all the live issues before it”). The record here does not clearly indicate that this Court failed to adjudicate the Section 550 claims such that they remain “live” claims — rather, it indicates that the claims were abandoned. To the extent the Judgment is ambiguous in this regard, this Court may properly consider its intent in entering the Judgment.
The record clearly shows that the Court intended to dispose of all remaining “live” claims by entering the Judgment. The Judgment is titled “Final Judgment.” While labeling a judgment as “final” does not make it so, Witherspoon, 111 F.3d at 403, such labeling “does illuminate the ... court’s intent-” DIRECTV, 420 F.3d at 526 (emphasis in original). The language in the Judgment is “specific and heavy with conclusion.” Vaughn, 891 F.2d at 1197. Nothing in the Judgment, or in the 2009 Memorandum Opinion, suggests that the Judgment was “incomplete.” Id. It recites that “the Court tried all remaining claims in this adversary proceeding ...” Judgment, p. 1. It permits execution and “all other legal process to enforce this Final Judgment....” Id. at p. 5. Finally, there are other objective indications in the record that this Court intended its Judgment to be “final.” Again, some further factual background is required.
Shortly after this Court entered the 2009 Memorandum Opinion, then-counsel for the Judgment Defendants, Wick Phillips LLP (the “Wick Firm”) filed a “Motion for Withdrawal of Counsel” (the “Motion to Withdraw”), see Docket No. 586, and sought an expedited hearing on the Motion to Withdraw. The Motion to Withdraw sought withdrawal “effective upon *886entry of the Final Judgment...Judgment Defendants opposed the Motion to Withdraw.21 The Court held a hearing on the request to expedite the hearing on the Motion to Withdraw on June 3, 2009. At the conclusion of the June 3, 2009 hearing, the Court scheduled an evidentiary hearing on the contested Motion to Withdraw for June 23, 2009. The Judgment Defendants then filed “Defendants’ Motion for Continuance of Hearing Set for June 23, 2009,” see Docket No. 598, in which they alleged that they needed a continuance “to allow Mr. Kornman to meet with possible substitute counsel and engage appellate counsel for Defendants prior to entry of a Final Judgment in this case.” Id., at p. 2. One of the bases for the Judgment Defendants’ opposition to the Motion to Withdraw was that they recognized that their time to appeal would run from entry of the Judgment, and they wanted to obtain substitute counsel and/or appellate counsel. The Court ultimately re-scheduled the hearing on the Motion to Withdraw from June 23, 2009 to July 2, 2009.
During the course of these various hearings, the parties and the Court made comments which establish that all parties, and the Court, intended the Judgment to be final, because those comments reflect a recognition that the Judgment Defendants’ appellate clock would start ticking upon entry of the Judgment. For example, at the June 3, 2009 hearing, the Court indicated:
I’m willing to hold off for a reasonable period of time from entry of the judgment. That gives you a bit more time to try and find counsel. I don’t feel like I am able to hold off, because that will be prejudicial to the Trustee, for an unreasonable time.... I can’t prejudice the Trustee, who is entitled to begin to undertake whatever actions he is going to begin to undertake once the judgment is entered. But I recognize that, once that happens, a clock starts ticking for you.
Tr. Hearing held 6/3/09, p. 10:8-20 (Docket No. 590). Counsel for the Trustee stated:
I understand the Court’s dilemma and the considerations that the Court has, but we would certainly request that any delay of entry of the judgment be minimal. Anyone can file a notice of appeal, and there will be a substantial period of time after that before a lot of the hard work has to be done on the appeal.
Tr. Hearing held 6/3/09, p. 12:5-10 (Docket No. 590). Similarly, Kornman testified he had been trying to find an attorney to represent him on an appeal. Tr. Hearing held 7/2/09, p. 47-48. The Court ruled on the Motion to Withdraw on July 13, 2009. During its ruling, the Court stated:
Here, it is clear that withdrawal may have a material adverse effect on the Defendants’ interests. This lawsuit is ripe for entry of a large money judgment against Kornman and various of the other defendants. Upon entry of that judgment, the judgment defendants will have only a short period of time to *887file a notice of appeal or motion for reconsideration.
Tr. Hearing held 7/13/09, p. 10:15-21 (Docket No. 619). As should be clear from these examples, the Court (and all parties) intended that the Judgment be final.
For all of these reasons, the Court declines to conclude that the Judgment lacks finality because it fails to dispose of the Section 550 claims against GMK, K & A and Leasecorp.22
(v) Claims against Financial Marketing Services (‘FMS”)
The Judgment Defendants next assert that although the Court’s 2009 Memorandum Opinion states that the Trustee’s “alter ego” and “sham to perpetrate injustice” claims against FMS “fail on the evidentiary record adduced at trial,” the Judgment makes no mention of these claims and therefore lacks finality because it fails to adjudicate all claims against all parties. They do not, however, cite to any case law supporting this argument. The argument is based on the following:
With respect to the Trustee’s “sham to perpetrate injustice” claim against FMS, this Court held in its 2009 Memorandum Opinion that Texas law governed the claim, and required the Trustee to establish reliance on the financial backing of FMS’s owners. See Faulkner v. Kornman (In re The Heritage Organization, L.L.C.), 413 B.R. 438, 522 (Bankr.N.D.Tex.2009). The Court held that there was no evidence at trial as to who owned FMS, and no evidence of reliance. Id. The Court therefore held that the Trustee’s claim against FMS failed on the evidentiary record at trial. Id. Similarly, with respect to the alter ego claim against FMS, the Court held that it too was governed by Texas law. Id. The Court held that there was no evidence establishing (i) who FMS’s shareholders were, (ii) that the corporate form was being used to avoid liability, the effect of a statute, or to achieve an inequitable result, or (iii) that corporate formalities had not been followed. Id.
The Judgment, however, does not reference FMS at all. It simply states:
After certain claims in this adversary proceeding were resolved by settlement, judgment, or summary judgment, the Court tried all remaining claims in this adversary proceeding from January 7 through January 16, 2009 and heard closing arguments on February 26, 2009. Following careful consideration of the evidence, arguments of counsel, and applicable law, the Court issued written findings of fact and conclusions of law in a Memorandum Opinion entered on May 11, 2009. In accordance with such Memorandum Opinion, the Court now renders its Final Judgment as follows.
Judgment, pp. 1-2. The Judgment then awards the Trustee affirmative relief (including transfer avoidance and monetary recovery) as to those defendants which the Court found liable in its 2009 Memorandum Opinion. The Judgment further provides (i) for the recovery of interest and costs of suit, (ii) that the Trustee may only obtain one satisfaction of amounts for which the Court has found certain defendants to be jointly and severally liable, and (iii) that the Trustee is entitled to writs of execution and all other legal process to enforce the Judgment. The Judgment does not, however, state that any relief not specifically granted in the Judgment is denied.
The Trustee points out that the Judgment recited that it was issued “in accor*888dance with such Memorandum Opinion,” see Docket No. 608, and that this Court has acknowledged on the record that “the judgment incorporated the opinion.” See Trustee’s Opp. To Defs.’ Mot. To Amend or Modify the Court’s Mem. Op. And Order Denying their Mot. To Vacate, p. 6. The Trustee argues that since the 2009 Memorandum Opinion made clear that the Trustee did not prevail on this claim, and the Judgment incorporated the 2009 Memorandum Opinion, the failure to mention the claims against FMS in the Judgment does not deprive it of finality.23 The Trustee also fails to cite to any case law supporting this argument.
The Judgment Defendants concede that a judgment must be interpreted in light of the rendering court’s opinion, findings, and conclusions of law. Great Lakes Dredge & Dock Co. v. Huffman, 319 U.S. 293, 295, 63 S.Ct. 1070, 87 L.Ed. 1407 (1943); Fagin v. Quinn, 24 F.2d 42 (5th Cir.1928) (a judgment is to be construed in light of the court’s opinion). Further, where a judgment fails to express the rulings in the case with clarity or accuracy, a court may refer to the findings and the entire record for the purpose of determining what was decided. Security Mut. Cas. Co. v. Century Cas. Co., 621 F.2d 1062, 1066 (10th Cir.1980). Here, the entire record establishes that the claims against FMS were decided. Moreover, the requirement that a judgment be set forth in a separate document embodied in Rule 58 of the Federal Rules of Civil Procedure maybe waived. Bankers Trust Co. v. Mallis, 435 U.S. 381, 98 S.Ct. 1117, 55 L.Ed.2d 357 (1978); In re Taumoepeau, 523 F.3d 1213 (10th Cir.2008); In re Litas Intern. Inc., 316 F.3d 113 (2nd Cir.2003); Transit Mgt. Of Southeast Louisiana, Inc. v. Group Ins. Admin., Inc., 226 F.3d 376 (5th Cir.2000) (finding no waiver where party defending appeal moved to dismiss appeal as premature on the ground that judgment appealed from failed to expressly dismiss claims).
Here, there was in fact a separate judgment under Rule 58 and although there is no separate judgment with respect to the claim against FMS, the Judgment Defendants have waived technical compliance with the Rule by invoking Rule 60(b), which by its terms applies only to final judgments, several times since then. In re Liberty Coal Co., L.L.C., No. 09-CV-0371-MJR, 2010 WL 1415998 at *1 (S.D.Ill. Mar. 31, 2010) (“so long as the order from which the parties appealed is a final order, and the parties fail to mention the failure of the court to enter judgment, they will have waived the issue”); see also Mondragon v. Thompson, 519 F.3d 1078, 1081 (10th Cir.2008) (where a judgment must be set out in a separate document under Rule 58(a), a failure of the trial court to follow the rule will result in entry of judgment “by legal fiction 150 days after the issuance of the opinion it should have accompanied”).
For all of these reasons, the Court declines to conclude that the Judgment lacked finality because it failed to mention FMS.
(vi) Claims Against Vickie Walker
The Judgment Defendants recite certain facts with respect to the Trustee’s claims against Vickie Walker in their Motion for Amended Findings. Specifically, the Judgment Defendants assert that this Court entered a “Judgment Against De*889fendant Vickie Walker Pursuant to Federal Rule of Civil Procedure 68” on December 31, 2008, see Docket No. 512, which awarded the Trustee $10,631.45 plus post-judgment interest. See Judgment Defs.’ Br., p. 5. The Judgment Defendants further recite that the judgment against Ms. Walker “does not contain Fed.R.Civ.P. Rule 54(b) language, and no order of severance appears on the docket.” Id. at p. 6. However, in the section of their brief entitled “Reasons Supporting Lack of Finality,” the Judgment Defendants do not rely upon these facts as a basis for the Court to conclude that the Judgment lacks finality. See id., pp. 6-9. Further, the Judgment Defendants’ brief contains no legal argument with respect to the claims against Ms. Walker.24 Therefore, the Court does not believe from a review of the Judgment Defendants’ papers that the Judgment Defendants contend that the Judgment lacks finality because it failed to dispose of claims against Ms. Walker. However, because the Trustee addressed the claims against Ms. Walker in his opposition (presumably in an abundance of caution because the Judgment Defendants had recited certain facts respecting the judgment against her in the factual background section of their opening brief), the Court wanted to clarify this issue. At the hearing on the Motion for Amended Findings, the Court asked counsel for the Judgment Defendants precisely which claims, against which parties, he was relying upon in support of his arguments that the Judgment lacks finality. Counsel clarified that he is relying upon the sets of claims/defendants set forth on pages 6-9 of the moving brief, and those set forth in footnote 14 of his reply brief — none of which include any claims against Ms. Walker. Audiotape of hearing held 11/22/11 at 3:48:33-3:53:11 (on file with the Court).25 Therefore, the Court will not address any issues with respect to the Trustee’s claims against Ms. Walker, because the Judgment Defendants have raised none.
(vii) Claims Against Heritage Advisory Group
The Judgment Defendants’ initial briefing does not assert that the Judgment lacks finality for its failure to dispose of the Trustee’s claims against this entity. However, in their reply, the Judgment Defendants assert that Heritage Advisory Group was named as a defendant in the Second Amended Complaint and in the parties’ Joint Pre-Trial Order, but concedes that the Stipulation respecting claims remaining for trial does not indicate that any claims against this entity remain for adjudication at trial. Nevertheless, the Judgment Defendants assert that there is no order dismissing all claims asserted against Heritage Advisory Group, and it is not mentioned in the Judgment.
As the Trustee points out and the Court finds, the Stipulation was signed by counsel for Heritage Advisory Group (and by counsel for the Judgment Defendants). It therefore complies with Rule 41(a)(l)(A)(ii). Further, the Stipulation was approved by this Court’s order, and thus it alternatively complies with Rule *89041(a)(2). Lastly, the Stipulation, at the very least, embodies and evidences the Trustee’s abandonment of claims against Heritage Advisory Group.
For all of these reasons, the Judgment does not lack finality because of any claims against Heritage Advisory Group.
B. The Stay Motion
As noted at the outset, also before the Court is the Judgment Defendants’ Stay Motion. The Judgment Defendants argue that the Judgment is not final, and therefore the Trustee’s registration of the Judgment in the Southern District of Texas was improper, and his efforts to enforce the Judgment violate due process under the 14th Amendment to the United States Constitution and should be stayed pending this Court’s disposition of the Motion for Amended Findings. Because the Court has concluded that the Motion for Amended Findings should be denied, the Stay Motion must also be denied.
C. The Dismissal Motion
Also before the Court is the Judgment Defendants’ Dismissal Motion pursuant to Rules 12(b)(1) and (h)(3), in which they argue that since no final judgment has been entered, this Court retains jurisdiction to determine its jurisdiction and may determine that this adversary proceeding should be dismissed for lack of subject matter jurisdiction, for all of the reasons set forth in their prior Stem Motion. Because the Court has concluded that (i) the Motion for Amended Findings should be denied, and (ii) the Judgment is final, the Dismissal Motion must also be denied as the Court’s prior determination of its jurisdiction may not now be attacked.26 See Faulkner v. Kornman (In re The Heritage Organization, L.L.C.), 459 B.R. 911 (Bankr.N.D.Tex.2011).
II. CONCLUSION
The Judgment was, is and remains final. It disposed of all live claims against all live parties; no order of severance was therefore required, and the Court need not address the Judgment Defendants’ arguments with respect to the failure of the Judgment to include a certification under Rule 54(b).
To the extent the Court has erred in concluding that the Judgment was final, a jurist wearing a longer robe and sitting on a taller bench than this one will surely say so. In the meantime, this Court declines to amend its October Opinion to expressly find that no final judgment has been entered, or to find that the Judgment is not final, and therefore the Motion for Amended Findings is denied. As a result, the Court adheres to its ruling in the October Opinion and declines to vacate the Judgment and the 2009 Memorandum Opinion for the reasons stated in its October Opinion.
Accordingly, the Stay Motion and the Dismissal Motion are also denied.
SO ORDERED.27
. This number does not include motions to withdraw by the various attorneys who have represented the defendants or motions for expedited hearings on many of the underlying motions. It also bears noting that this adversary is one of twenty-eight spawned as a result of the bankruptcy filing by The Heritage Organization, Inc. (“Heritage”) in 2004. This adversary proceeding is the last vestige in this Court of the Heritage bankruptcy case. The United States District Court for the Northern District of Texas withdrew the reference with respect to one adversary proceeding which had been pending in this Court; it appears that the District Court action is still pending. See Civ. Action No. 3:07-cv-0321-F.
. The Trustee asserts, and the Judgment Defendants do not dispute, that a dispute erupted over the proper form of judgment. After hearing both sides’ arguments and after hearing a motion by the Trustee to amend the pretrial order to include a request for pre-judgment interest, the Court ultimately entered the form of judgment submitted by counsel for the Judgment Defendants. See Transcript of hearing held July 2, 2009, at p. 15, line 1 (Docket No. 613). The Judgment Defendants themselves therefore titled the judgment as a "Final Judgment.”
. The Judgment Defendants notified the United States District Court for the Northern District of Texas that they no longer wished to prosecute their appeal, and the appeal was dismissed by order entered on November 12, 2009.
.The Judgment Defendants asked this Court to "order that counsel for Plaintiff cease and desist from any further actions in the Houston Miscellaneous proceeding except insofar as such proceedings relate to property actually located within the Southern District of Texas, that true, correct, and complete copies of all materials submitted to the Houston Court, all correspondence and communications with the Houston Court, and all materials received as a result of communications with the Houston Court, be served on counsel for Defendants immediately.” See Docket No. 708.
. The Judgment Defendants, in a footnote to their brief in support of the present motion, assert that since the Trustee did not argue res judicata or assert that the Judgment Defendants had launched an impermissible collateral attack on the Judgment, the issue was waived and the Court should not have raised the issue sua sponte. See Moving Defs.' Br. In Supp. Of their Mot. to Amend or Modify the Court’s Mem. Op. And Order Denying their Mot. To Vacate, ("Judgment Defs.’ Br.”), p. 1, n. 1. To the extent that the Court raised the issue sua sponte, the Judgment Defendants were given the opportunity to respond. At the hearing on the Stem Motion, the following colloquy took place:
Court: [F]or reasons no one cited me to, I don't think I get to the merits of whether I had jurisdiction under Stem or didn’t have jurisdiction under Stem to try this case. I think that the Fifth Circuit has made it clear, as have courts in other circuits, including the Seventh, that under these kinds of circumstances, you don't come in and collaterally attack a judgment like this.
Mr. Clary: Your Honor, may I respond?
The Court: Please.
Tr. Hearing held 9/22/11, 44:2-10 (Docket No. 808).
Counsel for the Judgment Defendants then conceded that he had anticipated the argument:
Mr. Clary: Your Honor, as you noted, nobody's briefed that. And there’s a reason for that. The trustee- — I expected the trustee to make that argument, and the trustee didn’t.
The Court: So did I.
Id. at 44:11-15 (Docket No. 808).
Counsel for the Judgment Defendants then responded to the res judicata issue on its merits:
Mr. Clary: And had the trustee made that argument, my response would have been: Number one, I don’t think this is a collateral attack. A 60(b)(4) motion — and Judge Clark in San Antonio has written on this expressly, I have the citation where he said a 60(b)(4) attack on a judgment is not — is not a collateral attack.
Id. at 44:16-22 (Docket No. 808).
Counsel for the Judgment Defendants provided the Court with Judge Clark's decision. *867While the Court ultimately disagreed with the Judgment Defendants' position, any error here in raising an issue the that Trustee had not raised was harmless. Fed.R.Civ.P. 61 ("Unless justice requires otherwise, no error in admitting or excluding evidence — or any other error by the court or a party — is ground for granting a new trial ... or for vacating, modifying, or otherwise disturbing a judgment or order. At every stage of the proceeding, the court must disregard all errors and defects that do not affect any party’s substantial rights.”).
. At the time they filed the Stern Motion, the Judgment Defendants made a similar motion seeking to stay the enforcement of the Judgment, which this Court denied.
. The Trustee’s opposition to the Motion for Amended Findings notes that the Second Amended Complaint asserts no claims against the Oak Group. The Judgment Defendants’ reply makes no further mention of the claims against the Oak Group and appears to abandon any argument that the Judgment lacked finality because it failed to dispose of claims against that entity. In fact, the Motion for Amended Findings concedes that the stipulation is "some indication” that claims against the Oak Group were abandoned, but simply notes that "we have not found any case allowing sub silencio abandonment of an entire party (as distinguished from certain claims against a party).” Motion for Amended Findings, p. 7, n. 6. Here, as noted, the abandonment was express — not sub silencio — and was done with the Judgment Defendants’ consent. The Judgment Defendants have not cited any case law to the Court which compels a plaintiff to proceed to trial on claims it no longer wishes to pursue or which'requires a Court to enter Judgment on such claims.
. The Trustee does not dispute, and the record establishes, that the Trustee never “cause[d] the filing of a motion and order for dismissal with prejudice of all claims" against the McElwee Defendants. Regrettably, this is not the first time that the Trustee's counsel has failed to do what he has undertaken to do, or failed to take care in complying with procedural rules, thus creating unnecessarily complicated legal issues.
. Fed.R.Civ.P. 41 is applicable here by virtue of Fed. R. Bankr.P. 7041.
. Fed.R.Civ.P. 15 is applicable here by virtue of Fed. R. Bankr.P. 7015.
. The Court agrees with the Judgment Defendants that the Trustee apparently simply assumed that the claims had already been dismissed. See Amended Motion for Leave, p. 2. (noting that the Second Amended Complaint "eliminates all claims against former defendants who have been dismissed from this proceeding after settlements approved by the Court").
. The Exxon court did not suggest what the consequences might be for filing a motion for leave to amend under Rule 15, rather than a to dismiss under Rule 41, to drop all claims against a single defendant in a multi-defen-dant action.
. Even if they had standing to complain of the Trustee’s alleged breach of a settlement agreement to which they were not parties, the Court would conclude that the Trustee’s alleged breach was immaterial. The Judgment Defendants assert that the McElwee Settlement Agreement was breached because the McElwee Defendants were entitled thereunder to a dismissal "with prejudice,” but a dismissal under either Rule 41(a) or Rule 15 would be “without prejudice.” However, on the facts of this case, a dismissal under either rule would be tantamount to a dismissal "with prejudice,” because the McElwee Defendants were released under the McElwee Settlement Agreement and the release was effective upon payment of the settlement sum to the Trustee, not upon the ultimate dismissal of the claims against them. See Docket No. 1367 in Case No. 04-35574-BJH, Ex. A (“[effective subject to and upon payment” of $90,000, the Trustee released the McElwee Defendants as provided in the McElwee Settlement Agreement). For this same reason, the Court rejects another of the Judgment Defendants’ arguments, advanced at the hearing on the Motion for Amended Findings but not in their briefing. The Judgment Defendants argued at the hearing that this Court’s order granting the Trustee’s Amended Motion for Leave provided that the filing of the Second Amended Complaint was "without waiver of or prejudice to the parties' rights as to any claims not proceeding to trial by reason of previous rulings of the Court.” See Docket No. 489. The Judgment Defendants argued that this language encompasses the Court’s order approving the McElwee Settlement Agreement, and therefore the McElwee Defendants remained entitled, notwithstanding the filing of the Second Amended Complaint dropping them as parties, to a dismissal with prejudice of the claims against them. As noted earlier, a dismissal of the claims against them was completely unnecessary, as those claims had been released upon payment of the $90,000, so even assuming they were dropped "without prejudice” as a result of the Trustee dropping them through the use of Rule 15, their removal from the lawsuit through that vehicle was effectively "with prejudice.”
. The details regarding the filing of this “Complaint” in the Southern District of Texas are set forth in this Court’s Memorandum Opinion entered on May 22, 2011 in Adv. Pro. No. 10-3357-BJH.
. This Court takes judicial notice of the docket and filed pleadings pursuant to Fed.R.Evid. 201. Hernandez v. United States, No. EP-09-CV-00164-KC, 2010 WL 8033181 (W.D.Tex. Dec. 7, 2010).
. Kroney-Mincey, Inc. represented in the Kroney Settlement Agreement that it had the authority to bind its insurance carrier to this payment obligation. See Ex. A to Docket No. 1184 in Case No. 04-35574-BJH.
. Rule 41(a)(l)(A)(i) is inapplicable here, since the Kroney Defendants filed a joint answer to the original complaint prior to the Trustee’s dismissal of the claims against them under Rule 41. See Docket No. 68.
. At the time the Kroney Compromise Motion was filed, the Trustee’s claims against the McElwee Defendants had not yet been settled, but the McElwee Defendants were represented by the same counsel who represented the Judgment Defendants and all other Kornman-related entities, Cole Ramey, Esq., although they later retained separate counsel. See Docket No. 197. The Trustee’s claims against Vickie Walker also remained "live" at the time of the filing of the Kroney Compromise Motion, but she too was represented by Mr. Ramey, although she too later retained separate counsel. See Docket No. 229. The Koshland Family Partnership, L.P. ("Kosh-land”) was a named defendant, but was separately represented by Jackson Walker, L.L.P. See Docket No. 127. That firm was served with the Kroney Compromise Motion and failed to object. Moreover, the record reflects that by the time the Kroney Compromise Motion was filed, Koshland had also executed a settlement agreement with the Trustee. See Ex. A to Docket No. 1153 in Case No. 04-35574-BJH. The Trustee’s claims against the "Mann Entities” were settled prior to the filing of the Kroney Compromise Motion and those claims had been dismissed. See Docket No. 89.
. The Trustee did not cite to any case law supporting this proposition. The Court agrees with the Judgment Defendants, however, that the 2009 Memorandum Opinion does not discuss these Section 550 claims against these entities; rather, it discusses the Section 550 claim asserted in Count 5 of the Second Amended Complaint only as it related to Gary Kornman and Ettman Family Trust I. The Trustee's quotation of language from page 96 of the 2009 Memorandum Opinion, is, as the Judgment Defendants point out, incomplete and out of context — and when the complete sentence is read, in context, it is clear that the Court was adjudicating Komman’s liability under Section 550, not Leasecorp’s. Further, the Court agrees with the Judgment Defendants that the quoted language appears in the context of the Court’s discussion of the Trustee's preference claims, not the Trustee’s fraudulent conveyance claims. The Section 550 claims against the three relevant entities were "limited” to recovery from them of fraudulent conveyances.
. Witherspoon is factually distinguishable from the present adversary proceeding. In that case, the plaintiff filed an action against six defendants. Five of the defendants filed a motion to dismiss or, in the alternative, a motion for summary judgment. The magistrate judge recommended to the district court that the motion be granted as a motion for summary judgment. After that report and recommendation, the sixth defendant filed its own motion for summary judgment, but neither the magistrate nor the district court reviewed it. The district court adopted the magistrate’s report, and issued a separate final judgment, which simply stated that "the defendants’ motion to dismiss” (without specifying which defendants) was granted (despite adopting the recommendation that the motion be granted as a summary judgment). The separate judgment purported to dismiss the plaintiff’s entire complaint with prejudice. The Fifth Circuit concluded that despite ambiguities apparent on the face of the judgment, the district court had ruled on the motion by the five defendants only, and the motion by the sixth remained "live and undetermined,” such that the plaintiff's claims against the sixth defendant remained viable and intact. Witherspoon, 111 F.3d at 402. Therefore, it was clear from the record that the judgment had failed to adjudicate the claims against the sixth defendant, and the Fifth Circuit concluded that the judgment lacked finality. Here, of course, the Court has concluded that the Trustee abandoned his Section 550 claims against GMK, K & A and Leasecorp. There is therefore nothing left to adjudicate as to these parties.
. The docket does not reflect that the Judgment Defendants filed any pleadings in response to the Motion to Withdraw. However, the Motion to Withdraw itself alleged that "counsel for Defendants are unable to provide this Court with a signature of the Defendants confirming Defendants’ consent because such consent has been withdrawn and Defendants now oppose this Motion.” Motion to Withdraw, pp. 2-3. Further, the Court held a status conference on the Motion to Withdraw on June 3, 2009, and Kornman (appearing for himself individually and in his capacity as principal of the entity defendants) made clear he opposed the Motion to Withdraw. The Court held hearings on the Motion to Withdraw on June 23, 2009 and July 2, 2009, at which Kornman testified in opposition to the Motion to Withdraw.
. This same analysis applies with respect to all of the defendants identified by the Judgment Defendants in footnote 14 of their reply brief.
. The Trustee articulates this argument most clearly in connection with his discussion of the claims against Leasecorp, Inc., GMK Corp., Heritage Advisory Group, LLC and Kornman & Associates, Inc., but its reasoning applies with equal force to the claims against Financial Marketing Services.
. The Judgment Defendants’ reply to the Trustee's opposition to the Motion for Amended Findings also fails to contain any legal argument respecting the claims against Ms. Walker or their effect, if any, on the Judgment’s finality.
. Further, a review of the docket discloses that the judgment against Ms. Walker was paid and released by the Trustee prior to issuance of both the 2009 Memorandum Opinion and the Judgment. See Docket No. 571. The Court does not believe there were any claims against Ms. Walker left to adjudicate once the Trustee obtained a judgment against her, she paid that judgment, and the Trustee thereafter released it.
. The Court assumes, without deciding, that the Judgment Defendants are correct that Stem implicates this Court's subject matter jurisdiction. This position is the subject of much scholarly debate, but this Court need not enter that debate at this juncture because even assuming Stem implicates subject matter jurisdiction for Rule 12 purposes, the Court’s prior determination of its jurisdiction is res judicata, for the reasons set forth in this and the October Opinion.
. A separate judgment is not required with respect to this Memorandum Opinion and Order pursuant to Fed.R.Civ.P. 58(a). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494644/ | MEMORANDUM OF OPINION ON MOTION TO MODIFY PLAN
JOHN C. AKARD, Bankruptcy Judge.
The captioned Debtors filed for Chapter 7 on May 17, 2007. Their case was converted to Chapter 13 on December 19, 2007. The Debtors’ Chapter 13 plan was *892confirmed on July 7, 2008 [Docket No. 61]. The Debtors’ plan provided for 60 monthly payments of $530.00, for a total plan base of $31,800.00. The plan provided that unsecured creditors would receive approximately 17% of their allowed claims [see Docket No. 27].
Post-confirmation, on August 14, 2009, the Debtors filed an Application to Employ Special Counsel [Docket No. 71] to pursue a cause of action on behalf of the Debtors for a violation of the Texas Deceptive Trade Practices Act (“DTPA”) that allegedly accrued on or about February 10, 2007 (before the Debtors’ filed their original Chapter 7 petition). The court granted this application by order dated September 15, 2009 [Docket No. 73],
On July 13, 2011, the Debtors filed a Motion to Compromise Controversy and Authorize Disbursement of Settlement Proceeds [Docket No. 79]. In this motion, the Debtors proposed to settle their DTPA claim against Consumer Credit Counseling Service of Greater San Antonio and Paula Sutton for $22,500.00. After attorneys’ fees and costs, the net proceeds of this settlement came to $12,633.00.1 The Chapter 13 Trustee objected to the Debtors’ proposed settlement [Docket No. 79] on the grounds that the settlement proceeds constituted a post-petition asset that had to be added to the base of the Debtors’ confirmed Chapter 13 plan. Nonetheless, the court orally granted the Debtors’ motion on October 11, 2011, with an order due from the Chapter 13 Trustee. This order has not yet been filed.
On October 26, 2011, the captioned Debtors filed a Motion to Modify their Chapter 13 plan (the “Motion”) [Docket No. 82]. The Motion recites that the Debtors have 14 months of payments left under their plan and no remaining unsecured creditors. The Debtors also represented in their Motion that, pursuant to their original Chapter 13 plan, unsecured creditors were to receive payments totaling $10,266.002 over the life of the Debtors’ plan. Of this amount, $6,678.00 remains to be paid over the next 14 months. The Debtors seek to modify their Chapter 13 plan by making a lump sum payment of $2,367.00 from the $12,633.00 they received in the recent settlement of their DTPA claim. They do not seek to modify the amount of their monthly payments or shorten the length of their plan. The lump sum payment of $2,367.00 represents the difference between the amount the Debtors received in settlement of their cause of action and the amount the Debtors’ Chapter 13 plan provides in payments to unsecured creditors. The Debtors’ argument appears to be that, under a liquidation analysis performed now, which is a requirement for plan modifications, see 11 U.S.C. § 1329(b)(1), 11 U.S.C. § 1325(a)(4), the Debtors’ only nonexempt asset would be the proceeds of the DTPA settlement — valued at $12,633.00.3 Accordingly, argue the Debtors, because the unsecured creditors are already receiving a total of $10,266.00 under the plan, the Debtors should now only have to pay the difference between that amount and the current liquidation value of their non-exempt property (the settlement proceeds) of $12,633.00. This comes out to $2,367.00. The Debtors propose to pay this amount *893as a lump sum now, while continuing to make the originally scheduled plan payments for the duration of the plan (14 more months).
The Chapter 13 Trustee filed an Objection to the Motion to Modify in which the Trustee asserts that the $12,633.00 constitutes additional disposable income and should be paid into the plan [Docket No. 83]. In their original schedules, the Debtors stated that they owed over $36,000.00 in unsecured debts. The claims register in this case reveals that 6 claims have been filed for a total amount of approximately $37,000.00. Thus, even with the addition of these funds, the unsecured creditors will not be paid in full. For the reasons discussed below, the Debtors’ Motion will be denied.
Discussion
In their Application to Employ Special Counsel [Docket No. 71] the Debtors state that their DTPA claim accrued on February 10, 2007. The Debtors filed their Chapter 7 petition for relief on May 17, 2007. That ease was converted to the present Chapter 13 case on December 19, 2007. “Section 541 of the Bankruptcy Code provides that virtually all of a debt- or’s assets, including causes of action belonging to the debtor at the commencement of the bankruptcy case, vest in the bankruptcy estate upon the filing of a bankruptcy petition.” Kane v. Nat’l Union Fire Ins. Co., 535 F.3d 380, 385 (5th Cir.2008) (citing 11 U.S.C. § 541). Additionally, for Chapter 13 cases, the definition of “property of the estate” is expanded to include “all property of the kind specified in [section 541] that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted ..., whichever occurs first ...” 11 U.S.C. § 1306(a). Finally, the order confirming the Debtors’ Chapter 13 plan provides, in accordance with the standard confirmation order for the Western District of Texas, that: “[a]ll property of the estate, including any income, earnings, or other property which may become part of the estate during the administration of the case, shall not revest in the Debtor.” [Docket No. 61]. In short, the Debtors’ pre-petition DTPA cause of action, and the subsequent settlement proceeds, constituted property of the Debtors’ estate at all relevant times.
The question thus becomes whether the Debtors must add the total amount of the settlement proceeds to the base of their plan, or whether simply satisfying the liquidation analysis by making a lump sum payment of $2,367.00 is sufficient.
To initially confirm a Chapter 13 plan, the plan must satisfy various requirements of sections 1325(a) and (b). Particularly relevant here are sections 1325(a)(4) and 1325(b)(1). Section 1325(a)(4), referred to as the “liquidation analysis,” provides:
(a) Except as provided in subsection (b), the court shall confirm a plan if — ...
(4) the value, as of the effective date of the plan, of property to be distributed under the plan on account of each allowed unsecured claim is not less than the amount that would be paid on such claim if the estate of the debtor were liquidated under chapter 7 of this title on such date[.]
11 U.S.C. § 1325(a)(4). Section 1325(b)(1), referred to as the “disposable income test,” provides that, if the trustee or a creditor objects to confirmation of the debtor’s plan, the court may not approve the plan unless it “provides that all of the debtor’s projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.” 11 U.S.C. § 1325(b)(1)(B).
*894Here, the Debtors argue that, while initial confirmation of a plan requires satisfaction of both the liquidation analysis and — upon objection by a creditor or the trustee — the disposable income test, modification of a Chapter 13 plan requires satisfaction of only the liquidation analysis.
Section 1329 of the Code governs plan modifications. Section 1329 provides:
(a) At any time after confirmation of the plan but before the completion of payments under such plan, the plan may be modified, upon request of the debtor, the trustee, or the holder of an allowed unsecured claim, to—
(1) increase or reduce the amount of payments on claims of a particular class provided for by the plan;
(2) extend or reduce the time for such payments;
(3) alter the amount of the distribution to a creditor whose claim is provided for by the plan to the extent necessary to take account of any payment of such claim other than under the plan ...
(b)(1) Sections 1322(a), 1322(b), and 1323(c) of this title [11 USCS §§ 1322(a), 1322(b), and 1323(c) ] and the requirements of section 1325(a) of this title [11 USCS § 1325(a) ] apply to any modification under subsection (a) of this section.
11 U.S.C. § 1329. It is clear that the liquidation analysis applies to the Debtors’ proposed plan modification. See In re Stinson, 302 B.R. 828, 832 (Bankr.D.Md.2003) (“When considering a plan modification where assets have not re-vested and thus are estate assets at the time of sale, the court is required to perform a liquidation analysis under Section 1325(a)(4) as of the time of the requested modification, not as of the date of confirmation of the original plan.”). However, there is a split in authority on the issue of whether the section 1325(b)(1) disposable income test applies to plan modifications. Although it now appears to be the minority position,4 this court agrees with the bankruptcy court for the Northern District of Texas which concluded that “[although section 1329 does not expressly state that a post-confirmation modification must satisfy the disposable income test, [this court has] held that a modification of this nature must satisfy Code § 1325(a)(1), which (at least if the modification is proposed by the debtor) indirectly necessitates compliance with the disposable income test.” In re Braune, 385 B.R. 167, 170 (Bankr.N.D.Tex.2008) (citing In re Nahat, 315 B.R. 368, 377 (Bankr.N.D.Tex.2004); In re Solis, 172 B.R. 530, 532 (Bankr.S.D.N.Y. 1994); In re Martin, 232 B.R. 29, 36-37 (Bankr.D.Mass.1999), and noting that “[sjection 1325(a)(1) requires the plan or postconfirmation modification to conform to the ‘provisions of this chapter and with other applicable provisions of this title.’ ”); see also In re Riddle, 410 B.R. 460, 463 (Bankr.N.D.Tex.2009) (confirming debtors’ plan modification after concluding, among other things, that “substantially all of Debtors’ disposable income will be committed to the plan going forward”);5
*895This conclusion — that the disposable income test applies in the context of plan modifications — supports and conforms to the general rule that the trustee (or a creditor or the debtor) may request a plan modification in the event a debtor’s income increases post-confirmation. See United States Tr. v. Cortez (In re Cortez), 457 F.3d 448, 457 (5th Cir.Tex.2006) (stating that, under section 1325(b)(1)(B), “[i]f the trustee objects to the plan confirmation, the court may not approve the plan unless it ‘provides that all of the debtor’s projected disposable income to be received [during the plan] will be applied to make payments under the plan.’ 11 U.S.C. § 1325(b)(1)(B) (emphasis added)”; and further stating that “[e]ven if the plan, as initially proposed, is confirmed, § 1329 allows the trustee to seek a subsequent modification of the plan based on an increase in the debtor’s income, so that more money is paid to the creditors.”).
Having concluded that, contrary to the Debtors’ assertions, the “disposable income test” (as well as the liquidation analysis) applies to plan modifications, the next question becomes whether the Debtors’ post-confirmation settlement proceeds constitute “disposable income” such that these proceeds must be added to the base of the Debtors’ Chapter 13 plan. Before BAPC-PA was enacted, “disposable income” was defined as “income which is received by the debtor and which is not reasonably necessary to be expended ... for the maintenance and support of the debtor or a dependent of the debtor.... ” 11 U.S.C. § 1325(b)(2)(A) (1994). The Bankruptcy Code now defines “disposable income” as follows: “current monthly income received by the debtor less amounts reasonably necessary to be expended — (A)(i) for the maintenance or support of the debtor or a dependent of the debtor, or for a domestic support obligation, that first becomes payable after the date the petition is filed ...” 11 U.S.C. § 1325(b)(2)(A). In turn, BAPCPA defines “current monthly income” the debtor’s “average monthly income from all sources” during the six months preceding the filing. 11 U.S.C. § 101(10A)(A)(i).
While these definitions might suggest that a debtor’s “projected disposable income” under section 1325(b)(1)(B) depends on historical data (given the definition of “disposable income” under section 1325(b)(2)), such that post-confirmation changes in a debtor’s income would not change the calculation of “projected disposable income” for purposes plan modification,6 the Fifth Circuit has concluded that “projected disposable income” is not the same thing as “disposable income,” and *896thus the definition of “disposable income” under section 1325(b)(2) is just the starting point for determining “projected disposable income” under section 1325(b)(1)(B) (the “disposable income test”). Said the Fifth Circuit,
As noted, Congress changed the definition of ‘disposable income’ in § 1325(b)(2), but left unchanged the phrase ‘projected disposable income’ in § 1325(b)(1)(B). We are persuaded that the independent definition of ‘projected’ adds to the phrase’s overall meaning. The term ‘projected,’ not defined in the statute, means ‘[t]o calculate, estimate, or predict (something in the future), based on present data or trends.’ In re Jass, 340 B.R. [411] at 415 [ (Bankr.D.Utah 2006) ] (quoting the Am. Heritage College Dictionary 1115 (4th ed. 2002)). In view of this definition, with which [the debtor] agrees, we interpret the phrase ‘projected disposable income’ to embrace a forward-looking view grounded in the present via the statutory definition of ‘disposable income’ premised on historical data. The statutorily defined ‘disposable income’ is the starting point — it is presumptively correct — from which the bankruptcy court projects that income over the course of the plan. Under this interpretation, the statutory definition of ‘disposable income’ is integral to the bankruptcy court’s decision to confirm or reject a Chapter 13 debtor’s proposed plan. Additional language in § 1325(b)(1) supports this conclusion. Specifically, the statute speaks of ‘the debtor’s projected disposable income to be received in the applicable commitment period.’ This language links ‘projected disposable income’ with the debtor’s income actually received during the plan, and indicates a forward-looking orientation of the phrase. Further, the statute requires the projection to be performed ‘as of the effective date of the plan,’ which allows for consideration of evidence at the time of the plan’s confirmation that may alter the historical calculation of disposable income on Form 22C. Finally, the statute directs that projected disposable income ‘be applied to make payments,’ contemplating that the debtor will actually receive this money in the first place.
Nowlin v. Peake (In re Nowlin), 576 F.3d 258, 263 (5th Cir.2009). See also In re Hardacre, 338 B.R. 718, 722 (Bankr. N.D.Tex.2006) (noting that “[w]hile Congress could have used the phrase ‘disposable income’ in section 1325(b)(1)(B) and thereby invoked its definition as set forth in section 1325(b)(2), it chose not to do so. Consequently, Congress must have intended ‘projected disposable income’ to be different than ‘disposable income.’ ”).
This court finds that, in accordance with the Fifth Circuit’s conclusion that “analysis of a debtor’s “projected disposable income,” as defined in section 1325(b)(1), should take into account “evidence of present or reasonably certain future events that [will] substantially change the debtor’s financial situation,” Nowlin, 576 F.3d at 266-67, the present Debtors’ settlement proceeds must be included in the Debtors’ projected disposable income for purposes of plan modification.7 The Debtors have received $12,633.00 in settlement proceeds and this has substantially *897changed their financial situation. In short, under the Fifth Circuit’s forward-looking approach to “projected disposable income,” these proceeds must be included in the Debtors’ projected disposable income and added to the base of the Debtors’ plan in order to satisfy the section 1325(b) disposable income test.
Finally, the Debtors argue that the proceeds should not be considered disposable income because the Debtors need to use the money to purchase a new car. No evidence was presented at the hearing regarding the Debtors’ need to purchase a new car, or whether use of any or all of the settlement money is reasonably necessary to purchase the car. Accordingly, the court will deny the Debtors’ Motion to Modify the Plan. The Debtors must commit the $12,633.00 in settlement proceeds to the base of their plan in repayment of their unsecured creditors.8
. Neither the Debtors’ DTPA claim nor the settlement proceeds were ever listed in the Debtors’ schedules — the most recent amended schedules having been filed on May 7, 2008.
. The Debtors’ schedules filed in this case list their total unsecured debt at over $36,000.00.
.In the order confirming the Debtors’ original Chapter 13 plan [Docket No. 61], the court found that the liquidation value of the Debtors’ non-exempt property, as of the date of confirmation, was $0.00.
. See In re Grutsch, 453 B.R. 420, 424 (Bankr. D.Kan.2011) (noting that "although there is a split in authority, the vast majority of courts deciding the issue have held that post-confirmation modifications are not governed by 11 U.S.C. § 1325(b).”).
. But see In re McCollum, 363 B.R. 789, 798 (E.D.La.2007) ("When a debtor seeks to modify a confirmed plan to reduce the time required to make payments, Section 1329(b)(1) provides that the requirements of Section 1325(a) apply to the modification. Section 1325(a) includes the 'best interests of the creditors’ test but not the disposable income test, which is included in Section 1325(b). The Trustee argues that the provisions of Section 1325(b) are incorporated by reference in Section 1325(a). This argument is unpersua*895sive. Section 1329(b)(1) explicitly provides that, along with Section 1325(a), Sections 1322(a) and (b) apply to post-confirmation modifications. It is unlikely that Congress chose to list specific subsections of the Code that would be applicable to post-confirmation modifications but chose to omit Section 1325(b) because it is incorporated by reference in another section. Thus, the plain meaning of the statute supports the bankruptcy court’s conclusion that, even if early termination constituted a plan modification, such modification was not subject to the disposable income test.”); In re Gonzalez, 388 B.R. 292, 306-07 (Bankr.S.D.Tex.2008) ("When considering whether to approve a proposed modification, the Court considers §§ 1322(a)-(b), 1323(c) and 1325(a). Notably absent is § 1325(b). Accordingly, when considering a modification, the Court considers (among other things) whether the modification was proposed in good faith, but does not consider § 1325(b)'s projected disposable income test.”).
. This reasoning has also been used as support for not applying the disposable income test to plan modifications. See, e.g., In re Walker, 2010 WL 4259274, at *9-10, 2010 Bankr.LEXIS 3618, at *25-26 (Bankr.C.D.Ill. Oct. 21, 2010).
. To constitute "projected disposable income” the proceeds must first constitute income. Black’s Law Dictionary defines "income” as: "[t]he money or other form of payment that one receives, usually periodically, from employment, business, investments, royalties, gifts, and the like.” Black's Law Dictionary (9th ed. 2009). As stated by the bankruptcy court in In re Launza, “[i]f gifts constitute income, then monies received in the settlement of a lawsuit also constitute income.” 337 B.R. 286, 289 (Bankr.N.D.Tex.2005).
. The short answer to this matter is that the purpose of Chapter 13 is for the debtors to pay their bills (or as much of their bills as they can during the life of the plan). Chapter 13 should not be used as a way to play games with the creditors. The suit was not listed in the original schedules, so it was not considered when the plan was proposed. The proceeds of the suit are property of this bankruptcy estate and, as such, should be used to pay the creditors of this estate. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494645/ | MEMORANDUM OPINION
MARVIN ISGUR, Bankruptcy Judge.
This Memorandum Opinion concerns whether the Bankruptcy Abuse and Consumer Protection Act of 2005 (“BAPCPA”) abrogated the absolute priority rule for individual Chapter 11 cases. The Court holds that it did not.
Factual Background
There are no material factual disputes. The sole issue is whether BAPCPA abrogated the absolute priority rule for individual Chapter 11 cases.
Philip Reed Lively initially filed a Chapter 13 bankruptcy petition. (ECF No. 1). The case was converted to a Chapter 11. (ECF No. 65). Lively filed his Amended Chapter 11 plan on August 19, 2011. (ECF No. 88). At the confirmation hearing, the Court preliminarily announced that it would deny confirmation of the plan for violating § 1129(b)(2)(B)(ii) — otherwise known as the absolute priority rule. The Court allowed briefing on the question of whether BAPCPA abrogated the absolute priority rule for individual chapter 11 cases. Lively filed a brief in support of his argument that it did. (ECF No. 104). Having considered the brief and applicable law, the Court now denies confirmation.
Lively’s proposed chapter 11 plan provided for payment to his unsecured creditors of a forecast 7.38% distribution. *899Lively had forecast that his future income to be used to fund the plan would have come from his salary, his social security benefits, income from a mortgage note receivable, income from leasing nine railroad cars and a periodic payment from a recreational boat consignment lot operated by his son. Lively’s plan would allow him to retain ownership of the mortgage note receivable, the nine railroad car leases and his interest in the consignment lot.
The railroad car leases serve as collateral for a $234,000 bank loan. The plan proposes for Lively to retain the rail cars and retire the loan with payments over 15 years.
The mortgage note receivable serves as collateral for a $248,000 bank loan. The plan proposes for Lively to retain the mortgage note receivable and retire the loan with payments over the remaining term of the loan.
The recreational boat consignment lot is subject to a lease that will be assumed.
Lively estimates that he owes $731,000 in unsecured claims. These are to be partially paid, pro rata, over 5 years at the rate of $1,000.00 per month. Accordingly, holders of unsecured claims are being asked to lose approximately $670,000, while Lively retains ownership of all of his assets.
Analysis
After careful analysis of Lively’s brief, the Bankruptcy Code, and the relevant case law, the Court holds that BAPCPA did not abrogate the absolute priority rule for individual Chapter 11 cases.
Although no creditor objected to confirmation, the Court has a “mandatory independent duty” to determine whether the standards set forth in § 1129 of the Bankruptcy Code have been satisfied. In re Williams, 850 F.2d 250, 253 (5th Cir.1988), quoting In re Holthoff, 58 B.R. 216, 218 (Bankr.E.D.Ark.1985). For the reasons set forth in this opinion, the Court concludes that the requirements of neither § 1129(a) nor § 1129(b) have been met and that confirmation must be denied.
Subsection 1129(b) (“Cram-Down”) Necessary
Although no creditor objected to confirmation,1 3 of the 4 holders of unsecured claims voted to reject the plan. Acceptance of a plan is determined by § 1126 of the Bankruptcy Code. Under that section, an impaired class of creditors accepts a plan only if it is approved by two-thirds in amount and a majority in number of the holders of claims who cast votes. 11 U.S.C. § 1126(c). Because three of the four votes rejected the plan, class 6 did not accept the plan. Accordingly, the plan did not meet the requirements of § 1129(a)(8) of the Bankruptcy Code. The plan, if it is to be confirmed, must meet the requirements of § 1129(b) — otherwise known as “cram-down.”
Subsection 1129(b) Requirements
For a plan to be confirmed under § 1129(b), all § 1129(a) requirements must be met except § 1129(a)(8). In other words, not all impaired classes of claims or interests must accept the plan. Subsection 1129(b) allows confirmation of such a plan only if it “does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan.” 11 U.S.C. § 1129(b)(1).
The condition that a plan be “fair and equitable” with respect to an impaired dis*900senting class of unsecured creditors is further defined by § 1129(b)(2)(B):
(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of (a)(14) of this section.
11 U.S.C. § 1129(b)(2)(B). Lively admits the plan does not provide for payments equal to the allowed amount of the claims of the impaired dissenting classes of unsecured creditors. (ECF No. 104 at 1). Therefore, the plan fails to satisfy § 1129(b)(2)(B)(i). In order to be confirmed, the plan must satisfy § 1129(b)(2)(B)(ii).
Absolute Priority Rule in Individual Chapter 11 Cases
Prior to BAPCPA, § 1129(b)(2)(B)(ii) read:
The holder of any claim or interest that is junior to the claims of such [impaired dissenting] class will not receive or retain under the plan on account of such junior claim or interest any property.
11 U.S.C. § 1129(b) (2) (B) (ii) (2008) (amended 2005). This is commonly known as the absolute priority rule. In individual Chapter 11 cases, the absolute priority rule prevents debtors from receiving or retaining any property under the plan unless claims of the impaired dissenting classes of unsecured creditors are paid in full.2
BAPCPA added additional language to § 1129 (b) (2) (B) (ii):
The holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a) (Ilf).
11 U.S.C. § 1129(b)(2)(B)(ii) (emphasis added).3 The issue is how this new language affects the absolute priority rule for individual Chapter 11 cases.
BAPCPA’s Structural Changes to Individual Chapter 11 Cases
BAPCPA added provisions that significantly alter the structure for individual Chapter 11 cases. Most importantly, § 1115 adds additional property to the estate:
*901(a) In a case in which the debtor is an individual, property of the estate includes, in addition to all of the property specified in section 541—
(1) all property of the kind specified in section 541 that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first; and
(2) earnings from services performed by the debtor after commencement but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first.
11 U.S.C. § 1115. Were it not for § 1115(a)(2), money earned by the debtor for services performed after the commencement of the case would not otherwise be estate property. See 11 U.S.C. § 541(a)(6).
Interpreting “Included in the Estate Under Section 1115”
There is a split of authority regarding the proper interpretation of the phrase “included in the estate under section 1115.” The issue is important because § 1129(b)(2)(B)(ii) excepts property “included in the estate under section 1115” from the absolute priority rule in individual chapter 11 cases. The majority interprets this language to mean property added to the estate by § 1115. See, e.g., In re Borton, 2011 WL 5439285 (Bankr.D.Idaho Nov. 9, 2011); In re Kamell, 451 B.R. 505 (Bankr.C.D.Cal.2011); In re Maharaj, 449 B.R. 484 (Bankr.E.D.Va.2011). This is known as the “narrow” interpretation. The result of this interpretation is that the exception applies to income received by the debtor for postpetition services, but not to assets owned as of the petition date. The minority interprets the language much more broadly. See, e.g., In re Shat, 424 B.R. 854 (Bankr.D.Nev.2010); In re Johnson, 402 B.R. 851 (Bankr.N.D.Ind. 2009); In re Roedemeier, 374 B.R. 264 (Bankr.D.Kan.2007). These courts view § 1115 as supplanting § 541, meaning that § 1115 actually defines property of the estate in individual chapter 11 cases instead of merely adding property to the estate as defined by § 541. As § 1115 supplants § 541, the argument goes, property “included in the estate under section 1115” in fact references the entire estate. This is referred to as the “broad” interpretation. The result is an exception for all property of the estate in individual Chapter 11 cases.
Lively argues for the “broad” interpretation. The leading case adopting the “broad” interpretation is In re Shat. 424 B.R. 854 (Bankr.D.Nev.2010). This opinion will therefore address Shat and explain how the Court arrived at the opposite conclusion of Lively and the Shat court.
Language Unambiguous
Shat views § 1129(b)(2)(B)(ii) as ambiguous.4 424 B.R. at 863 (“[The extent of the BAPCPA changes] depends on what the meaning of the ambiguous phrase in Section 1129(b)(2)(B)(ii) that an individual debtor may retain property ‘included in the estate under section 1115.’ ”) (internal citations omitted).
The Court finds the phrase “included in the estate under section 1115” unambiguous. It means property added to the estate by § 1115. If a text is unambiguous on its face, does not produce ab-*902surd results, and fits coherently into the statute’s overarching structure, the statutory interpretation exercise is complete. See Lamie v. United States Trustee, 540 U.S. 526, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004); United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (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.”). The Court nevertheless alternatively addresses the crucial argument put forth by Lively and discussed in Shat.
A “Trivial” Exception?
If the text is ambiguous it means there are at least two superficially plausible interpretations of “included in the estate under section 1115.” It could either mean property added to the estate by § 1115 or all property referenced by § 1115 — that is, the entire estate. A key argument put forth by Lively,5 and often mentioned in cases adopting the “broad” interpretation,6 is that the “narrow” interpretation renders the exception trivial. The implication is that the more trivial the exception, the less likely it was Congress’ true intention— thereby supporting the “broad interpretation.” This Court disagrees that the exception is trivial.7
The reason is that, even if the requirements of § 1129(a)(15) are triggered,8 which they are not in Lively’s case, debtors still have the ability to retain property earned during the first five years of the plan by either economizing or increasing their actual earned income. Take the following, routine, hypothetical:
• A married couple files a joint Chapter 11 petition.
• At confirmation the debtors are making two separate $700 monthly car payments to secured creditors. The plan is confirmed with the two car payments.
• One year into the plan, the debtors trade these cars for less expensive cars requiring payments of only $400 per month each.
BAPCPA’s § 1129(b)(2)(B)(ii)’s exception allows the debtors to retain the sav*903ings on the cars. Under § 1825(b)(2) as incorporated by § 1129(a)(15), the $1,400.00 in car payments would have served to reduce the debtors’ projected disposable income. Nevertheless, the trade-in of the cars would allow the debtors’ actual disposable income to be supplemented by a $600.00 per month saving without any corresponding increase in projected disposable income — which is determined as of the petition date. Over the remaining four years of the plan, the total amount retained by the debtors would be $28,800.9
The debtors’ actual income might increase during the plan as well — perhaps if one of the debtors received a raise or decided to work fifty hours per week instead of forty. Because debtors’ projected disposable income, and monthly payments to secured creditors, were calculated based on circumstances at the beginning of the plan, the resulting difference is an amount the debtors may retain because of the exclusion contained in § 1129(b)(2)(B)(ii).10
Conclusion
The starting point for any exercise in statutory interpretation is the statute’s plain language. Lamie v. United States Trustee, 540 U.S. 526, 124 S.Ct. 1028, 157 L.Ed.2d 1024 (2004). 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.” United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989).
The statutory scheme is coherent and consistent. The exception fits coherently into an overall statutory scheme that coh-tinues to allow individuals to reorganize under Chapter 11, while adding the possibility that the plan be required to distribute a minimum of five years’ worth of the debtor’s projected disposable income.
BAPCPA did not abrogate the absolute priority rule for individual Chapter 11 cases. The Court will issue a separate Order denying confirmation of the plan.
. Because of the absence of an objection, Lively was not required to pay five years’ worth of projected disposable income under the plan. See 11 U.S.C. § 1129(a)(15).
. Individual debtors might be allowed to retain property under the plan even if the impaired dissenting classes of unsecured creditors are not paid in full if the individual debtors contribute new value, as they are not thereby retaining the property on account of a junior claim or interest. This possibility is not at issue in this case.
. Some courts have argued that the reference to (a)(14) is a scrivener's error and that therefore the exception is actually subject to the requirements of subsection (a)(15). See In re Shat, 424 B.R. 854, 860 n. 21 (Bankr.D.Nev. 2010). The Court believes that Congress may have intended to reference (a)(15). The reference to (a)(14), however, “is not entirely absurd. ... One could easily assume that Congress wished to protect domestic support creditors by not allowing a debtor to keep any postpetition earnings — a form of Section 1115 property — so long as any domestic support obligation was not current.” Id. at 861 n. 21. Therefore, the Court may not correct the scrivener’s error. The exception is subject to the requirements of (a)(14).
. It appears Lively views the language as unambiguously abrogating the absolute priority rule for individual chapter 11 cases. (ECF No. 104 at 6) ("In plain language, the new exception in § 1129(b)(2)(B)(ii) provides that an individual debtor in Chapter 11 may retain property that is included within the definition of property of the estate in § 1115."). The Court disagrees.
. Lively argues: "The narrow interpretation also leads to a result and a statute that don't mean very much.... What good does it do a debtor to be able to retain postpetition income and property if the postpetition income and property is going to be distributed to creditors for five years?” (ECF No. 104 at 4).
. "The broader view also saves Section 1129(b)(2)(B)(ii) from an almost trivial reading; if the narrow view is taken, the section protects only the value of aggregate postpetition earnings payable after the fifth anniversary of plan confirmation.” In re Shat, 424 B.R. at 868. "These considerations indicate the narrow reading of the new exception in § 1129(b)(2)(B)(ii) would have little impact on this Debtor's (and probably most other individual debtors') ability to reorganize in Chapter 11." In re Roedemeier, 374 B.R. 264 (Bankr.D.Kan.2007).
. Even if the exception were trivial, the Court would have to follow the plain meaning of the text as long as the results are not absurd and the text fits coherently and consistently into the statute’s overarching structure. See Lamie v. United States Trustee, 540 U.S. 526, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004); United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (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.”). It is not clear to this Court that a trivial exception would necessarily be incoherent and inconsistent with the statute's overarching structure.
.Once the holder of an allowed secured claim objects to confirmation, section 1129(a)(15) requires a plan to either pay such holder's claim in full or distribute a total value of not less than five years' worth of the debtor's projected disposable income.
. The total savings per month is $600 ($300 for both cars). There are 48 months left in the first five years of the plan. Forty-eight times $600 equals $28,800.
. It is true that a creditor could attempt to modify the plan under 11 U.S.C. § 1127(e). However, a court would not necessarily approve the modification. Regarding the trade-in, a modification would have the perverse result of punishing debtors for economizing. As to the example of a debtor deciding to work more hours, a debtor might return to the regular normal number of hours if the only result of the greater effort is an increased payout to creditors. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494646/ | MEMORANDUM OPINION
KAREN K. BROWN, Bankruptcy Judge.
Before the Court is the complaint of T.D. Farrell Construction, Inc. (Plaintiff Farrell), a Georgia company authorized to do business in Texas, seeking a judgment against debtor, Wendy Schreiber.
This case arose in connection with Farrell’s construction of Home Depot store # 6584 in Corpus Christi, Texas in 2002-2003. Farrell contracted with Monitor Trust to perform site preparation and utilities work for the building. Monitor Trust (Monitor) subcontracted with Town & Country Excavation, Inc. (Town & Country) to excavate and improve the real property selected for the project.
Specifically, Farrell seeks a judgment against debtor contending that she violated the Tex. Prop.Code § 162.001 et seq. (violation of the Texas Construction Trust Fund Act) and a determination that the judgment is not dischargeable under 11 U.S.C. § 523(a)(4) (defalcation in a fiduciary capacity) or § 523(a)(6) (willful and malicious injury to property of another). In addition, Farrell objects to debtor’s discharge under 11 U.S.C. § 727(a)(2)(B) (concealment of property of the estate after the filing of the petition with intent to hinder, delay or defraud); (a)(3) (failure to keep or preserve recorded information from which debtor’s financial condition could be ascertained), (a)(4)(A) (knowingly and fraudulently making a false oath or account), (a)(5) (failure to explain satisfactorily any loss of assets), and (a)(7)(committing acts in violation of § 727(a)(2), (3), (4), (5), or (6) on or within one year before the date of the petition, or during the case, in connection with another case, under the Bankruptcy Code or the Bankruptcy Act, concerning an insider.) In addition, Farrell objects to debtor’s exemptions.
In response, debtor agrees that she was a minority shareholder of Town & Country Excavation, Inc. Debtor denies any actions in violation of 11 U.S.C. §§ 523 or 727.
This Court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334 and § 157. This is a core proceeding.
I. Procedural History
On February 2, 2006, Wendy Schreiber filed a voluntary Chapter 7 petition. Farrell filed the instant complaint and both sides moved for summary judgment. Farrell moved for summary judgment on the basis that its state court judgment against others precluded debtor from litigating liability. The bankruptcy court ruled that debtor is not in privity with Town & Country for purposes of application of claim or issue preclusion. This ruling was affirmed on appeal. The district court further suggested that Farrell might use the judgment and other evidence to demonstrate that debtor is liable for Town & Country’s debt. Upon remand, this court tried the issues stated in the parties’ pleadings and joint pretrial statement. Unlike its allega*908tions in its motion for summary judgment, Farrell’s complaint and the parties’ joint pretrial statement do not contend that debtor is liable to Farrell on the basis of the debt represented by that judgment. Rather, Farrell alleges that debtor, in her capacity as an officer of Town & Country, individually owed a duty under the Texas Construction Trust Fund Act to pay Town & Country’s suppliers and failed to do so, thereby establishing a debt for damages owed by debtor in favor of Farrell.
II. Facts
A. Wendy Schreiber’s Background and Work History
Wendy Schreiber was born December 14, 1979. At the time of the Home Depot construction she was 23. After graduating high school, Wendy Schreiber worked at Site Preparation, a construction site preparation company. Site Preparation worked on a number of Home Depot construction projects. There Schreiber trained to do preliminary estimates for site work. In 2000 the owner of Site Preparation died and the company closed.
1. Express Site Preparation
After Site Preparation closed, three of its employees, Bill Williams, Shawn Pidde-man, and Wendy Schreiber started a company, Express Site Preparation, to perform construction site work. Express Site Preparation was in business for only a year and closed when Piddeman moved out-of-state. Express Site Preparation was financially successful and performed site work on five jobs including three Home Depots. Wendy Schreiber saved approximately $150,000 from her earnings at Express Site Preparation.
2. Town & Country Excavation, Inc.
When Express Site Preparation ceased doing business, Williams and Kurt Codding, a former employee of Home Depot, invited Schreiber to join them to establish Town & Country Excavation, Inc. Kevin Robinson, another employee of Express Site Preparation agreed to act as consultant to Town & Country.1
When Town & Country was formed, Bill Williams was in his 60s and nearing retirement, Kurt Codding was 47, Kevin Robinson was 42, and Wendy Schreiber was 23. Initially, Williams was president, Codding was vice-president, and Wendy Schreiber was secretary.
Subsequently, in July or August 2002, Williams retired. At that point, Kurt Codding became president and took a 60% share of the corporate stock. Schreiber remained secretary of the company and a minority shareholder in the company with her interest at 40%.
From its inception date of January 4, 2002, until it ceased doing business in 2004, Town & Country grossed $7,526,905.46. Town & Country’s gross receipts for 2003 were $4.7 million. In addition to the shareholders, Town & Country employed Lester Shimonski, Chase Pasley, and Connie Aikens. Connie Aikens controlled the company’s computer server, input all invoices, printed all company cheeks, and compiled the company’s payment requests for the Home Depot Corpus Christi job.
B. Home Depot Corpus Christi
T.D. Farrell Construction, Inc., plaintiff and general contractor, was owned 100% by Timothy Farrell. T.D. Farrell Construction, Inc. contracted with Home Depot to build a retail store at 4014 S. Port *909Avenue, Corpus Christi, Nueces County, Texas 78415, in 2002 to 2003, for $4,698,764.00. Home Depot paid T.D. Farrell Construction, Inc. in full under its contract.
Inasmuch as Kurt Codding had left Home Depot to start Town & Country Excavation, Inc., there was some concern that if Home Depot was aware that Farrell proposed to use Codding’s company as a subcontractor on the Home Depot Corpus Christi job, that Home Depot would not award T.D. Farrell the general construction contract. Monitor Trust had previously acted as sub-contractor to Town & Country, so it was proposed that Monitor Trust act as subcontractor with Farrell and Town & Country sub-sub-contract with Monitor Trust.
T.D. Farrell subcontracted the sitework and utilities for the Home Depot Corpus Christi project to Cyril B. Sturm d/b/a Monitor Trust for $972,000.00. Monitor Trust’s scopes of work included: providing site clearing, demolition, haul off, fill, storm drainage, piping, water distribution, sanitary sewer, and temporary roads.
Monitor Trust’s sub-sub-contract with Town & Country Excavation, Inc. provides for payment by Monitor Trust to Town & Country of $747,000 of the $972,000, Monitor was to be paid by T.D. Farrell. Under its contract with Monitor Trust, Town & Country Excavation, Inc. was to provide site clearing; grubbing and demolition; earth moving and excavation; a 6 inch rock cap at the building; fine grading; dewater for the scope of work; proof, rolling and compaction; sheeting and shoring as required by OSHA; protection of existing structures; layout; lime stabilization; a concrete flow channel at the bottom of a retention pond; maintain all erosion control; and provide and maintain a six-inch construction road around the building. Kevin Robinson acted as project manager on the Home Depot Corpus Christi job for both Monitor Trust and Town & Country.
Once work began, Farrell refused to pay Monitor Trust in accordance with the contract and Monitor Trust’s payment requests. Although the original contract required Farrell to pay Monitor Trust $972,000, Farrell only paid Monitor Trust a total of $662,029.34. Monitor Trust, in turn, paid Town & Country Excavation, Inc., only $503,990.53 of the $747,000 due for Town & Country’s work.
Despite receiving only $503,990.53, for its work on the Home Depot Corpus Christi job, Town & Country paid $542,353.11, to suppliers, truckers, equipment lessors, employees, and others, on that job. Town & Country paid suppliers and expenses on the Home Depot Corpus Christi job as follows: building supplies $7,218.77; contract labor $76,024.00; equipment rental $80,605.50; freight and delivery $1361.57; fuel $16,476.08; job materials $155,830.68; meals 314.93; travel $28,471.40; trucking $83,582.75; automobile expense $461.17; equipment maintenance $2,135.94; hotels $933.28; finance charge $172.91; leased equipment $8,437.92; miscellaneous $4,072.99; payroll $68,426.55; legal fees $4,283.79; tools and machinery $42.88; and truck allowance $3,500.00. See Plaintiffs Exhibit 1.1. Of this total, Town & Country paid $411,670.38 for labor and materials alone. See Defendant’s Ex. 2.
Town & Country paid in full all suppliers to the Home Depot Corpus Christi project whose invoices were due as of January 31, 2003, the date of the last payment request Town & Country submitted to Monitor Trust that was paid. In addition, Town & Country made payments in February, and March, 2003, to Contractors Building Supply, Crescent Machinery Inc., Labor Ready, Inc., Haas Resources Company, Orona Bros, Fox Tree and Land*910scape Nursery, M & M Transport Martinez Trucking, Padilla Trucking, Cantu’s Trucking, Rosendo Nava, Hertz, and Tahoe Trucking. Each of these businesses supplied materials or services to the Home Depot Corpus Christi jobsite.
During the time period that Town & Country worked on the Home Depot Corpus Christi project, the company worked on and received payments from other projects, including a Wal-Mart in Arkansas, Dickinson High School, a Home Depot in Lufkin, Texas, and a Home Depot in McAllen, Texas. In addition to the income Town & Country received from other jobs, Schreiber and Robinson loaned funds or used personal credit cards to pay expenses associated with the Home Depot Corpus Christi’s job. Schreiber testified, and the Court finds her testimony credible, that she used funds that she saved from working at Express Site Preparation to fund loans to Town & Country.2 Town & Country’s 2003 tax return reflects loans from shareholders in the amount of $123,667. Schreiber testified that Town & Country’s Compass Bank records matched the loan ledger Schreiber kept. Altogether, Schreiber’s records show that she received from Town & Country a total of $239,622.86, for reimbursement of expenses, loan repayments, and draws. Schreiber’s draws from Town & Country totaled $75,000.
Instead of paying in accordance with its contract with Monitor Trust, Farrell decided which suppliers should be paid and either paid them directly, back charging against Monitor Trust’s pay requests, or issued joint checks payable to Monitor Trust and the supplier. Monitor Trust received no funds from the joint checks.
As work on the Home Depot project progressed, it became necessary for Monitor Trust to incur the cost of delivery of much more limestone than had originally been anticipated by the contracting parties. To pay for these increased costs, Monitor Trust submitted change order requests to Timothy Farrell, who acted as project manager for T.D. Farrell Construction, Inc. Although Farrell knew that far more limestone was required to complete the site work than had been originally anticipated and that far more limestone had in fact been delivered to and incorporated into construction of the project, he refused to submit Monitor Trust’s change order requests to Home Depot for approval while the work was on-going. Moreover, although Farrell had paid other suppliers on the job directly or by joint check, he did not pay for limestone delivered to the jobsite by Martin Marietta Materials in February and March 2003, for which it was owed $333,645.34, and for which it filed a lien on April 30, 2003.
As of July 16, 2003, in addition to the funds due Martin Marietta Materials, there remained unpaid the following suppliers: Ingram Ready Mix owed $4,243.40; Rental Service Corp. owed $49,378.87; Crescent Machinery owed $49,736.44; Contractors Building Supply owed $13,969.85; and Austin White Lime owed $18,510.28. All of these suppliers’ unpaid invoices are dated and were received after January 31, 2003.
Farrell, alleging that Monitor Trust and Town & Country were responsible for payment of these suppliers, sued and eventually took judgment against Monitor Trust, Town & Country Excavation, Inc. and others, but not debtor, for damages it allegedly suffered arising from these unpaid suppliers. Farrell alleges that he settled with these suppliers for the following amounts and took an assignment from each of its *911claims against Town & Country: Ingram Ready-Mix $4,243.40; Rental Service Corp. $20,000; Crescent Machinery $8,000; Contractors Building Supply $13,969.85; and Austin White Lime $4,000. T.D. Farrell alleges that it paid Martin Marietta Materials the sum of $333,645.34 by depositing that amount into the registry of the court of Nueces County, Texas, “of which the amount of $179,645.34 had been previously paid, and the amount of $154,000.00, had not been previously paid by it.” See Judgment T.D. Farrell V. Sturm, Cause No. 03-03510-E, 148th Judicial District Court of Nueces County, Texas.
Timothy Farrell delayed until September or October of 2003, long after the job was completed, to submit Monitor Trust’s requested change orders to Home Depot for approval and payment. Timothy Farrell testified that Home Depot approved change orders totaling $422,915. Farrell testified that change order no. 1 totaling $73,297 included payment for drainage work and for hauling away unsuitable material; change order no. 2 totaling $188,019 included payment for supplying limestone at the main building pad and limestone at the garden center loading dock; and change order no. 3 totaling $161,599, included payment for installing rock for an access road, processing material, and stabilizing subgrade material with lime at the parking lot. These three change orders increased the amount due under the contract for Monitor Trust’s scope of work from the original contract price of $972,000, to an adjusted contract price of $1,394,915.00. Although Home Depot made monthly progress payments to Farrell and Farrell added 10% to Monitor Trust’s change order requests when it submitted them to Home Depot for approval, Farrell never paid any of this money to Monitor Trust.
III. Violation of § 523(a)(4)
Bankruptcy Code § 523(a)(4) provides: (a) A discharge under section 727 ... 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).
T.D. Farrell alleges that debtor violated § 523(a)(4), defalcation in a fiduciary capacity, by violating the Texas Construction Trust Fund Act while an officer and shareholder of Town & Country Excavation, Inc. Under Tex. Prop.Code § 162.001(a), trust funds are construction payments made to a contractor or subcontractor or to an officer, director, or agent of a contractor or subcontractor, under a construction contract for the improvement of specific real property in this state. Tex. Prop. Code § 162.001. The beneficiary of any trust funds paid or received in connection with the improvement, is any artisan, laborer, mechanic, contractor, subcontractor, or materialman who labors or who furnishes labor or material for the construction or repair of an improvement on specific real property in this state. Tex. Prop.Code § 162.003. The trustee of the trust funds is any contractor, subcontractor, or owner or an officer, director, or agent of a contractor, subcontractor, or owner, who receives trust funds or who has control or direction of trust funds. Tex. Prop.Code § 162.002.
Under the act, a trustee misapplies the trust funds if he intentionally or knowingly, or with “intent to defraud” (i.e., he intends to deprive the beneficiaries of the trust funds), directly or indirectly retains, uses, disburses, or otherwise diverts trust funds without first fully paying all current or past due obligations incurred by the trustee to the beneficiaries of the trust funds. Tex. Prop.Code § 162.005(a)(1); Tex. Prop.Code § 162.031(a). “Current or *912past due obligations” are those obligations incurred or owed by the trustee for labor or materials furnished in the direct prosecution of the work under the construction contract prior to the receipt of the trust funds and which are due and payable by the trustee no later than 30 days following receipt of the trust funds. Tex. Prop.Code § 162.005(a)(2). It is an affirmative defense to prosecution or other action brought under subsection (a) that the trust funds not paid to the beneficiaries of the trust were used by the trustee to pay the trustee’s actual expenses directly related to the construction or repair of the improvement or have been retained by the trustee, after notice to the beneficiary who has made a request for payment, as a result of the trustee’s reasonable belief that the beneficiary is not entitled to such funds or have been retained as authorized or required by Chapter 53 of the Texas Property Code. Tex. Prop.Code § 162.031(b).
The Court finds that T.D. Farrell acted as trustee under the Texas Construction Trust Fund Act when it, as general contractor, paid its subcontractor, Monitor Trust, $662,029.34 for construction of the Home Depot Corpus Christi. T.D. Farrell asserts that it is itself also a beneficiary of the funds it paid to Monitor Trust in T.D. Farrell’s capacity as trustee under the Texas Construction Trust Fund Act. However, T.D. Farrell has offered no authority supporting its position that it can be both the statutory beneficiary and the statutory trustee of the Home Depot Corpus Christi trust funds. The court in Ro-bax Corp. v. Professional Parks, Inc., Not Reported in F.Supp.2d, 2008 WL 3244150 (N.D.Tex.2008) concluded that a contractor who has paid trust funds downstream does not have the status of a beneficiary of those funds for purposes of asserting a claim against the downstream subcontractor for misuse of those funds:
Although Texas Waterworks has met many of the elements of a Trust Act claim against defendants, it has not demonstrated that it is among the class of persons whom the Trust Act was intended to protect. The funds Texas Waterworks paid Professional were trust funds, but Texas Waterworks was not a beneficiary of these funds.... The court is not aware of any case in which a party in Texas Waterworks’ situation-a contractor who has paid the trust funds at issue to a downstream subcontractor-has successfully asserted a Trust Act claim against a downstream subcontractor for misappropriation of those funds.
Robax Corp. v. Professional Parks, Inc., Not Reported in F.Supp.2d, 2008 WL 3244150 (N.D.Tex.2008). This Court concludes that T.D. Farrell is not a proper plaintiff to assert a claim to the Home Depot Corpus Christi trust funds it paid to Monitor Trust.
Nevertheless, in an effort to circumvent its lack of standing as a statutory beneficiary of the trust funds over which it was trustee, T.D. Farrell obtained assignments from some of the unpaid suppliers of their beneficiary status and T.D. Farrell alleges that, consequently, Wendy Schreiber owes it as a fiduciary duty. T.D. Farrell alleges that each of the following entities executed an assignment to Farrell of its status as a beneficiary of trust funds under the Texas Construction Trust Fund Act: Martin Marietta Materials, Ingram Ready Mix, Rental Service Corp., Crescent Machinery, Contractors Building Supply, and Austin White Lime.
The Court finds, first, that there is no evidence that Martin Marietta Materials executed an assignment to T.D. Farrell of any claims or of its statutory beneficiary status. As to the other suppliers, *913T.D. Farrell has submitted no authority for the proposition that a general contractor who has acted as trustee for trust funds can by means of assignment, subro-gation, or indemnity assert a statutory claim in place of the actual statutory beneficiary under the Texas Construction Trust Fund Act. The Texas Construction Trust Fund Act “subjects litigants to civil liability if (1) they breach the duty imposed by the Act, and (2) the requisite plaintiffs are within the class of people the Act was designed to protect and have asserted the type of injury the Act was intended to prohibit.” Lively v. Carpet Services, Inc., 904 S.W.2d 868, 873 (Tex.App.Hous. [1 Dist.] 1995, writ denied). Where a Texas statute requires a plaintiff to have particular characteristics to obtain the benefit of a protected status, an assignment of the protected status is ineffective. See e.g. PPG Industries, Inc. v. JMB/Houston Centers Partners Ltd. Partnership, 146 S.W.3d 79 (Tex.2004) (holding consumer claims under the Texas Deceptive Trade Practices Act non-assignable.) In Dewayne Rogers Logging, Inc. v. Propac Industries, Ltd., 299 S.W.3d 374, 386-387 (Tex.App.Tyler 2009, writ denied) the court explained that indemnification, subrogation and assignment of a statutory status, in that case, DTPA consumer status, is ineffective to grant standing to one who seeks to pursue the statutory claims of another:
Subrogation is the right of one who has paid an obligation, that another should have paid, to be indemnified by the other. Int’l Elevator Co., Inc. v. Garcia, 73 S.W.3d 420, 421 (Tex.App.-Houston [1st Dist.] 2002, no pet.). DTPA claims generally cannot be assigned by an aggrieved consumer to someone else. PPG Indus., Inc. v. JMB/Houston Ctrs. Partners Ltd. P’ship, 146 S.W.3d 79, 92 (Tex.2004). Specifically, a subrogee who cannot qualify as a consumer in its own right may not assume the status of its insured for the purposes of pursuing a DTPA claim. Trimble v. Itz, 898 S.W.2d 370, 372 (Tex.App.-San Antonio 1995, writ denied). As mentioned earlier, Lloyds has admitted that it cannot, by itself, maintain consumer status. Moreover, as Rogers Logging’s subrogee, Lloyds may not pursue claims under the DTPA by assuming Rogers Logging’s status as a consumer. See Trimble, 898 S.W.2d at 372. Therefore, Lloyds does not have standing to pursue its DTPA claims as Rogers Logging’s subrogee. See Tex. Bus. & Com.Code Ann. § 17.45(4); Trimble, 898 S.W.2d at 372.
Dewayne Rogers Logging, Inc. v. Propac Industries, Ltd., 299 S.W.3d 374 (Tex.App.Tyler 2009).
“The Texas Construction Trust Fund Act was enacted to further the ... legislative intent of protecting material-men.” Scoggins Const. Co., Inc. v. Dealers Elec. Supply Co., 292 S.W.3d 685, 693 (Tex.App.Corpus Christi, 2007 rev’d on other grounds) (“[T]he Trust Fund Act is remedial in nature and is to protect the “exposed” or “unpaid” subcontractor or supplier on a project,” citing Lively, 904 S.W.2d at 871). Farrell has offered no authority establishing that Texas law permits assignment to a general contractor of the beneficiary protection provided by the Texas Construction Trust Fund Act. The Court declines to conclude that such an assignment is valid under Texas law for trust funds for which the general contractor was trustee.
Moreover, even if Farrell’s assignments of the beneficiaries’ statutory status are valid, Farrell has not shown that as a result of its payments to the unpaid suppliers, it has become an “unpaid” or “exposed” contractor on the Home Depot Corpus Christi job. To the contrary, the evidence shows Farrell marked up Moni*914tor Trust’s change order requests by 10% when it submitted them to Home Depot for approval. Further, the evidence shows that Home Depot paid Farrell in full. Although, Farrell alleges in its pleadings, both in state and federal court, that it “paid twice” for construction of the Home Depot Corpus Christi, this Court finds that there is no evidence of such. The evidence establishes that Farrell was paid in full for its original contract and for the change order requests approved by Home Depot for Monitor Trusts’ scope of work. The evidence establishes that, although Farrell was paid in full under its original contract and for the approved change order requests for increased costs under Monitor Trust’s scope of work, Farrell failed to pay construction funds due under its contract with Monitor Trust. The Court concludes that Farrell’s complaint that other downstream suppliers were not paid does not establish rights against debt- or under the Texas Construction Trust Fund Act or under 11 U.S.C. § 523.
The Court finds that T.D. Farrell as trustee under the Texas Construction Trust Fund Act for construction of the Home Depot Corpus Christi paid Monitor Trust a total of $662,029.34. The Court finds that Monitor Trust, as trustee, paid Town & Country a total of $503,990.53. The Court finds that Wendy Schreiber as trustee under the Texas Construction Trust Fund Act received a total of $503,990.53 in trust funds for construction of the Home Depot Corpus Christi. The Court finds that Wendy Schreiber, as an officer and shareholder of Town & Country, used all of the trust funds totaling $503,990.53, plus additional funds, altogether totaling $542,353.11, to pay laborers and suppliers who furnished labor or materials for the construction of the Home Depot Corpus Christi and to pay Town & Country’s actual expenses directly related to the construction or repair of the Home Depot Corpus Christi. The Court finds that Wendy Schreiber, as trustee of trust funds received in connection with the construction of the Home Depot Corpus Christi, did not misapply the trust funds in violation of the Texas Construction Trust Fund Act. See Tex. Prop.Code § 162.005(a)(1); Tex. Prop.Code § 162.031(a). The Court finds that T.D. Farrell has failed to prove a cause of action against Wendy Schreiber under the Texas Construction Trust Fund Act.
In addition, Farrell has failed to demonstrate that the Texas Construction Trust Fund Act creates the type of fiduciary relationship cognizable for an exception to dischargeability under § 523(a)(4). In In re Tran, 151 F.3d 339, 342-343 (5th Cir.1998), the Fifth Circuit held “[a] state cannot magically transform ordinary agents, contractors, or sellers into fiduciaries by the simple incantation of the terms ‘trust’ or ‘fiduciary.’ ” The court ruled that in order to satisfy the dictates of § 523(a)(4), “a statutory trust must (1) include a definable res and (2) impose ‘trust-like’ duties.” Id. at 343.
The Tran court “trust-like duties” for a state statutory trust to be cognizable under § 523(a)(4):
The preliminary question-and the one on which the Commission’s argument founders-is whether the Act imposes sufficient “trust-like” duties on a ticket sales agent. For if the duties required under the Act are not of the kind necessary to create a fiduciary as that term is used in § 523(a)(4), the only remaining form of trust that could arise under the Act would be one stemming from an agent’s wrongdoing; and, as we have seen, such a trust is not what Congress had in mind when designing the exemption contained in § 523(a)(4).
*915In our previous cases, we have not expressly identified the particular “trust-like” duty-or combination of duties-that a state statute must impose to create the specie of fiduciary that meets muster under § 523(a)(4). Nonetheless, one such duty has loomed large-the duty that a trustee refrain from spending trust funds for non-trust purposes. Indeed, on two occasions, the absence of such a requirement has proved determinative. In Boyle, we examined whether a contractor was a fiduciary under § 523(a)(4) by virtue of the Texas Construction Trust Fund Statute. The version of the statute then in force specified that funds loaned or paid under a construction contract to finance improvements on particular real property were trust funds, and set forth criminal penalties for a contractor or other trustee who, with the intent to defraud, used those funds without paying fully his obligations to beneficiary. In rejecting the argument that the statute constituted as fiduciaries all persons accepting funds or loans under a construction contract, we stressed that the statute prohibited the expenditure of trust funds for non-trust purposes only if done with fraudulent intent.
[The construction fund statute] does not prohibit a fund holder from paying, without any fraudulent intent, creditors on one project with surplus funds left over from earlier work and then using funds provided for that later project on still other work. In short, the statute does not create “red,” “blue,” and “yellow” dollars each of which can only be used for “red,” “blue,” or “yellow” construction project.
We held that, absent such an affirmative requirement, the subject statute did not make fiduciaries out of all contractors for the purposes of § 523(a)(4), but rather made fiduciaries of only those contractors who diverted funds with the intent to defraud.
In Coburn Company of Beaumont v. Nicholas [956 F.2d 110 (5th Cir.1992) ], we were confronted with an amended version of the Texas Construction Fund Statute featured in Boyle. Although the amended statute broadened the scienter requirement to cover trustees who “intentionally or knowingly” spent trust funds for non-trust purposes before fully paying all legitimate obligations, it also provided affirmative defenses that permitted a trustee to spend trust funds for non-trust purposes under certain circumstances. As the amended version of the statute, like its predecessor, did not expressly and totally prohibit such expenditures, we again rejected the argument that the statute elevated every contractor who accepts funds or loans under a construction contract to a § 523(a)(4) fiduciary.
Our discussion of the significance of the absence of a statutory prohibition of spending putative trust funds for non-trust purposes does not suggest the converse, i.e., that the mere inclusion of such a prohibition would alone be sufficient to create a fiduciary relationship under the debt discharge exception. The absence of such a prohibition is telling, though, because without such a requirement, the supposed trustee appears not so much to be responsible for managing a beneficiary’s funds on the beneficiary’s behalf as to be engaged in a typical agency relationship.
Not only do the Act and the regulations promulgated under it fail to prohibit expressly a ticket sales agent from spending lottery ticket proceeds for non-lottery-i.e., non-trust-purposes; neither do they mandate that the agent must segregate lottery proceeds from his other funds. Clearly, the absence of this lat*916ter duty undercuts the argument that the Act seeks to prohibit an agent from spending trust funds for non-trusts purposes without expressly saying so. For, in the absence an express segregation requirement, it would be virtually impossible to monitor even an express spending prohibition, let alone one imposed sub silentio. Therefore, any suggestion that a fiduciary of § 523(a)(4) proportions is somehow conjured up by implication just does not hold water.
In re Tran, 151 F.3d 339, 343-345 (5th Cir.1998) (footnotes omitted.)
The court finds that Farrell has not demonstrated that the Texas Construction Trust Fund Act imposes sufficient trust like duties on a contractor to meet the requirements of § 523(a)(4).
T.D. Farrell alleges that the subcontract between T.D. Farrell and Monitor Trust creates an express trust at paragraph 11.1, which states:
11.1 Based upon applications for payment submitted to the Contractor by the Subcontractor, corresponding to applications for payment submitted by the Contractor to the Architect, and certificates of payment issued by the Architect, the Contractor shall make progress payments to the account of the Subcontract Sum to the Subcontractor as provided below and elsewhere in the Subcontract Documents. Unless the Contractor provides the Owner with a payment bond in the full penal sum of the Contract sum, payments received by the Contractor and Subcontractor for Work properly performed by their contractors and suppliers shall be held by the Contractor and Subcontractor for those contractors or suppliers who performed Work or furnished materials, or both under contract with the Contractor or Subcontractor for which payment was made to the Contractor by the Owner or to the Subcontractor by the Contractor, as applicable. Nothing contained herein shall require money to be placed in a separate account and not commingled with money of the Contractor or Subcontractor, shall create any fiduciary liability or tort liability on the part of the Contractor or Subcontractor for breach of trust or shall entitle any person or entity to an award of punitive damages against the Contractor or Subcontractor for breach of the requirements of this provision.
To create an express trust by a written instrument, the beneficiary, the res, and the trust purpose must be identified. Pickelner v. Adler, 229 S.W.3d 516 (Tex.App.-Hous. [1 Dist.] 2007), review denied. The Court finds that the contract documents do not create an express trust, to the contrary, the quoted provision expressly denies that the contract creates a fiduciary relationship. Further, for breach of an express trust to give rise to an exception to discharge “[t]he purported trustee’s duties must ... arise independent of any contractual obligation. The trustee’s obligations, moreover, must have been imposed prior to, rather than by virtue of, any claimed misappropriation or wrong.” In re Tran, 151 F.3d 339, 342 (5th Cir.1998). The Court concludes that T.D. Farrell has failed to prove that Wendy Schreiber is liable under 11 U.S.C. § 523(a)(4) for defalcation in a fiduciary duty arising from an express trust.
The Court concludes that T.D. Farrell has failed to prove that it holds a debt owed by Wendy Schreiber for breach of a statutory fiduciary duty under the Texas Construction Trust Fund Act, whether owed directly to T.D. Farrell, or indirectly through T.D. Farrell’s assignments of the statutory beneficiary status held by others. The Court further finds that T.D. Farrell has failed to prove that it holds a debt owed by Wendy Schreiber for breach of a *917fiduciary duty owed to it under an express trust created by the contract documents or otherwise. Moreover, the Court finds that T.D. Farrell has failed to prove that it holds any debt owed by debtor. The Court concludes that T.D. Farrell has failed to prove a breach of fiduciary duty by Wendy Schreiber that is non-discharge-able under 11 U.S.C. § 523(a)(4).
T.D. Farrell contends that Wendy Schreiber directed payments of trust funds to Kevin Robinson, Kurt Codding, and herself while sub-sub-contractors went unpaid. As to this allegation, the Court reiterates its finding that Wendy Schreiber used all of the trust funds to pay laborers and suppliers who furnished labor or materials for the construction of the Home Depot Corpus Christi and to pay Town & Country’s actual expenses directly related to the construction or repair of the Home Depot Corpus Christi. Moreover, Town & Country’s bank records and debtor’s testimony show that Town & Country Excavation, Inc. worked on several simultaneous on-going construction projects at the same time it also worked on the Home Depot Corpus Christi. Schreiber and Robinson loaned funds to support the company’s cash flow issues created by Farrell’s failure to pay in accordance with the contract with Monitor Trust. The Court finds that debtor’s and Robinson’s loans to the company were repaid from non-trust funds.
IV. Violation of § 523(a)(6)
Bankruptcy Code § 523(a)(6) provides:
(а) 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—
(б) 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).
Farrell alleges it suffered a willful and malicious injury under § 523(a)(6) because debtor knew payments received on the project had to be used to pay subcontractors and suppliers and if not paid, those subs would assert liens against the project for which Farrell would be responsible. Farrell alleges that debtor made payments to herself and to Kevin Robinson at a time when Town & Country was receiving payments on the project and had unpaid debts to subcontractors and suppliers. Farrell alleges that debtor’s payments to herself and Kevin Robinson constitutes conversion and that she made the payments knowing it would cause injury to Farrell and with the intent to injure Farrell. Farrell alleges that debtor took money in the amount of $469,484.18, to injure Farrell or its property without Farrell’s knowledge or consent and without justification or excuse.
The court in Newman v. Link, 866 S.W.2d 721, 726 (Tex.App.Houston [14 Dist.] 1993, writ denied) set out the elements of conversion of money as follows:
Conversion consists of the wrongful exercise of dominion or control over another’s property in denial of or inconsistent with the other’s rights in that property. Waisath v. Lack’s Stores, Inc., 474 S.W.2d 444, 446 (Tex.1971). An action for conversion of money will lie where the money is ‘(1) delivered for safe keeping; (2) intended to be kept segregated; (3) substantially in the form in which it is received or an intact fund; and (4) not the subject of a title claim by the keeper.’ Edlund v. Bounds, 842 S.W.2d 719, 727 (Tex.App.-Dallas 1992, writ denied).
866 S.W.2d at 726.
The Court finds that T.D. Farrell has failed to prove that: Farrell delivered money to debtor for safekeeping, that was intended to be kept segregated, substantially in the form in which it was received, and that was not the subject of a *918title claim by the keeper. First, Farrell delivered no funds to debtor or to Town & Country. Secondly, the funds Town & Country received from Monitor Trust were to be used to pay suppliers to the Home Depot Corpus Christi job as well as operating expenses of the Town & Country. There were no funds delivered to Town & Country or debtor that were to be kept in an intact fund or in substantially the same form as received. There were no funds delivered to Town & Country or debtor that were to be kept segregated or that was delivered for safe keeping. The Court finds that T.D. Farrell has failed to prove that Schreiber converted any funds or that she made payments to herself or Robinson with the intent to injure Farrell. The Court finds that T.D. Farrell failed to prove that debtor took money in the amount of $469,484.18, to injure Farrell or its property without Farrell’s knowledge or consent and without justification or excuse.
V. Discharge under § 727
A. § 727(a)(2)(B)
Bankruptcy Code § 727(a)(2)(B), (a)(3), (a)(4)(A), (a)(5), and (a)(7) provide:
(a) The court shall grant the debtor a discharge, unless—
(2) the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated, or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed—
Farrell alleges that debtor violated § 727(a)(2)(B) because debtor transferred, removed, destroyed, mutilated, or concealed property of the estate after the date of filing of the petition, including books, records, computer equipment, documents, papers and similar records of Town & Country and her personal financial records, records related to construction of her house, and documents related to financial transactions with Kevin Robinson. Farrell alleges that on October 4, 2005, Farrell deposed Kurt Codding who testified that all of the company records were kept at the company office in Katy Texas and that debtor oversaw that office. Farrell admits that Town & Country’s project related records were produced, but contends that debtor has failed to produce documents including the financial records of Town & Country from which debtor’s financial condition could be ascertained and which relate to loans made by debtor to Town & Country and repayment of those loans. Farrell alleges that it obtained records from Compass Bank showing that Schreiber signed checks to herself and to Robinson between January 2003 and August 2004 when trust funds were allegedly misappropriated.
Debtor filed a chapter 7 voluntary bankruptcy petition on February 2, 2006. Debtor attended creditors’ meetings on February 23, 2006, and March 23, 2006. Debtor gave 2004 examination on November 3, 2006. Debtor amended her schedules and statement of affairs on March 15, 2006.
The Court finds that there is no evidence that debtor transferred, removed, destroyed, mutilated, or concealed any property of the estate after the date of filing of the petition. The Court finds that at Kurt Codding’s direction the records of Town & Country were shipped to Kurt Codding’s home near Dallas for storage prior to debtors’ bankruptcy filing. Codding directed all corporate decisions from his home, which he referred to as the “Dallas office” of Town & Country.
*919The evidence shows that Wendy Schreiber was the minority, 40%, shareholder of Town & Country. Schreiber worked in Town & Country’s Katy office and signed all of the company’s checks. Schreiber did not, however, prepare or determine the payees or amounts of those checks. Other than paying the rent for the lease of the office space and the office utility bills, the evidence shows that Schreiber did not control any of the financial, business, or operational aspects of Town & Country Excavation, Inc.
The evidence shows that Codding was the sole decision maker for Town & Country. Codding directed Town & Country’s employees, including debtor, in the performance of their duties. The evidence shows that when Codding consulted or relied on anyone else, it was Kevin Robinson or Connie Aiken. If a legal matter arose or if someone needed to execute a document on behalf of the company, such as a lien release or to submit a payment application on a construction job, Codding had Robinson or Connie Aiken perform those tasks regardless of whether Schreiber was present and available to perform the necessary task. Schreiber seems to have understood her position as “corporate secretary” of Town & Country to mean she was the president’s administrative assistant. When Codding directed Schreiber to fax, email, or mail documents to him, she did so. When Codding wanted reports, run from the company computer Schreiber or Connie Aiken ran the reports and sent them to him. Robinson oversaw the construction projects on behalf of Town & Country.
When it was time to prepare a payment request on a job, Robinson would notify Codding of the status at the jobsite of which suppliers had delivered materials and were due for payment. Connie Aiken would run computer reports showing invoices submitted for payment and send the information to Codding. Codding would then determine to whom and for how much checks should be written. Connie Aiken would print the checks. Schreiber would sign the checks.
Town & Country ceased business in July or August of 2004. The evidence shows that Town & Country’s bank records were located in filing cabinets all along the office wall. When Town & Country was winding down in March 2004, Kurt Codding told Connie Aikens to box up everything including bank records and send the records to him in Dallas, Texas for storage. Connie Aikens complied with Codding’s direction. Schreiber had no objection to the boxing and shipping of the corporate records to Codding because he was president of the company and 60% majority shareholder. Connie Aikens also picked up and shipped to Codding Town & Country’s corporate records in the possession of Levin & Atwood, the corporation’s attorneys. Connie Aiken boxed all of the corporate records at Kurt Codding’s direction and shipped all of them to him before the company closed its doors in July of 2004. In addition, the evidence shows that Kurt Codding directed Chase Pasley to load up Town & Country’s office equipment when it closed its business and Pasley did so. Kurt Codding also told Wendy Schreiber to go home around that time because the company had no income coming in; so she would not have any more work to do in the office.
Schreiber did not file income tax returns for the two years prior to filing bankruptcy. Schreiber received no income from Town & Country in 2004. In preparation for her creditor’s meeting, debtor obtained Town & Country’s tax returns from Jerry Denman, Town & Country’s accountant. Wendy Schreiber’s attorney gave debtor’s 2003 tax return and that of Town & Coun*920try to the U.S. Trustee’s attorney at Schreiber’s first meeting of creditors. Wendy Schreiber produced documents dated from 2003 through 2004 at her deposition. Wendy Schreiber has records of her bank accounts and credit cards from 1998 forward. Since 2002, Wendy Schreiber has been the signatory on two personal Compass Bank accounts, one company Compass Bank account, and in 2005 she opened an account at Hibernia Bank, n/k/a Capital One.
The Court finds that debtor produced all of her personal financial records, including a tax return, bank records, her Town & Country personnel records, and her records of loans made to and repayments made by Town & Country. Debtor also contacted the Town & Country’s corporate accountant and obtained and produced Town & Country’s tax returns. Debtor also obtained production of some of Town & Country’s corporate records by having Robinson contact Codding to ask Codding to ship records to Robinson’s home. When Robinson received the records, debt- or produced them to Farrell.
B. § 727(a)(3)
Bankruptcy Code § 727(a)(2)(B), (a)(3), (a)(4)(A), (a)(5), and (a)(7) provide:
(a) The court shall grant the debtor a discharge, unless—
(3) the debtor has concealed, destroyed, mutilated, falsified, or failed to keep or preserve any recorded information, including books, documents, records, and papers, from which the debtor’s financial condition or business transactions might be ascertained, unless such act or failure to act was justified under all of the circumstances of the case;
Farrell alleges that debtor violated § 727(a)(3) because Farrell sued Town & Country and others, but not the debtor, in 2003 and sued debtor and Robinson in 2005, concerning the allegedly missing trust funds of Town & Country. Farrell alleges that debtor failed to preserve recorded information concerning her personal finances and of Town & Country in violation of § 723(a)(3). Farrell alleges that after debtor filed bankruptcy, Farrell sought books and records of Town & Country and although Farrell admits that debtor produced project related books and records, Farrell nevertheless contends that debtor has not produced books, records, documents from which debtor’s financial condition or business transactions might be ascertained, including documents to support payments to debtor and Robinson made during the construction of the Home Depot Corpus Christi project. Farrell asserts that debtor testified at her 2004 examination that some payments made to her were in repayment of loans. Farrell contends there are no records for these loans.
Farrell contends that it sought discovery through 2004 examinations of financial documents of Town & Country from Kurt Codding, Kevin Robinson, Compass Bank, and debtor. Farrell contends that the bank records it obtained from Compass Bank show that between January 2003 and August 2004, debtor signed checks to herself that totaled over $200,000 and checks to Kevin Robinson that totaled over $400,000. Farrell alleges that debtor could not satisfactorily explain these payments when asked about them in a Rule 2004 examination and has not kept or preserved personal financial records or those of Town & Country that would explain the purpose if any of those payments. Farrell alleges that debtor had an obligation as corporate officer and under the Bankruptcy Code to preserve recorded information related to the assets she controlled and that she failed to do so both before and during state court litigation Farrell filed in June 3, 2003, and this bankruptcy court *921litigation. Farrell alleges that Farrell’s litigation against Town & Country placed obligations on debtor and on Town and Country to keep or preserve books, records and documents. Farrell alleges that debtor has concealed, destroyed mutilated, falsified, or failed to keep or preserve recorded information including but not limited to books documents records and papers from which debtors financial condition or business transactions might be ascertained and such acts or failures to act were not justified under all of the circumstances of the case.
C. § 727(a)(4)(A)
Bankruptcy Code § 727(a)(2)(B), (a)(3), (a)(4)(A), (a)(5), and (a)(7) provide:
(a) The court shall grant the debtor a discharge, unless—
(4) the debtor knowingly and fraudulently, in or in connection with the case—
(A) made a false oath or account;
The Court finds that debtor has produced all of her personal records and that those records are adequate to satisfactorily explain her financial transactions. The evidence shows that, until she was made aware of it during the course of this adversary proceeding, Wendy Schreiber did not know that Town & Country was a defendant in any lawsuit. The evidence shows that Schreiber did not retain promissory notes for Town & Country once they were paid in full. Schreiber testified that Town & Country’s Compass Bank records matched the loan ledger Schreiber kept documenting her loans to the company. The Court finds Schreiber’s testimony to be credible. Schreiber’s records show that her reimbursements, draws, expenses, and loans repayments by Town & Country totaled $239,622.86. Schreiber’s draws from Town & Country totaled $75,000. The Court finds that debtor did not control the financial records of Town & Country Excavation, Inc. upon its cessation of business and it was appropriate for debtor to rely upon Codding’s implicit representation that he would safely store the corporate records as president and majority shareholder of the corporation. The Court finds that debtor adequately explained the payments to herself and to Robinson. The Court finds that debtor’s records and explanations are justified under all of the circumstances of the case.
Farrell alleges that debtor has misrepresented her assets and made false sworn statements in violation of § 727(a)(4)(A). Debtor’s schedule A describes real property as rural homestead in Weimar, Texas. Debtor valued her interest at $450,000. Farrell contends that this statement is false. Farrell alleges that at the time debtor swore to Schedule A, she had listed or intended to list 20 of the 70 acres of the property including the house for sale for $575,000 at ForSaleByOwner.Com. Further, Farrell alleges that the valuation of the property is false and grossly understated as the listing price for the property currently is $875,000 and has been for months. Farrell alleges that debtor swore at her 341 meeting on February 23, 2006, that the down payment money for the real property listed in Schedule A was taken out of savings. Farrell contends that debtor took the money from Town & Country to make the down payment.
On her schedules, debtor valued her rural homestead of 69.082 acres at 2471 Highway Colorado County, Weimar, Texas, at $450,000.00, with liens totaling $378,149.00. Debtor claimed this property exempt for a value of $71,851.00. First and second liens against the property are held by First Ag Credit in the amounts of $239,127.00 and $139,022.00. Wendy Schreiber testified at her February 23, *9222006, 341 meeting that she made a down payment of $40,000 to acquire her home located in Weimar, Texas. The total mortgage payment is $2,300. Kevin Robinson pays ^ of the monthly mortgage payment, and Wendy Schreiber pays $1,150. The property is appraised by the local taxing authority at $450,000, which is the value debtor included in her schedules. Debtor believes she has equity in the house of $72,000. The Court finds debtor’s testimony credible that she saved her income from Express Site Preparation and that this income funded the purchase of her home. Farrell has failed to introduce any evidence indicating that the value shown in debtor’s schedule is false. The Court finds that debtor has explained the circumstances of Town & Country’s loan repayments to debtor. The Court finds that debtor has not falsely sworn to the value of her property on schedule A.
Farrell next alleges that in item 18 of her Statement of Financial Affairs, debtor knowingly and fraudulently failed to disclose other businesses she operated within the 6 year time period preceding the commencement of this case, including Lantana Services and EGN Services. The evidence shows that debtor’s statement of affairs lists Town & Country Excavation Services, Inc., beginning date April 3, 2002, and ending date June 30, 2004, in response to question 18 requiring debtor to list information concerning all businesses in which debtor was an officer within 6 years prior to commencement of the case. In addition, debtor listed her stock ownership and officer position in response to question 21b. The evidence also shows that for two months during 2002, debtor owned stock in Kurt Codding’s company, Durosealant. Schreiber resigned from that company in March 2002 and gave the stock to Kurt Codding. During 2002 and 2003, debtor did business as EGN Services. As EGN Sendees, debtor hired dump truck drivers and invoiced for the trucking services. Debtor did business as Lantana Services in 2004, and filed an assumed name certificate in Colorado County, Texas. Debtor opened an account for Lantana Services in October of 2004 into which debtor deposited funds in October 2004 and in February of 2005. As Lantana Services, debtor hired truckers and invoiced site contractors for the trucking services. The Court finds debtor’s testimony credible that she inadvertently failed to schedule these short term business ventures and her stock in Town & Country Excavation, Inc.
Farrell alleges that debtor swore at her 2004 Examination that she did not know the purpose or circumstances surrounding payments to Kevin Robinson in July 2003. Farrell alleges that statement was false. The Court finds that debtor has explained Town & Country’s payments to Kevin Robinson. The Court finds that debtor’s inability to respond to Farrell’s impromptu demand during deposition that she names the exact purpose of every check written during the existence of Town & Country’s work on the Home Depot Corpus Christi does not constitute a knowing and fraudulent false oath or account.
D. § 727(a)(5)
Bankruptcy Code § 727(a)(2)(B), (a)(3), (a)(4)(A), (a)(5), and (a)(7) provide:
(a) The court shall grant the debtor a discharge, unless—
(5) the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities;
*923Farrell alleges that debtor violated § 727(a)(5) because debtor cannot explain the sources and disposition of her assets and those she controlled as a corporate officer on behalf of Town & Country. Farrell alleges that debtor had not or refused to credibly explain what she did with trust funds of which she was trustee that she paid to herself and Kevin Robinson during the time period between February 2003 and August 2004. Farrell alleges that debtor has failed to explain satisfactorily before determination of denial of discharge any loss of assets or deficiency of assets to meet debtor’s or Town & Country’s liabilities.
The Court finds that debtor has explained satisfactorily, before determination of denial of discharge, any loss of assets or deficiency of assets to meet the debtor’s liabilities. The Court further finds that the evidence is clear that Farrell’s failure to pay Monitor Trust on its contract to build the Home Depot Corpus Christi and Monitor Trust’s consequent failure to pay Town & Country, contributed to the financial demise of Town & Country. The Court finds that debtor has adequately explained any failure of assets to meet liabilities for both herself and for Town & Country.
E. § 727(1)(2), (3), (4)(A), and (5)
Bankruptcy Code § 727(a)(2)(B), (a)(3), (a)(4)(A), (a)(5), and (a)(7) provide:
(а) The court shall grant the debtor a discharge, unless—
(7) the debtor has committed any act specified in paragraph (2), (3), (4), (5), or
(б) of this subsection, on or within one year before the date of the filing of the petition, or during the case, in connection with another case, under this title or under the Bankruptcy Act, concerning an insider;
Farrell alleges that under § 727(a)(7), debtor has committed acts specified in § 727(a)(2), (3), (4)(A), and (5) concerning insiders Town & Country and Kevin Robinson. The Court finds that Farrell has failed to prove that debtor committed any act in violation of § 727(a)(7).
VI. Exemptions
Farrell filed an objection to debt- or’s exemptions. Farrell’s objection to exemptions contends that debtor’s exemption of her equity in her homestead exceeds that amount allowed by 11 U.S.C. § 522(p), $125,000. Debtor’s schedule C shows that debtor exempted her equity in the property, a total of $71,851.00. The Court finds that the amount of interest debtor acquired within the look back period does not exceed the cap of § 522(p). Therefore, debtor’s claim of exemption does not violate § 522(p). See e.g., In re Fehmel, 372 Fed.Appx. 507 (5 th Cir. Tex.2010). Farrell contends that debtor’s listing of her property for $875,000 proves that she has attempted to exempt more than the amount allowed by the cap of § 522(p) and (q). The Court finds that debtor has scheduled her property appropriately. The Court further finds that a seller’s listing price without completion of a sale is inadequate to prove value.
Farrell also contends that debtor’s exemption of her homestead violates § 522(q)(i )(B)(ii). The Court finds that as with the result under § 522(p), debtor has not sought to exempt any amount of interest in excess of the cap of § 522(q).
VII. Conclusion
The Court concludes that T.D. Farrell has failed to prove a cause of action for violation of Tex. Prop.Code § 162.001 et seq. (the Texas Construction Trust Fund Act). The Court concludes further T.D. Farrell has failed to prove that its alleged debt is not dischargeable under 11 U.S.C. § 523(a)(4), or (a)(6). The Court further concludes that Farrell has failed to prove *924an objection to debtor’s discharge under 11 U.S.C. § 727(a)(2)(B), (a)(3), (a)(4)(A), (a)(5), or (a)(7). Lastly, the Court concludes that T.D. Farrell has failed to prove its objections to debtor’s claim of exemption.
. Subsequent to the events described herein, Robinson and Schreiber began a personal relationship and now have two children together. Robinson pays Schreiber child support periodically.
. Debtor also used her savings to make a down payment on a home. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494648/ | MEMORANDUM OF DECISION ON MOTION OF THE UNITED STATES FOR ADEQUATE PROTECTION, ACCOUNTING, DISGORGEMENT, AND PAYMENT; AND MOTION AND AMENDED MOTION OF THE DEBTOR FOR RECOVERY PURSUANT TO 11 U.S.C. § 506(c)
MELVIN S. HOFFMAN, Bankruptcy Judge.
This matter offers an object lesson in how not to run a chapter 11 case. The dispute between the Internal Revenue Service and the debtor, Strategic Labor, Inc., is embodied in the following motions now under consideration: Creditor United States’ Motion For Adequate Protection, Accounting, Disgorgement, And Payment Of The United States’ Prepetition Tax Claim [Docket # 87]; Motion Of Debtor In Possession For Recovery Pursuant To 11 U.S.C. § 506(c) Of The Reasonable And Necessary Costs And Expenses Of Preserving And Disposing Of Property Securing The Secured Claim Of The Internal Revenue Service For Its Benefit [# 99]; and Amended Motion Of Debtor In Possession For Recovery Pursuant To 11 U.S.C. § 506(c) Of The Reasonable And Necessary Costs And Expenses Of Preserving And Disposing Of Property Securing The Secured Claim Of The Internal Revenue Service For Its Benefit [# 116], None of the motions would have been necessary had Strategic Labor and its counsel administered this case with more care and candor or if the IRS had stepped in earlier to assert its rights. The IRS has offered a plausible although, with the benefit of hindsight, not necessarily a superlative explanation for its apathy. The conduct of the debtor and its counsel, on the other *14hand, defies justification.1
Background
The relevant facts are not in dispute. On June 28, 2010 Strategic Labor, a company which developed, distributed and supported automated workforce scheduling software, filed a voluntary petition for reorganization under chapter 11 of the Bankruptcy Code2 for the stated purpose of consummating a sale of its assets. Strategic Labor’s counsel on the petition date and throughout this ease was The Gordon Law Firm LLP. A few days after the bankruptcy filing, on July 2, 2010, Infor Global Solutions (Michigan), Inc., a reseller of Strategic Labor’s software, entered into an asset purchase agreement (the “APA”) with Strategic Labor pursuant to which Infor agreed to acquire substantially all the company’s assets, excluding cash, accounts receivable and “work-in-progress accounts receivable,”'3 for a purchase price of $200,000. On the same day Strategic Labor filed its motion to sell the assets to Infor or the highest bidder free and clear of liens pursuant to Bankruptcy Code § 363.
According to the schedules of assets and liabilities filed by Strategic Labor to support its bankruptcy petition, the company had assets valued at $112,137.53 on the petition date consisting primarily of accounts receivable valued at $103,141.29. Schedule D entitled “Creditors Holding Secured Claims” listed a single creditor, Balboa Capital, holding a secured claim in the amount of $18,000. The schedule described Balboa Capital’s collateral as “workforce scheduling product development software” of “undetermined value.”4 Strategic Labor did not list the IRS as a secured creditor but rather scheduled the IRS’s claim as a priority unsecured claim in the amount of $491,594.62 on schedule E along with the wage claims of certain employees, including members of the Gondek family. The family wage claimants were Michael Gondek, the debtor’s president and 20% shareholder; James Gondek, the debtor’s secretary and 50.5% shareholder; Richard Gondek, the debtor’s director of professional services and 27% shareholder; and Daniel Gondek, whose primary duties have been described as handling customer support. James is the father of Michael, Richard and Daniel. All are insiders as defined in Bankruptcy Code § 101(31)(B).
Despite listing the IRS in its schedules as an unsecured priority creditor, in its statement of financial affairs (the “SOFA”) accompanying the schedules Strategic Labor represented that the IRS had placed a *15tax lien on its assets in the amount of $492,569.28, an amount slightly higher than the amount stated in schedule E.
It is also to be noted that while schedule H of Strategic Labor’s schedules of assets and liabilities did not list any co-debtors for any of the company’s obligations, the IRS has alleged and the debtor has not denied that James, Michael and Richard Gondek were individual guarantors of the Balboa Capital debt.
Not only are the schedules incomplete and inconsistent with the SOFA they are also inconsistent with statements in the affidavit of Michael Gondek filed in support of first day motions on June 80, 2010 (the “Gondek Affidavit”). According to the affidavit, the debtor had, as of the petition date, “(i) cash on hand of $4,650; (ii) accounts receivable of $103,141.21; and (iii) anticipated future billings in open software contracts of $184,095.00” for a total asset valuation of $291,886.21. Mr. Gon-dek also stated that:
14. Prior to the Petition Date, the Debtor granted a security interest in substantially all of its assets to Balboa Capital (“Balboa”) to secure financing in the amount of approximately $128,000 provided by Balboa for the debtor’s product development initiatives in 2008. To perfect its security interest in the Debtor’s assets, Balboa filed a UCC-1 Financing Statement under the name Carbaldav on January 30, 2008. As of May 31, 2010, the approximate amount owed to Balboa by the Debtor was $18,633.86.
[and]
16. As of the Petition Date, the Internal Revenue Service held tax liens of $469,004.94 against the Debtor’s assets resulting from the Debtor’s alleged failure to make payroll tax payments in parts of 2007 and 2008. Of the total liens as of May 31, 2010, $290,859.17 is attributed to tax, $145,703.16 is attributed to penalties, and $32,482.61 is a1> tributed to interest.
Mr. Gondek’s affidavit, filed two days after the bankruptcy petition and prior to the schedules and SOFA, materially contradicts the schedules as to the extent of Balboa’s security interest in Strategic Labor’s assets, the value and description of those assets and the status of the IRS as a secured creditor.5
On June 30, 2010 Strategic Labor filed an “Emergency Motion for Entry of Interim and Final Orders (1) Approving Post-Petition Financing Pursuant to 11 U.S.C. §§ 105, 362, 363, 364 and 507, (2) Granting Liens and Providing for Superpriority Administrative Expense Status, (3) Modifying the Automatic Stay, and (4) Scheduling a Final Hearing” (the “DIP motion”) seeking to borrow up to $50,000 from Infor, the stalking horse bidder under its sale motion. In the DIP motion Strategic Labor acknowledged the IRS’s lien stating:
Approximately six (6) months ago, the Debtor and the Lender [Infor] began discussing the purchase by the Lender of certain of the Debtor’s assets. Shortly thereafter, and during the Lender’s due diligence, the Debtor learned for the first time that it had substantial payroll tax liens of $470,000.
On July 7, 2010, I entered an interim order and on July 22, 2010 a final order allowing the DIP motion which authorized Strategic Labor to borrow up to $50,000 from Infor (the “DIP loan”) and granted *16Infor a security interest in all of the debt- or’s property subject to “existing, valid, prior, and otherwise unavoidable, perfected liens and security interests....” Neither the DIP Motion nor the order referred to Balboa Capital or the IRS by name but the order clearly subordinated Infor’s security interest to their liens to the extent valid. The DIP Motion did not include nor was it accompanied by a request to use cash collateral of any secured creditor; in fact, Strategic Labor acknowledges that it never made such a request at any point in this case. Indeed, the DIP motion proclaimed that Strategic Labor had no intention of using either the IRS’s or Balboa’s cash collateral. Paragraph 16 of the DIP motion states:
Approval of the DIP Facility will provide the Debtor with immediate and ongoing access to borrowing availability to pay its operating expenses, including post-petition wages, as well as to satisfy the costs of administration of this case.
The IRS was served with a copy of the DIP motion and did not object to it.
On August 18, 2010, the IRS filed a proof of claim in the amount of $491,505.37 arising from Strategic Labor’s failure to remit payroll taxes to the IRS. The IRS asserted a security interest in all of Strategic Labor’s personal property. Attached to its proof of claim was a schedule setting forth a series of federal tax liens for tax periods in 2007 and 2008, notices of which had been filed between December 24, 2009 and January 28, 2010 in the United States District Court for the District of Massachusetts in accordance with 26 U.S.C. § 6323(f)(l)(A)(ii).6
According to its monthly operating reports filed with the United States trustee,7 Strategic Labor received a total of $41,000 in DIP financing from Infor.8 Strategic Labor repaid the DIP loan in full during the bankruptcy. Paragraph 9 of the final order approving the DIP motion provides for the loan to be repaid out of the proceeds of the sale of the debtor’s assets. The term sheet for the DIP loan provides that the loan would serve as Infor’s deposit for the purchase of the assets. Neither of these provisions was complied with. Instead, the debtor’s monthly operating report for the month of August 2010 indicates that during that month Strategic Labor, using cash in its general operating account, repaid Infor by check in the amount of $1,000 and by electronic transfer in the amount of $40,388.61. The monthly operating report described both payments as “Repay DIP Financing.”
As indicated previously, on July 2, 2010 Strategic Labor filed its motion to sell substantially all its assets to Infor free and clear of liens, claims, and encumbrances pursuant to the APA and also to approve *17bidding procedures for the sale. Paragraph 4 of the order approving the bidding procedures, the proposed form of which was drafted by the Gordon firm, provided that the “Notice of Auction and Sale Hearing” was to be served on, among others, “all parties known to the Debtor to have, or assert any liens, claims and encumbrances or other interest against the Debt- or, including (a) the Internal Revenue Service .... ” The IRS was served with the Notice of Auction and Sale Hearing and did not oppose the sale.
In response to the sale notice, Strategic Labor received an offer for its assets from a third party that was higher than Infor’s stalking horse bid. According to the bid procedures previously established, this resulted in an open cry auction at the sale hearing between Infor and the third party in which Infor emerged victorious with a final bid of $300,000, a $100,000 improvement on its stalking horse bid. My order approving the sale to Infor was entered on August 30, 2010 and the sale was consum-
mated on September 3, 2010. The sale proceeds of $300,000 were deposited into the Gordon firm’s IOLTA clients’ funds account.9
On November 15, 2010 the Gordon firm filed its first interim application for compensation seeking $78,738.05 consisting of $73,587.50 in fees and $5,150.55 in expense reimbursement. Notice of the fee application was served on the IRS. The application was allowed without objection. On May 4, 2011 the Gordon firm filed its final fee application in which it sought approval of the previously allowed interim award as well as additional fees of $35,799.50 and expense reimbursement of $699.30. No objections were raised to the final fee application and it too was allowed resulting in a total award to the Gordon firm on both applications of $109,387 in fees and $5,849.85 in expense reimbursements.
Also on May 4, 2011 Strategic Labor filed its motion to dismiss this ease.10 In the dismissal motion the company, appar*18ently experiencing a relapse of the amnesia reflected in its original schedules of assets and liabilities, stated that Balboa Capital was its only secured creditor and once again indicated that Balboa’s collateral consisted solely of workforce scheduling product development software. The debt- or also revealed that it had paid Balboa in full satisfaction of its secured claim although it did not identify the source of the funds for such payment.11 The dismissal motion described the IRS as an unsecured priority creditor holding a claim of $491,505.37. The debtor also disclosed for the first time two additional unsecured priority creditors, the Massachusetts Division of Unemployment Assistance and the Massachusetts Department of Revenue, with claims according to the debtor of $36,123.79 and $2251.71, respectively. The debtor proposed that after payment of the Gordon firm’s final fee request of $36,498.80 the balance would be distributed pro rata to the three priority unsecured creditors. The motion made no mention of the priority wage claims originally listed on schedule E to the debtor’s bankruptcy petition.12 Finally, Strategic Labor’s motion to dismiss revealed for the first time on the record of this case, in addition to the payment to Balboa, that the Gordon firm was holding in its IOLTA account not the full $300,000 proceeds of the sale to Infor but $221,261.95. Evidently the Gordon firm had released and Strategic Labor had paid from the $300,000 sale proceeds $78,738.05 in interim fees and expenses of the Gordon firm.
Strategic Labor’s motion to dismiss caught the attention of the IRS. The slumbering giant was aroused and began to stir. It filed an objection to the motion to dismiss. At the hearing on the motion it became clear that on Strategic Labor’s bankruptcy petition date the IRS held a security interest in all the debtor’s assets by virtue of its pre-petition tax liens, that its liens had attached to the proceeds of the sale to Infor, that Strategic Labor had never sought authority to use the IRS’s cash collateral, including the sale proceeds, and hence that the validity of some or all post-petition payments made by Strategic Labor using the IRS’s cash collateral could be called into question.13 Based on the information in the motion to dismiss that the assets of the estate consisted only of the $221,261.95 remaining sale proceeds, the IRS rightly concluded that during the course of this chapter 11 case Strategic Labor had burned through a great deal of the IRS’s cash collateral. In light of these startling revelations the motion to dismiss was denied.
The Dispute
Matters, of course, did not end there. The IRS filed the presently pending motion for an accounting, adequate protection, disgorgement and payment.14 Distilled to its essence, the IRS seeks immediate payment of all funds remaining in the Gordon firm’s IOLTA account, disgorgement from the Gordon firm of its $78,738.05 interim fee award and disgorgement from the Gondeks of *19$59,061.95 in compensation and benefits paid to them by Strategic Labor during the chapter 11 case15 plus $18,000 on the basis that three of the Gondeks were guarantors of the Balboa loan and thus benefitted personally when they caused Strategic Labor to make its post-petition payments to Balboa.
Strategic Labor’s primary response to the IRS’s attack was to file its presently pending motions seeking to surcharge the IRS’s cash collateral under Bankruptcy Code § 506(c)16 for the Gordon firm’s fees and expenses totaling $100,661.35, consisting of the $78,738.05 previously paid and an additional $21,923.30 of the $36,498.80 requested in the firm’s final fee application. The debtor also sought to recover $55,738.51 in compensation and benefits paid to the Gondeks. Strategic Labor justified its surcharge request by pointing out that the chapter 11 case was filed for the sole purpose of consummating a sale of its assets on a going concern basis under Bankruptcy Code § 363, that the IRS received notice of the sale in addition to all other pleadings filed in the case and by not objecting to the sale the IRS is deemed to have consented to it, and that the § 363 sale process generated a bidding war that resulted in a final sale price of $300,000, a 50% premium over the initial price and far more than the IRS would have realized had it shut Strategic Labor down and liquidated its assets at a tax sale. In short, Strategic Labor claims that since the chapter 11 process resulted in a substantial benefit to the IRS the costs of achieving that benefit should be chargeable to the IRS’s recovery. The IRS opposes in its entirety Strategic Labor’s request for a § 506(c) recovery.
While the surcharge motions are clearly Strategic Labor’s preferred solution to the IRS’s disgorgement motion, Strategic Labor has offered two additional grounds for avoiding the impact of the IRS’s motion. First, Strategic Labor argues that the cash generated by the company post-petition was not the IRS’s cash collateral. Without citing any legal authority, Strategic Labor *20asserts that the proceeds of its pre-petition receivables and open software contracts were not the IRS’s cash collateral because they would have been substantially valueless had the company not supplied post-petition software support to the account debtors and customers. Second, Strategic Labor suggests that even if the proceeds of the accounts receivable and software contracts were the IRS’s cash collateral, the IRS knew the debtor was spending that cash collateral and by not objecting the IRS cannot now seek disgorgement. For this proposition Strategic Labor relies on two bankruptcy court decisions, Matter of Nat’l Safe Ne., Inc., 76 B.R. 896 (Bankr.D.Conn.1987) and In re Gemel Int'l, Inc., 190 B.R. 4 (Bankr.D.Mass.1995).
The error in the debtor’s first argument is demonstrated by reading the definition of cash collateral contained in Bankruptcy Code § 363(a):
In this section, “cash collateral” means cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents whenever acquired in which the estate and an entity other than the estate have an interest and includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or other payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a security interest as provided in section 552(b) of this title, whether existing before or after the commencement of a case under this title, (emphasis supplied).
The fact that by staying in business Strategic Labor preserved the value of the IRS’s collateral thereby increasing the dollar amount of the proceeds recovered therefrom doesn’t change the character of the recovery from proceeds to something else. Congress recognized the value of preservation and enhancement of collateral by enacting § 506(c), not by depriving a secured creditor of its security interest in post-petition proceeds of pre-petition collateral.
As for Strategic Labor’s second argument that the IRS should have objected sooner to the unauthorized use of cash collateral, the IRS credibly maintains that it was unaware of the debtor’s unauthorized use until receiving the motion to dismiss by which time the money had been spent. Paragraph 16 of the DIP Motion bears repeating at this point:
Approval of the DIP Facility will provide the Debtor with immediate and ongoing access to borrowing availability to pay its operating expenses, including post-petition wages, as well as to satisfy the costs of administration of this case.
There is no reasonable way to understand this except as a representation by Strategic Labor that it did not intend to use cash collateral to satisfy the costs of administering its chapter 11 case. Strategic Labor’s commitment not to use cash collateral so fundamentally distinguishes this case from Nat’l Safe and Gemel as to make any further attempt at analogy meaningless.
Strategic Labor submitted a number of affidavits to support its surcharge requests. In his affidavit, Douglas Wolfson, associate general counsel of Infor, referring to Strategic Labor as “SLI,” stated:
4. In or about the spring of 2010, Infor completed its due diligence concerning SLI’s assets and liabilities. Based on the results of Infor’s due diligence review, including discovery of SLI’s substantial tax liabilities, having considered and rejected a number of alternative transaction structures for acquiring the desired assets, Infor was not willing to purchase the assets of SLI without the protections afforded to asset purchasers by a Bankruptcy Code Section 363 sale *21conducted in accordance with the Bankruptcy Code and Rules.
5. It was crucial for Infor that its purchase of SLI’s assets occur quickly as SLI’s assets, nearly all intangible, were at serious risk of losing their value due to SLI’s continuing financial difficulties. Infor believed that a Chapter 11 case would facilitate a prompt sale of SLI’s assets and that SLI’s assets would likely become worthless if it ceased doing business in the ordinary course.
In addition each of the Gondeks submitted an affidavit attesting to his efforts to keep the business operating in chapter 11, shepherding the company through the sale process and attempting to interest additional bidders to participate in the sale. A member of the Gordon firm submitted an affidavit in which he described his communications during the chapter 11 case with an IRS employee who seemed “pleased with the sale process” and who never “once raised any cash collateral or adequate protection concerns or the possibility of seeking relief in accordance with Section 363(e) or (f) of the Bankruptcy Code.” In this affidavit counsel represented that it was due to the efforts of Strategic Labor’s employees, “with assistance of counsel,” that the second bidder was identified.
Discussion and Analysis of § 506(c) Requests
Any consideration of a request to recover funds from a secured creditor’s collateral requires, first of all, reference to the statute. Bankruptcy Code § 506(c) creates an exception to the general principle of bankruptcy distribution that prefers secured creditors to all other claimants with respect to the proceeds of the secured creditor’s collateral by permitting a trustee or debtor in possession to recover from such proceeds the reasonable, necessary costs and expenses related to preservation or disposition of the secured creditor’s collateral to the extent of any benefit to the creditor. Hartford Underwriters Ins. Co. v. Union Planters Bank, N.A., 530 U.S. 1, 5, 120 S.Ct. 1942, 1946, 147 L.Ed.2d 1 (2000) {“Henhouse”); In re Parque Forestal, Inc., 949 F.2d 504, 511 (1st Cir.1991) (citing In re Trim-X, Inc., 695 F.2d 296, 302 (7th Cir.1982)).17 A trustee or debtor invoking § 506(c) must establish by a preponderance of the evidence that (1) the expenditure in question was necessary, (2) the amount expended was reasonable, and (3) the secured creditor benefitted. Parque Forestal, 949 F.2d at 512 (citing In re P.C., Ltd., 929 F.2d 203, 205 (5th Cir.1991)). The party seeking a § 506(c) recovery must prove that the benefit to the secured creditor that was “concrete and quantifiable.” Rifken v. CapitalSource Finance, LLC (In re Felt Mfg. Co., Inc.), 402 B.R. 502, 523 (Bankr.D.N.H.2009). It has been noted that “this is not’ an easy standard to meet.” Id. (citing Debbie Reynolds Hotel & Casino, Inc. v. Calstar Corp. (In re Debbie Reynolds Hotel & Casino, Inc.), 255 F.3d 1061, 1067-68 (9th Cir.2001)). “A debtor does not satisfy her burden of proof by suggesting hypothetical benefits.” In re Compton Impressions, Ltd., 217 F.3d 1256, 1261 (9th Cir.2000) (quoting In re Cascade Hydraulics & Utility Service, Inc., 815 F.2d 546, 548 (9th Cir.1987)). A general assertion that the secured creditor benefited from the continued operation of the business, without more, is also insufficient. Id. The debtor must prove that the expenditures were made “primarily” to benefit the secured *22creditor.18 Parque Forestal, 949 F.2d at 512 (citing Brookfield Production Credit Ass’n v. Borron, 738 F.2d 951, 952 (8th Cir.1984)).
“Typical examples [of allowed surcharge costs] include appraisal fees, auctioneer fees, moving expenses, maintenance and repair costs, and advertising costs.” In re Swann, 149 B.R. 137, 143 (Bankr.D.S.D.1993); see also, 4 Alan N. Resnick & Henry J. Sommer, CollieR on BankRuptcy 11506.05[4], at 506-118 (16th ed. 2009) (“Necessary expenses include appraisal fees, auctioneer fees, advertising-costs, moving expenses, storage charges, payroll of employees directly and solely involved with the disposition of the subject property, maintenance and repair costs, and marketing costs.”). “Similarly, if a secured creditor has a lien on all, or virtually all, of a debtor’s assets, the debtor is engaged in ongoing business operations, and the debtor’s continued operations preserve or enhance the value of the secured creditor’s collateral, items that may qualify as ‘necessary’ expenses chargeable against the collateral include the debtor’s payroll costs, insurance costs, workers’ compensation expenses, and post-petition administrative taxes.” Id. Attorneys’ fees, whether actually paid or simply incurred by the estate, have been recognized for § 506(c) treatment. Felt Mfg., 402 B.R. at 523 (Bankr.D.N.H.2009) (citing In re K & L Lakeland, Inc., 128 F.3d 203, 212 (4th Cir.1997) (Hamilton, J., dissenting)).
As the First Circuit observed in Parque Forestal, while § 506(c) does not require advance consent by the secured creditor, consent is still a relevant consideration. A secured creditor may not have consented to a specific expenditure but may be subject to surcharge if it can be shown that the creditor acknowledged the desirability of the expenditure. Id. at 512.
The post facto attempt by a debtor to recover administrative expenses out of a secured creditor’s cash collateral in a chapter 11 case is rare because it is risky. Normative chapter 11 practice dictates a debtor’s seeking the secured creditor’s consent or a court order for a carveout to cover some or all the debtor’s administrative expenses before the expenses are incurred. This case is anything but normative. Here, not only did Strategic Labor fail pre-emptively to seek the IRS’s approval for a carve-out for administrative expenses, it went ahead and spent the IRS’s cash collateral without authority, including paying its attorneys’ fees out of the IRS’s cash.
While I will not overlook or condone the conduct of the debtor and its counsel, I am not prepared to deny outright the debtor’s motions for § 506(c) recovery. After all, the sale to Infor which Strategic Labor and its professionals oversaw and consummated will result in a recovery by the IRS that is exponentially greater than what the IRS could have hoped to achieve through a forced liquidation of its collateral.19
It remains Strategic Labor’s burden to establish that the expenses for which it seeks § 506(c) status were reasonable and necessary and were expended primarily to benefit the IRS. Strategic Labor seeks to recover $100,661.35 in attorneys’ fees and costs and $55,783.51 (although as noted *23earlier, Strategic Labor actually paid the Gondeks $58,165.25 during the post-petition period) in compensation and benefits paid to its insider management team. These expenditures significantly exceed the parameters for reasonable and necessary expenditures primarily benefitting the IRS.
Despite the debtor and its counsel’s dismaying confusion about whether the IRS was a secured or a priority unsecured creditor, the record of this case has been consistent and unambiguous from the outset that the primary beneficiary of the debtor’s efforts to sell its assets on a going concern basis in chapter 11 would be the IRS. While the IRS certainly did not consent to the surcharging of the sale proceeds or other proceeds of its collateral for Strategic Labor’s costs, it acknowledged the desirability of the process by which the proceeds were generated by refraining from objecting to the sale. Parque Forestal, 949 F.2d at 512.
In these circumstances, the appropriate Strategic Labor costs eligible for § 506(c) treatment are the costs directly associated with the sale to Infor. Since it is clear that the continued operation of the debtor’s business was a prerequisite to the sale, the debtor may recover its expenditures for compensation and benefits to its management team through the sale date of September 3, 2010. Daniel, Michael and Richard Gondek all terminated their employment with Strategic Labor in August 2010 and, subject to the offset discussed below, their compensation and benefits totaling $26,242.95 are allowable § 506(c) costs. James Gondek remained an employee of Strategic Labor through December 31, 2010, at a weekly net salary of $1213.44, receiving total compensation through that date of $29,122.68 and expense reimbursement of $372.88. Since the sale to Infor closed on September 3, 2010, the allowable portion of James’s compensation for § 506(c) purposes is $12,134.40.
Strategic Labor submits that James remained on the payroll post-closing to perform various continuing obligations of the company to Infor. These continuing obligations were few and certainly did not require a full-time employee. The prime post-closing obligation imposed by the APA was the assignment to Infor of any executory contracts of Strategic Labor designated by Infor within three months of the closing. APA at 10.6.20 The only ex-ecutory contract actually assumed by the debtor and assigned to Infor post-closing was the contract with the Florida Department of Corrections. The debtor has failed to supply any evidence, however, as to what if any role James played in this process hence the debtor has failed to carry its burden of establishing what portion of James’ post-closing compensation should be allocated to this limited activity. The debtor has failed also to allocate James’s $372.88 in expense reimbursements between pre- and post-closing periods. Accordingly, only $12,134.40 of James’ compensation is allowable for surcharge. This results in a grand total of Strategic Labor’s operating costs eligible for recovery from the IRS’s collateral un*24der Bankruptcy Codes § 506(c) of $38,377.35 before any further offset.
The debtor also proposes to surcharge the IRS for $100,661.35 in fees and expenses of the Gordon firm. This includes all the expenses of the firm in both its interim and final fee application totaling $5,849.85, and $94,811.50 in fees, consisting of the entire $73,587.50 from the interim application and $21,224.00 of the $35,799.50 from the final application.
A detailed analysis of the Gordon firm’s daily billing records contained in the debt- or’s § 506(c) motion establishes that $38,871 in fees were billed by the firm for legal services directly related to the sale to Infor.21 In addition, a total of $2,500.00 was billed in connection with the motion to assume and assign the Florida Department of Corrections executory contract to Infor post-closing.22 The balance of the Gordon firm’s billings for general administrative services, preparing fee applications and motions to employ professionals, obtaining approval of the DIP loan, legal services post-closing and the like are not appropriate for recovery out of the IRS’s collateral. Of the $5,849.85 in expenses charged by the Gordon firm to Strategic Labor, almost half appears to have no relation whatsoever to the sale process or the Florida Department of Corrections matter. I find that $3,340.15 in expenses may be surcharged against the IRS’s collateral.23 Thus the total in fees and expense reimbursements to the Gordon firm eligible for § 506(c) surcharge by Strategic Labor is $44,711.15 before any additional offset. Adding this to the $38,377.35 in allowable management costs results in a grand total § 506(c) surcharge before any offset of $83,088.50.
In the typical case, here the matter would rest. Unfortunately, in this case Strategic Labor, without authority to do so, has already spent most of the money it seeks in its surcharge motions and a good deal more besides. Before Strategic Labor is entitled to any recovery for benefits conferred upon the IRS there must be taken into account as an offset any harm suffered by the IRS as a result of Strategic Labor’s and its counsel’s conduct. To surcharge a secured creditor’s collateral for a benefit received without adjusting for offsetting detriment would be inequitable.
The IRS seeks disgorgement from Strategic Labor of the amount it paid to Balboa Capital ($18,957.41) on the grounds that the Gondeks caused the payments to made so as to reduce their exposure as guarantors. While this may be a reasonable inference, another factor of significance is that, as set forth in the debtor’s schedules, § 341 meeting testimony and motion to dismiss, Balboa Capital’s security interest was limited to a single item, workforce development software.24 Stra*25tegic Labor’s United States trustee monthly operating reports indicate that Balboa was repaid $18,957.41 in approximately equal installments over a six month period post-petition out of the company’s general operating cash. Even assuming that Balboa’s secured claim was senior to the IRS lien (something the IRS disputes), Balboa’s cash collateral would at best consist of the proceeds of the sale of workforce development software. Strategic Labor’s general operating debtor in possession account as tracked in its United States trustee monthly operating reports does not identify proceeds generated by the workforce development software nor does the APA allocate the purchase price to individual assets. Thus Balboa’s secured claim may have been repaid, not with its cash collateral, but with the IRS’s cash collateral. Since Strategic Labor’s use of the IRS’s cash collateral was unauthorized and it has failed to establish that Balboa was paid with the proceeds attributable only to Balboa’s collateral, the payment to Balboa was of direct and quantifiable detriment to the IRS. Strategic Labor’s § 506(c) recovery must, therefore, be reduced by the Balboa payments totaling $18,957.41, resulting in a net § 506(c) award of $64,131.09.
Even if the specifics of the Balboa payoff were ignored, I would have no difficulty reducing the debtor’s § 506(c) award by $18,957.41 as a sanction to the debtor, its management and counsel for their collective failure to abide by the statutory requirements for use of cash collateral, for their sloppy administration of this case, and most especially for their misleading representation in paragraph 16 of the DIP Motion, all inuring to the ultimate detriment of the IRS.
I do not view the § 506(c) awards allowed here or the factors applied to arrive at them as being discretionary. The awards result from a straightforward application of relevant Bankruptcy Code provisions as informed by binding First Circuit precedent.
Conclusion
As previously indicated, much more than the net § 506(c) award has already been taken by Strategic Labor and spent. Strategic Labor must, therefore, recover the unauthorized payments and thus I will issue disgorgement orders as follows. Strategic Labor paid $58,165.25 in management costs but $38,377.51 is the most that Strategic Labor may receive under § 506(c). Therefore, Strategic Labor must recover $19,787.74 from its payee, James Gondek, who will be ordered to disgorge this amount. Strategic Labor also paid without authority $78,738.05 in legal fees and expenses and based on a § 506(c) allowance of $44,711.15, must recover $34,026.90 from the Gordon firm who will be ordered to disgorge this amount. However, I have reduced the § 506(c) award by $18,957.41. Because I find the debtor’s management and counsel equally responsible for the conduct described herein, especially the unauthorized use of cash collateral, I will apportion the reduction equally reducing the § 506(c) award for management costs and legal fees by $9,478.70 each. The debtor must recover an additional $9,478.70 from the four Gon-deks who will be ordered, jointly and severally, to disgorge this amount and $9,478.70 from the Gordon firm who will be ordered to disgorge this amount. The debtor shall pay all amounts recovered to the IRS. The Gordon firm shall also pay to the IRS forthwith the $221,261.95 in net sale proceeds it is holding in its IOLTA account.
On June 15, 2011, the United States trustee filed a motion to convert this case to chapter 7. After the filing of responsive pleadings and a hearing on August 11, 2011, that motion was continued pending *26rulings on the debtor’s motion to dismiss and the motions of the IRS and the debtor which are the subject of this memorandum. Having now adjudicated all these motions and in light of the results, it is appropriate to rule on the motion to convert by allowing it.
Separate orders shall issue.
. Lest the United States trustee feel neglected, it must be observed that more careful monitoring of the administration of this case by United States trustee personnel might also have prevented or at least blunted the impact of the present situation.
. See 11 U.S.C. § 101 et seq. (the "Bankruptcy Code” or the "Code”). All references to statutory sections are to the Bankruptcy Code unless otherwise specified.
. The APA defines "work-in-progress accounts receivable” as receivables for services or product delivered but not yet invoiced. It is likely that work-in-progress accounts receivable are the same as "anticipated future billings in open software contracts" identified as one of Strategic Labor’s assets in the Gon-dek Affidavit discussed later in this memorandum.
.In its statement of material facts, the IRS asserted that Balboa Capital "did not file a proof of claim in this bankruptcy case, and it is not a holder of a secured claim.” It cites the claims register as authority for that statement. But a secured creditor’s failure to file a proof of claim does not render its claim unsecured. In re MacKenzie, 314 B.R. 277, 279 (Bankr.D.N.H.2004) ("If a secured creditor does not file a proof of claim, it may look to its lien for satisfaction of the debt because the failure to file does not affect the validity of a perfected lien.”).
. According to a transcript submitted by the IRS, both James and Michael Gondek attended the debtor's meeting of creditors under Bankruptcy Code § 341 on August 4, 2010. When asked if Balboa Capital's collateral consisted of the workforce scheduling product, James responded affirmatively. Michael did not respond.
.Section 6321 of the Internal Revenue Code, 26 U.S.C. § 6321 (the "IRC”) gives the United States a lien on all personal and real property of any taxpayer who is liable for taxes and does not pay them after a demand is made. IRC § 6323(a) requires a notice which meets the requirements of subsection (f) before the lien imposed by § 6321 is valid. Section 6232(f) permits the notice of a lien on personal property to be filed with the office of the clerk of the United States district court for the district in which the property is located. The debtor does not dispute that the lien was properly noticed and is valid.
. I may take judicial notice of the monthly operating reports which are signed by the debtor under the pains and penalties of perjury and filed with the United States trustee. In re Harmony Holdings, LLC, 393 B.R. 409, 414 (Bankr.D.S.C.2008).
. The September 2010 monthly operating report also lists a payment from Infor to the debtor in the amount of $14,737.30. Unlike the payments comprising the $41,000, this payment is not described as "DIP FINANCING”. It appears to be a payment of an account receivable owed to the debtor by In-for.
. IOLTA, which stands for "Interest on Lawyers' Trust Accounts,” "is a program mandated by the Supreme Judicial Court [of Massachusetts], It requires lawyers and law firms to establish interest-bearing accounts for client deposits which are nominal in amount or large amounts held for a short period of time.” (www.maiolta.org) (last visited February 8, 2012).
. By its motion the debtor was attempting a so-called "structured dismissal.” Unlike the old-fashioned one sentence dismissal orders— "this case is hereby dismissed” — structured dismissal orders often include some or all of the following additional provisions: “releases (some more limited than others), protocols for reconciling and paying claims, 'gifting' of funds to unsecured creditors and provisions providing for the bankruptcy court’s continued retention of jurisdiction over certain post-dismissal matters.” Norman L. Pernick & G. David Dean. “Structured Chapter 11 Dismissals: a Viable and Growing Alternative After Asset Sales,” 29 Am. BankrInst. J. 1, 56 (June 2010).
An article authored by attorneys with the United States trustee program has raised concerns about structured dismissals:
First, compared to plan confirmation, structured dismissals "end run ... the protection granted creditors in Chapter 11” and strongly resemble impermissible sub rosa plans. Second, unlike chapter 7 liquidation, structured dismissals distribute assets without enforcing priorities, addressing litigation or ensuring accountability for distributing assets. Third, unlike traditional dismissals, structured dismissals fail to reinstate state law creditor remedies.
Nan Roberts Eitel, T. Patrick Tinker & Lisa L. Lambert, "Structured Dismissals, Or Cases Dismissed Outside of Code’s Structure?”, 30 Am. BankrInst. J. 20, 20 (March 2011), (quoting The Institutional Creditors of Continental Air Lines, Inc. v. Continental Air Lines, Inc. (In re Continental Air Lines, Inc.), 780 F.2d 1223, 1224 (5th Cir.1986)).
. The debtor's United States trustee monthly operating reports indicate that it paid Balboa $18,957.41 in approximately equal installments between July 30, 2010 and February 3, 2011.
. The debtor never sought to amend its schedules to reflect the information contained in its motion to dismiss.
. Although the IRS has not raised it, this would appear to include the $40,388.61 repayment of the DIP loan. A future chapter 7 trustee will no doubt investigate this and other payments.
. The IRS’s request for an accounting appears to have been satisfied voluntarily by the debtor.
. The IRS's figure is slightly higher than the one used by the debtor in its amended § 506(c) motion. Neither the IRS’s nor the debtor’s figure foots to the debtor's payroll records from June 28, 2010 to December 31, 2010 which the IRS submitted. These records reveal that Michael Gondek received three payroll checks: one labeled "regular” in the net amount of $1,378.25 and two labeled "bonus” in the net amounts of $2,844.91 and $1,466.69. From June 28, 2010 through August 29, 2010 Daniel received a net total of $5,521.29 (although the debtor listed the figure as $5,520.97 in its amended § 506(c) motion) while Richard received a total net salary of $10,740.12 for the same period. The payroll records indicate that James received a total net salary, including one check listed as a "bonus,” of $31,549.57 for the period from June 28, 2010 through December 31, 2010 although the amended § 506(c) motion listed his net pay for the same period as $29,122.68. Based on the payroll records during the post-petition period through the end of 2010, the Gondeks collectively netted salaries totaling $53,500.83. The debtor acknowledges the following additional amounts as reimbursement of expenses: $1,410.84 (Michael); $372.88 (James); and $2,881.17 (Richard). Salary and expense reimbursements to the Gondeks thus total $58,165.72 and I will use this figure.
Similarly the $18,000 figure used by the IRS is slightly lower than the actual amount paid to Balboa of $18,957.41 as reflected in the debtor's monthly operating reports. I will use the amount reflected in the monthly operating reports.
. Section 506(c) provides:
The trustee may recover from property securing an allowed secured claim the reasonable, necessary costs and expenses of preserving, or disposing of, such property to the extent of any benefit to the holder of such claim, including the payment of all ad valorem property taxes with respect to the property.
. Henhouse overruled Parque Forestal to the limited extent, not relevant here, that Parque Forestal held that “third parties who equitably come to stand in the trustee's shoes" have standing to bring a claim under § 506(c). Parque Forestal, 949 F.2d at 511.
. The IRS's position that the expenditures must have been for its exclusive benefit is rejected as being inconsistent with First Circuit precedent.
. The debtor’s assets, consisting almost entirely of accounts receivable, work in process and intellectual property, were of the type whose value would plummet if ongoing operations had ceased and the assets were sold at a liquidation sale. Wolfson Affidavit at ¶ 5.
. The APA also required Strategic Labor to promptly forward any orders or inquiries for Strategic Labor’s goods or services to Infor for six months post-closing, APA at ¶ 10.3; to cooperate with Infor in connection with any audit or response relating to the assets acquired by Infor, APA at ¶ 10.4; and to offer support to Strategic Labor’s existing customers who entered into support and license agreements with Infor for the period from the closing to the end of the existing customers’ agreement with Strategic Labor. APA at ¶ 10. 6. Again there is no evidence that James expended any time attending to any of these matters.
. The figure does not reflect any deduction for work that arguably might be duplicative and includes a generous estimate of time spent on the sale in instances where it was necessary to prorate so-called "lumped” time entries.
. The figure is not exact as some of the time entries lumped time spent working on the Florida Department of Corrections matters with other matters for which no surcharge is being allowed.
. Included is $344.65 which is half of the expense described as "Copying and postage of Nonevidentiary Hearing re [62].” That total expense appears to relate to two motions, one of which was the motion to assume the Florida Department of Corrections contract.
. The Gondek Affidavit, which describes Balboa as holding an all-asset lien, predates all these representations that Balboa held a single-asset lien. I assume therefore that the latter representations, which unlike the IRS’s lien status have never been contradicted, reflect a correction of the Gondek Affidavit. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494649/ | MEMORANDUM DECISION ON TRUSTEE’S APPLICATION TO EMPLOY TROUTMAN SANDERS LLP AS COUNSEL
ELIZABETH S. STONG, Bankruptcy Judge.
Before the Court is the Application of John S. Pereira, the Chapter 7 trustee for *29the estate of Christine Persaud, to retain Troutman Sanders LLP (“Troutman”) as his general and bankruptcy counsel.
One creditor, Abraham Klein, objects in part. Mr. Klein argues principally that as to certain claims, Troutman suffers from a disabling conflict of interest and is not “disinterested” as required by the Bankruptcy Code. He asserts that Troutman represented him and an entity that he owns and controls, Global Realty Ventures (“GRV”), in connection with a possible investment in a real estate venture in China and that, while this representation may presently be “on hold,” it is “ongoing.” And he states that the Trustee may assert claims against him or GRV that are substantially related to Troutman’s prior representation. As to these claims, Mr. Klein argues, Troutman must stand to the side.
Mr. Klein also asserts that the Trout-man retention will result in litigation that will diminish the funds available to priority and secured creditors, will not lead to a recovery for unsecured creditors, and otherwise will not benefit the estate. He argues that the proposed retention is an attempt to attack the validity of a pre-petition arbitration award in his favor, which is presently the subject of litigation in New York state court. And Mr. Klein claims that Troutman’s disclosures under Bankruptcy Rule 2014 are inadequate and incomplete.
The Trustee’s Application and Mr. Klein’s objection call for the Court to apply the standards of Bankruptcy Code Section 327 for the retention of professionals and New York’s professional conduct rules governing disqualification of counsel. They also require the Court to consider Bankruptcy Rule 2014 and the framework for disclosure by a professional seeking to be retained. And they require the Court to decide these issues in the context of a hotly disputed bankruptcy case that has already spawned numerous hearings and appeals, against the background of years of contentious litigation in New York state trial and appellate courts and an arbitration forum.
Jurisdiction
The Court has jurisdiction over this proceeding pursuant to 28 U.S.C. §§ 1334(b) and 157(b)(1). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A).
Background
Procedural History
On May 26, 2010, Christine Persaud filed a petition for relief under Chapter 11 of the Bankruptcy Code. The case was converted to one under Chapter 7 on April 8, 2011, and John Pereira was appointed Chapter 7 Trustee on April 13, 2011.
On August 10, 2011, the Trustee filed this Application to employ Troutman as general and bankruptcy counsel, supported by a declaration pursuant to Bankruptcy Rule 2014 by John Campo, a Troutman partner. Five days later, Mr. Klein filed an objection to the Application and thereafter, a reply in further opposition. The Trustee responded with a supplemental declaration of Mr. Campo, a declaration in response to Mr. Klein’s objection and a memorandum of law in support of the response, and affirmations of Mr. Campo and Aurora Cassirer of Troutman.
On September 19, 2011, the parties filed a joint pre-hearing statement. And on September 23, 2011, the Court entered an order, without objection from Mr. Klein, authorizing the Trustee to retain Trout-man as general and bankruptcy counsel except as to claims that the Trustee may assert against Mr. Klein or GRV.
Litigation among these parties in this Court has not been limited to the question of the Troutman retention. On October 31, 2011, the Court entered orders purSu*30ant to Bankruptcy Rule 2004 authorizing the Trustee to conduct examinations of Mr. Klein and other individuals, as well as Caring Home Care, LLC (“Caring”), limited principally to the production of documents concerning business arrangements among the Debtor, Mr. Klein, their related entities, and Caring. Those orders granted some, but not all, of the relief sought by the Trustee. Mr. Klein and others sought reconsideration of the Rule 2004 orders, and on November 10, 2011, the Court entered amended orders to clarify the scope of the required document production. The Court also entered an order on consent directing the Debtor to provide certain contact information to Mr. Klein.
Next, on November 18, 2011, the same day that document production was to commence, Mr. Klein and others sought a stay pending appeal of the Rule 2004 orders in the U.S. District Court for the Eastern District of New York on grounds, among others, that this Court lacks subject matter jurisdiction. The request for a stay was heard by Hon. Roslynn Mauskopf and denied on that same day.
The Evidentiary Hearing
The Court held an evidentiary hearing on the Trustee’s Application over nine days from September 15, 2011 to November 28, 2011. The Court heard testimony from Ms. Cassirer and Mr. Campo in support of the Application, and from Mr. Klein and his brother Hershel Klein in opposition. The Court also received the expert ethics testimony of Professor Bruce Green via affidavit, and thereafter marked the matter submitted.
Factual Background
Before this bankruptcy case was filed, the Debtor and Mr. Klein conducted certain businesses together, including Caring. The record shows that in late 2008, Mr. Klein explored the possibility of investing in a real estate venture in China with a partner (the “China Project”). In connection with that project, Mr. Klein or his brother Hershel Klein approached Trout-man, which maintains an office in Shanghai, for information and advice.
Over the course of several weeks beginning in late July 2008, Mr. Klein and Hershel Klein exchanged e-mails and had other contacts with Troutman professionals located in Shanghai and New York, including Edward Epstein and Wang Tian in the firm’s Shanghai office and Ms. Cassirer in New York. These communications addressed, among other subjects, due diligence in connection with the possible investment, the use of a local consultant in China, the investment vehicle, and Trout-man’s role. In early August 2008, Hershel Klein cautioned Mr. Epstein that it would not be “beneficial to filter all back and forth thru you as it would ring up unnecessary legal fees.” Trial Exh. 25 (e-mail from Hershel Klein to Edward Epstein and Abraham Klein (Aug. 5, 2008, 5:25 PM)).
At some point, Mr. Klein determined that GRV would be the investment vehicle, and in late November and again in mid-December 2008, Troutman prepared and forwarded to Mr. Klein an engagement letter reflecting the engagement of the firm by GRV. Hershel Klein executed the engagement letter on December 29, 2008, on behalf of GRV. It states in part:
8. Conflict Provisions
For the purposes of determining whether a conflict of interest exists, it is only GRV we will represent and not other entities in your corporate family, stockholders, officers, directors, employees or agents (“affiliates”). You have agreed that you will not give us confidential information regarding your affiliates.
*314. Termination of Engagement
... either of us may terminate the engagement at any time for any reason by written notice, subject on our part to applicable Rules of Professional Conduct. In the event that we terminate the engagement, we will take such steps as are reasonably practicable to protect your interests in the above matter.
Trial Exh. A (Dec. 9, 2008 engagement letter).
Troutman billed GRV in the amount of $10,573.50, for “Services Rendered” through November 30, 2008, in connection with “Project Juan Cheng” — the China Project — on December 10, 2008, to the attention of Mr. Klein. Trial Exh. N (Dec. 10, 2008 invoice). Troutman billed GRV in the amount of $6,368.30, for “Services Rendered” through December 31, 2008, in connection with the China Project on January 15, 2009, again to the attention of Mr. Klein. Trial Exh. N (Jan. 15, 2009 invoice).
In late December 2008 or early January 2009, it became evident that the China Project would be placed on hold. As Mr. Klein testified, he learned on December 31, 2008 “that the developer ... put [the China Project] on hold.” 11/14/11 Tr. 37:17. As he also testified, the China Project did not regain momentum after that date. Since that time, the China Project has been dormant.
During this same period, the business relationship between the Debtor and Mr. Klein soured. Litigation ensued, and their
dispute culminated in an arbitration. The Debtor did not appear in or defend the arbitration, and on March 31, 2009, the arbitration panel issued an award on default in favor of Mr. Klein. He brought a proceeding to confirm the award in state court, and on April 17, 2009, the New York Supreme Court, Kings County, entered an order confirming the arbitration award, also on default, upon the Debtor’s failure to appear at that day’s calendar call. See Klein v. Persaud, 84 A.D.3d 959, 959, 921 N.Y.S.2d 900, 900 (N.Y.App. Div.2d Dep’t 2011) (reciting procedural history). Trout-man had no role in those proceedings.
The Debtor appealed, arguing that the order confirming the arbitration award should be vacated because she had a reasonable excuse for the default and a potentially meritorious defense to the claims. On May 10, 2011, the Appellate Division found, among other things, that the Debtor “established the existence of a potentially meritorious defense,” vacated the confirmation order, and remitted the matter to the Supreme Court “for a new determination on the issue of whether the arbitration award should be confirmed.” Klein, 84 A.D.3d at 960, 921 N.Y.S.2d at 900, 901. Here too, Troutman had no role in those proceedings. That matter is stayed pending further action by this Court.1
The Trustee’s Application To Employ Troutman
Following the meeting of creditors pursuant to Bankruptcy Code Section 341(a), the Trustee determined that it was in the best interests of this estate to retain counsel with “the capacity and expertise to *32provide services in the areas of litigation, corporate, regulatory and tax.” Trustee Appl. ¶ 5, ECF No. 182. He seeks to retain Troutman to provide those services.
As noted above, the Troutman retention has been approved in large measure without objection, and is contested by Mr. Klein only as to claims that the Trustee may assert against him or GRV. As also noted above, the prospect of such claims has already led to vigorously contested litigation in this Court, the denial of emergency applications for a stay pending appeal by Mr. Klein, Melquisedec Escobar, Philip Gottehrer, Joel Klein and Caring, and at least five interlocutory appeals.
The Application states that Troutman is a “disinterested person” as defined in Bankruptcy Code Section 101(14), and that the firm “does not hold or represent any interest adverse to the Trustee or the Debtor’s estate in connection with the matters for which it is being retained,” except as set forth in the declaration of Mr. Cam-po. Trustee Appl. ¶ 9.
Mr. Campo states that “Troutman has investigated its relationships, if any, with the Debtor, the creditors and any parties in interest to whom Troutman will be adverse in this case.” Trustee Appl. Exh. A, Campo Decl. ¶ 5. He declares that “Trout-man does not represent any of the creditors or parties in interest to whom Trout-man will be adverse in this case.” Campo Decl. ¶ 5(e). And Mr. Campo states that “Troutman may, from time to time, represent, or may have represented in the past, clients that may be creditors or adverse parties of the Debtor’s estate in matters unrelated to this case.” Campo Deck ¶ 6.
Mr. Campo also declares that “Trout-man does not, has not, and shall not represent any entity other than the Trustee in connection with this case.” Campo Deck ¶ 7. And he concludes that after reviewing the currently available information, “no conflict exists in connection with [Trout-man’s] proposed retention by the Trustee,” and further, that he will file a supplemental disclosure should “any additional information come[] to Troutman’s attention.” Campo Deck ¶ 8.
After Mr. Klein objected to Troutman’s retention, Mr. Campo submitted a supplemental declaration pursuant to Bankruptcy Rule 2014. He states that Troutman represented GRV, but not Mr. Klein, in connection with the China Project, and that inasmuch as Mr. Klein is a creditor in this case in his individual capacity, Troutman has no conflict. Mr. Campo, who joined Troutman on October 1, 2010, nearly two years after the firm’s work on the China Project concluded, also states that Trout-man’s representation of GRV concluded in December 2008 and that the matter is closed.
In addition, Mr. Campo declares that Troutman’s prior representation of GRV does not impair the firm’s representation of the Trustee or its ability to be adverse to Mr. Klein. He states that Troutman’s representation of GRV concerned advice in connection with the China Project, was billed by attorneys in the firm’s Shanghai office, and was connected to the firm’s New York office only for purposes of introduction. He states that Troutman had a duty of loyalty “only ... with respect to [GRV] in the matter in which” the firm represented GRV, that the “matter is now closed,” and that “Troutman owes no duty of loyalty to [Mr.] Klein.” Campo Supp. Deck ¶ 7. And Mr. Campo declares that Troutman’s representation of GRV was “completely unrelated” to Mr. Klein’s disputes with the Debtor and the Debtor’s estate. Campo Supp. Deck ¶ 8.
Mr. Campo also states that in the course of Troutman’s prior representation of GRV in connection with the China Project, the *33firm did not obtain any confidential information that would bear on this case, and that there is “no conceivable overlap” between the subject matter of the prior GRV representation and the Trustee’s investigation of potential claims against Mr. Klein. Campo Supp. Decl. ¶ 9.
As to Troutman’s conflicts check, Mr. Campo states that he first learned that Mr. Klein believed Troutman represented him individually during a conversation with Mendel Zilberberg, Mr. Klein’s counsel, in August 2011, about the Trustee’s request for financial information and access to Caring. In response, Mr. Campo requested a conflicts check using Mr. Klein’s name, in both open and closed matters. This process identified the firm’s closed representation of GRV showing Mr. Klein as a GRV director or officer, and did not identify any matters, open or closed, where Mr. Klein was the client. Mr. Campo confirmed that the GRV matter was closed, and advised the Trustee of his conversation with Mr. Zilberberg and the results of the additional conflicts search. Mr. Cam-po and the Trustee concluded that there was no conflict in Troutman representing the Trustee.
Ms. Cassirer states that she is the source of Mr. Campo’s information concerning Troutman’s prior representation of GRV, and confirms that he provided accurate information to the Court. She affirms that she never “performed any substantive legal work on the [China Project], never billed any time to the client in connection with the prior representation [of GRV], and never became privy to any confidential information.” Cassirer Aff. ¶ 3. She also states that she is not aware of “any” information of any nature obtained by Trout-man, while representing GRV, that bears on or is relevant to the firm’s representation of the Trustee. Cassirer Aff. ¶ 4. And she states that even though it is unnecessary, the firm will place an “ethical wall” around Mr. Epstein to insulate him from contact with those persons who represent the Trustee. Id.
In summary, the Trustee argues that in 2008, Troutman represented GRV, an entity controlled by Mr. Klein, but not Mr. Klein individually, that the firm’s representation of GRV terminated more than two years ago, and that the subject matter of that representation is not substantially related to this case. He contends that Mr. Klein’s opposition to his retention of Troutman is a litigation tactic, designed to obstruct the Trustee’s investigation of potential claims against Caring and his effort to recover the estate’s interest in Caring. And the Trustee notes that Mr. Klein may well take issue with the retention of any law firm with the necessary expertise to investigate and pursue the dispute between the Debtor and Mr. Klein, notwithstanding the fact that the Trustee should be allowed to retain counsel of his choice to assist him in carrying out his fiduciary duties.
Mr. Klein’s Objection
Mr. Klein opposes the Trustee’s retention of Troutman on grounds that the firm is conflicted from asserting a claim against him, and this has emerged as the primary grounds for his objection. He points to his retention of Troutman “with respect to one of the entities that he owns and controls, Global Realty Ventures,” as the source of the conflict. Klein Opp. ¶ 12. Mr. Klein describes the representation as one which “may currently be on hold, but ... is still ongoing.” Id. And he suggests that based on communications in July 2011 between Mr. Zilberberg and Mr. Campo, Troutman may “have to investigate the very acts of Creditor Klein for which he has retained their services.” Klein Opp. ¶ 56.
Mr. Klein also argues that if the Trustee decides not to investigate Caring, other *34creditors may believe that he was influenced by Troutman’s representation of Mr. Klein, and may conclude that the Trustee did not adequately pursue the estate’s interests.
And Mr. Klein argues that “considering the totality of the circumstances,” the Trustee’s retention of Troutman will lead to “protracted litigation that will ultimately not yield any meaningful benefit to the unsecured creditors,” and will diminish the distributions to priority and secured creditors. Klein Opp. ¶ 12. He states that as of the date of the objection, there were filed priority claims of nearly $400,000 and secured claims of some $2,190,000. Viewed another way, he states that these claims include his own secured claim of approximately $1,940,000, and some $650,000 in additional secured and priority claims. In addition, Mr. Klein notes that his unsecured claim of approximately $663,000 plus other unsecured claims of some $57,000 total almost $720,000. Mr. Klein argues that if his claim is treated as secured, the Trustee would need to recover nearly $2.6 million, representing the total of these secured and priority claims, as well as additional amounts sufficient to pay administrative expenses and legal fees, before unsecured creditors would receive a distribution. And he calculates that “[i]n the unlikely event” that the Trustee recovers enough to satisfy both priority and secured creditors, and administrative claims, the benefit to unsecured creditors would still be “less than 8%.” Klein Opp. ¶ 35.
Alternatively, Mr. Klein posits that if his claim is deemed unsecured, the Trustee would have to recover approximately $650,000 to pay secured and priority claims, as well as sufficient funds to pay administrative expenses and legal fees, before unsecured creditors would receive a distribution. And he calculates that even if the Trustee recovered that amount, unsecured creditors (excluding himself) “would receive a little over 2% of the distribution.” Klein Opp. ¶ 36. In either circumstance, Mr. Klein asserts that the retention of a firm of the size and hourly rates of Troutman is “an improvident use of the estate assets.” Klein Opp. ¶¶ 37-38.
And finally, Mr. Klein states that based on the arbitration award, Persaud and the estate do not have an interest in Caring, so that the only reason for the Trustee to retain Troutman would be to improve his ability to overturn the arbitration award.
Mr. Klein acknowledges that “there was limited communication between us and the Troutman Firm” at the outset of the firm’s work on the China Project because GRV undertook certain due diligence for the China Project first. Trial Exh. O (Klein Supp. Aff. ¶ 30). Mr. Klein notes that when he contacted Troutman in 2008, it was not “certain” which entity ultimately would be involved in the China Project, and “it was clear” that “I and/or family members were the beneficial client of this representation.” Trial Exh. O (Klein Supp. Aff. ¶ 9). He states that “the Trout-man Firm was still retained and I was still a client of the [Troutman] Firm.” Trial Exh. O (Klein Supp. Aff. ¶ 27).
Mr. Klein argues that at this early stage in the China Project, Troutman’s New York and Shanghai offices both had roles in the firm’s work. He cites an introductory telephone call on July 30, 2008, among himself, Ms. Cassirer, and Mr. Epstein of Troutman’s Shanghai office, in which Ms. Cassirer described to Mr. Epstein the “basic contours of the deal” and his specific needs from the Shanghai office. Trial Exh. O (Klein Supp. Aff. ¶ 18.) He also points to Ms. Cassirer’s acknowledgment of a suggestion by Hershel Klein, endorsed by Mr. Klein, that Knight Frank, a consulting firm, complete its work before *35Troutman performed legal services. And Mr. Klein states, “I was Ms. Cassirer’s client.” Trial Exh. 0 (Klein Supp. Aff. ¶ 28).
Mr. Klein also asserts that Troutman’s representation is ongoing. As evidence of this, he points to the “the Retainer Agreement signed by the client” on December 29, 2008, and states that if Troutman was closing the matter at that time, and securing the signed agreement was a housekeeping matter before the file was closed, he would have expected an explanatory letter to that effect. Trial Exh. 0 (Klein Supp. Aff. ¶ 39).
Mr. Klein states that he “furnished the Troutman firm with confidential and secret information with respect to the development opportunity, and through various emails and telephone calls sensitive financial information was disclosed to the Troutman Firm.” Trial Exh. 0 (Klein Supp. Aff. ¶ 19). He disputes Mr. Campo’s statement that the firm did not learn confidential information that bears on this case during the course of the prior representation. And Mr. Klein argues that if Mr. Campo did not gain such information, they would be unable to opine that the two representations are unrelated.
As to the existence of a substantial relationship between the China Project and this bankruptcy case, Mr. Klein argues that the Debtor claims in a sworn affidavit dated April 21, 2009, submitted to New York Supreme Court, Kings County, in the action to confirm the arbitration award, that he improperly transferred funds from Caring to Trade Fame Group Ltd. (“Trade Fame”), “an offshore entity related to [his] dealings in China.” Trial Exh. O (Klein Supp. Aff. ¶ 51). Mr. Klein concludes that “GRV and Caring are inter-related matters both from the perspective of the Debt- or and by virtue of the fact that there was a contemplated deal between both entities” that also involved Trade Fame. Trial Exh. O (Klein Supp. Aff. ¶ 49). For this reason too, Mr. Klein contends that Troutman is conflicted from representing the Trustee in his investigation of transfers from Caring to Trade Fame.
Discussion
This Application requires the Court to consider the legal standards that govern disinterestedness under Bankruptcy Code Section 327. Mr. Klein’s objection also implicates the legal standard for disqualification under New York’s professional conduct rules, as applied by courts in this Circuit. And the application calls for this Court to assess the adequacy of the Trustee’s disclosures under Bankruptcy Rule 2014. Each of these is considered below in turn.
The Standards Governing Disinterestedness
Bankruptcy Code Section 327 provides that a trustee “may employ one or more attorneys ... that do not hold or represent an interest adverse to the estate, and that are disinterested persons.... ” 11 U.S.C. § 327(a). And Bankruptcy Code Section 101 defines a “disinterested person” as someone who “does not have an interest materially adverse to the interest of the estate_” 11 U.S.C. § 101(14)(C). While the Bankruptcy Code mandates that an attorney for the estate be disinterested, it does not define what it means to “hold” or “represent an interest adverse to the interest of the estate.”
In Bank Brussels Lambert v. Coan (In re AroChem Corp.), 176 F.3d 610 (2d Cir.1999), the Second Circuit observed that “counsel will be disqualified under section 327(a) only if it presently ‘holds or represents an interest adverse to the estate,’ notwithstanding any interests it may have held or represented in the past.” AroChem, 176 F.3d at 623. Following several *36other courts, the Second Circuit adopted the definition of disinterestedness articulated by the court in In re Roberts, 46 B.R. 815 (Bankr.D.Utah 1985), aff'd in relevant part and rev’d and remanded in part on other grounds, 75 B.R. 402 (D.Utah 1987). In Roberts, the bankruptcy court stated:
To “hold an interest adverse to the estate” means (1) to possess or assert any economic interest that would tend to lessen the value of the bankruptcy estate or that would create either an actual or potential dispute in which the estate is a rival claimant; or (2) to possess a predisposition under circumstances that render such a bias against the estate.
46 B.R. at 827. And the court defined representing an adverse interest as “serving] as [an] agent or attorney for any individual or entity holding such an adverse interest.” Id. See Dye v. Brown (In re AFI Holding, Inc.), 580 F.3d 832, 845 (9th Cir.2008) (adopting language similar to Roberts in the context of removing the trustee); I.G. Petroleum, L.L.C. v. Fenasci (In re W. Delta Oil Co.), 432 F.3d 347, 356 (5th Cir.2005) (same); Kravit, Gass & Weber, S.C. (In re Crivello), 134 F.3d 831, 835 (7th Cir.1998) (same); Electro-Wire Prods., Inc. v. Sirote & Permutt, P.C. (In re Prince), 40 F.3d 356, 361 (11th Cir.1994) (same); Rome v. Braunstein, 19 F.3d 54, 57 n. 1 (1st Cir.1994) (same); In re Caldor Inc.-NY, 193 B.R. 165, 171 (Bankr.S.D.N.Y.1996) (same).
Courts recognize that the determination whether an attorney has an interest that is adverse to the estate is “largely driven by the facts.” In re Leslie Fay Cos., 175 B.R. 525, 532 (Bankr.S.D.N.Y.1994). In Leslie Fay, the court concluded that “if it is plausible that the representation of another interest may cause the debtor’s attorneys to act any differently than they would without that other representation, then they have a conflict and an interest adverse to the estate.” Leslie Fay, 175 B.R. at 533.
And the Second Circuit noted that ascertaining the meaning of “disinterested” requires a separate analysis. See Aro-Chem, 176 F.3d at 628 (observing that “it is not enough” for counsel to satisfy the requirements of Bankruptcy Code Section 327(a), counsel also must be “disinterested”). As the Leslie Fay court stated, “[t]he word ‘disinterested’ is a term of art....” Leslie Fay, 175 B.R. at 531-32. Whether an interest is adverse to an estate is determined on a case-by-case basis. “[M]ost courts eschew a per se rule in favor of analysis premised upon the totality of the circumstances in a particular case.” Caldor, 193 B.R. at 172.
The disinterestedness requirement is founded upon important policy considerations which “ ‘serve [to] ensur[e] that all professionals appointed pursuant to [Section 327] tender undivided loyalty and provide untainted advice and assistance in furtherance of their fiduciary responsibilities.’ ” In re Project Orange Assocs., LLC, 431 B.R. 363, 371 (Bankr.S.D.N.Y.2010) (quoting Leslie Fay, 175 B.R. at 532). For these reasons, the standard for disinterestedness is high. But it is also specific, and facts, not impressions, are required.
Whether Troutman Is Disinterested
Here, the record shows that the Trustee has already demonstrated that, subject to Mr. Klein’s objection as to claims that the Trustee may assert against Mr. Klein or GRV, he may retain Troutman as his general and bankruptcy counsel for the estate. That is, subject to that objection, the Court has already determined that Trout-man represents no interest adverse to the Debtor’s estate with respect to the matters upon which the firm is to be engaged and is disinterested as that term is defined in Bankruptcy Code Section 101(14), and an *37order has been entered to that effect. The Court has also already determined that Troutman’s employment is necessary and would be in the best interests of the Debt- or’s estate.
Accordingly, based on the entire record, the Court concludes that subject to Mr. Klein’s objection, the Trustee has shown that Troutman is disinterested within the meaning of Bankruptcy Code Section 327.
The Standards Governing Disqualification
The decision to disqualify an attorney is committed to the sound discretion of the court. Allegaert v. Perot, 565 F.2d 246, 248 (2d Cir.1977). As the Second Circuit has observed, “ ‘a client’s right freely to choose his counsel’” must be balanced “against ‘the need to maintain the highest standards of the profession.’ ” Hempstead Video, Inc. v. Vill. of Valley Stream, 409 F.3d 127, 132 (2d Cir.2005) (quoting Gov’t of India v. Cook Indus., Inc., 569 F.2d 737, 739 (2d Cir.1978)). This relief is rare, because disqualification interferes with the attorney-client relationship and is at odds with a client’s right to select counsel of his or her own choosing. GSI Commerce Solutions, Inc. v. Baby-Center, L.L.C., 618 F.3d 204, 209 (2d Cir.2010). But courts should not hesitate to take this step when necessary.
Courts scrutinize motions to disqualify an adversary’s counsel with special care because of the obvious potential for abuse. Allegaert, 565 F.2d at 251. Disqualification may be necessary where an attorney’s conflict of interest erodes the court’s confidence in his or her ability to represent the client and “where the attorney is at least potentially in a position to use privileged information concerning the other side through prior representation.” Bd. of Educ. of the City of New York v. Nyquist, 590 F.2d 1241, 1246 (2d Cir.1979).
New York’s professional conduct rules provide a framework to assess questions of conflicts of interest for bankruptcy courts sitting in this jurisdiction. At the same time, the Second Circuit has noted that while “state disciplinary codes provide valuable guidance, a violation of those rules may not warrant disqualification,” which is disfavored unless “ ‘an attorney’s conduct tends to taint the underlying trial.’ ” GSI Commerce Solutions, 618 F.3d at 209 (quoting Nyquist, 590 F.2d at 1246).
It is fundamental that a lawyer may not represent an interest that is adverse to that of a current client. As the Second Circuit has found, “[wjhere the relationship is a continuing one, adverse representation is prima facie improper....” Cinema 5, Ltd. v. Cinerama, Inc., 528 F.2d 1384, 1387 (2d Cir.1976). It is equally fundamental that a lawyer may not represent an interest that is adverse to a former client in a substantially related matter. As the Second Circuit similarly observed, “[t]he ‘substantial relationship’ test is ... the one that we have customarily applied in determining whether a lawyer may accept employment against a former client.” Cinema 5, 528 F.2d at 1386. See Hempstead Video, Inc., 409 F.3d at 133 (stating that “[i]n cases of successive representation ... an attorney may be disqualified from representing an interest adverse to a former client where the matters are substantially related and the attorney was likely to have had access to confidential information).
Courts in this Circuit applying New York law use a three-part test when a former client seeks to disqualify its opponent’s lawyer. The movant must show:
(1) the moving party is a former client of the adverse party’s counsel;
(2) there is a substantial relationship between the subject matter of the *38counsel’s prior representation of the moving party and the issues in the present lawsuit; and
(3) the attorney whose disqualification is sought had access to, or was likely to have had access to, relevant privileged information in the course of his prior representation of the client.
Hempstead Video, 409 F.3d at 133 (quoting Evans v. Artek Sys. Corp., 715 F.2d 788, 791 (2d Cir.1983)).
The party seeking the attorney’s disqualification bears the burden of satisfying each part of this test. See Evans, 715 F.2d at 794 (observing that “the moving defendants bear the heavy burden of proving facts required for disqualification.”) (citing Gov’t of India, 569 F.2d at 739). Courts in the Second Circuit apply the “substantially related” element strictly, “requiring the moving party to demonstrate that the relationship between the two actions is ‘patently clear,’ or that the actions are ‘identical’ or ‘essentially the same.’ ” Bennett Silvershein Assocs. v. Furman, 776 F.Supp. 800, 803 (S.D.N.Y.1991) (quoting Gov’t of India, 569 F.2d at 740).
Whether GRV or Mr. Klein Was an Actual or Prospective Client of Troutman
The first step in the Court’s inquiry is to determine whether GRV or Mr. Klein was an actual or prospective client of Trout-man. New York’s professional conduct rules provide useful guidance on when the duties associated with an actual or prospective attorney-client relationship arise. New York Rule of Professional Conduct 1.18 defines a prospective client as “[a] person who discusses with a lawyer the possibility of forming a client-lawyer relationship with respect to a matter....” N.Y.R. Profl Conduct 1.18(a) (2011). Regardless of whether an attorney-client relationship is formed, the lawyer may not “use or reveal information learned in the consultation,” N.Y.R. Profl Conduct 1-18(b) (2011), except as he or she would be permitted to do in the case of a former client, “regardless of how brief the initial conference may be,” N.Y.R. Profl Conduct 1.18 cmt. 3 (2011).
The Restatement of the Law Governing Lawyers describes the framework for determining whether an attorney-client relationship has been formed. Looking to the Restatement, one court found that “[a]n attorney-client relationship arises when the client manifests ‘intent that the lawyer provide legal services for the [entity]’ and the lawyer ‘manifests consent to do so’ or fails to ‘manifest lack of consent.’” Teleglobe USA, Inc. v. BCE Inc. (In re Teleglobe Commc’ns Corp.), 392 B.R. 561, 588 (Bankr.D.Del.2008) (quoting Restatement (Third) of the Law Governing Lawyers § 14(2000)).
The Restatement provides further that “[t]he client’s intent may be manifest from surrounding facts and circumstances .... No written contract is required.” Restatement (Third) of the Law Governing Lawyers § 14 cmt. c (2000). When the client is an entity, whether the representation is limited to the organization or also extends to individuals related to the entity “is a question of fact to be determined based on reasonable expectations in the circumstances.” Teleglobe Commc’ns, 392 B.R. at 588 (quotation omitted).
Courts consider many in determining whether a client’s belief that a lawyer represents him or her is reasonable, including the client’s subjective belief as to the representation. In one situation, the court found that the plaintiffs subjective belief that a law firm represented him was unreasonable where there was no retainer agreement in effect *39and more than eight years had passed since the attorney represented the plaintiff “in a legal capacity.” DeVittorio v. Hall, 2007 WL 4372872, at *7-8 (S.D.N.Y. Dec. 12, 2007). And while a court may consider a putative client’s subjective belief that an attorney-client relationship exists, that belief alone “is not sufficient to establish an attorney-client relationship.” Kubin v. Miller, 801 F.Supp. 1101, 1115 (S.D.N.Y.1992). In order to determine whether such a relationship exists, “ ‘it is necessary to look at the words and actions of the parties.’ ” Hashemi v. Shack, 609 F.Supp. 391, 393 (S.D.N.Y.1984) (quoting People v. Ellis, 91 Misc.2d 28, 35, 397 N.Y.S.2d 541, 545 (Sup.Ct.N.Y.Co.1997)).
The Trustee and Mr. Klein agree that GRV was a client of Troutman in connection with the China Project. But they do not agree as to whether Mr. Klein was ever a client of the firm. Mr. Klein argues that as a result of GRV’s continuing relationship with Troutman and his own role as GRV’s sole shareholder, he was also a Troutman client in his individual capacity. Mr. Klein also argues that Troutman led him and GRV to believe that the firm represented both of them in connection with the China Project. The Trustee disagrees, and states that Troutman represented only GRV and owes duties only to that entity.
Mr. Klein and his brother Hershel Klein approached Troutman in July 2008 to inquire about representation in connection with the China Project. Hershel Klein testified that he made the initial contact, and explained to Ms. Cassirer “what we are looking for the law firm to provide to us.” 9/20/11 Tr. 28:4-5. He also advised Ms. Cassirer via e-mail that he was “extremely conscious about keeping the information that [he] would be giving her confidential.” 9/20/11 Tr. 21:19-20. He testified that Troutman sent “us” a draft letter of intent using the name of an investment vehicle that he provided, before “we changed” the investment vehicle for the China Project to GRV. 9/20/11 Tr. 43:4, 21-22.
Mr. Klein testified that in the first week of August 2008, he, Hershel Klein, Ms. Cassirer and Mr. Epstein communicated both orally and by e-mail about the structure of the China Project and how it might be funded. He advised Troutman that it was “important ... for the project itself ... to be confidential,” and that “we” were going to provide “confidential information ... in connection with ... this particular project in China.” 9/21/11 Tr. 23:3-4, 25:13, 18-19. Mr. Klein understood that all of the information provided to Trout-man would be kept confidential.
Mr. Klein argues that because GRV was not discussed in these early conversations, Troutman could not reasonably have believed that GRV was its client. Mr. Klein also argues that despite the later discussions about the use of an entity as the China Project investment vehicle, he reasonably believed that he, individually, was Troutman’s client.
Here, as noted above, the parties agree that GRV was an actual client of Trout-man. The record also establishes that Mr. Klein was a prospective client of the firm with respect to the China Project. In the course of the preliminary discussions about the China Project among Mr. Klein, Hershel Klein, and Troutman, Mr. Klein may be viewed as “[a] person who discusses with a lawyer the possibility of forming a client-lawyer relationship” with respect to that matter. N.Y.R. Prof 1 Conduct 1.18(a) (2011).
Accordingly, based on the entire record, the Court concludes that GRV was an actual client of Troutman, and Mr. Klein was *40a prospective client of Troutman, with respect to the China Project.
Whether GRV Was a Current Client of Troutman when the Trustee Sought To Retain the Firm
The next step in the Court’s inquiry is whether GRV, which retained Troutman in connection with the China Project, remained a client of the firm at the time that the Trustee sought to retain it in this bankruptcy case. New York Rule of Professional Conduct 1.7 governs conflicts of interest involving current clients. This rule prohibits a lawyer from “representing a client if a reasonable lawyer would conclude that ... the representation will involve the lawyer in representing differing interests....” N.Y.R. Profl Conduct 1.7(a) (2011).
The rules do not describe a single standard to determine when an attorney-client relationship exists, and the realities of law practice suggest that a common-sense approach based on the particular facts and circumstances is warranted. Indicia of an ongoing attorney-client relationship may include regular communications relating to the subject matter of the representation as well as activity by the attorney and the client in furtherance of the objective of the retention. A current attorney-client relationship may also be reflected in the attorney’s time and billing records.
Mr. Klein argues that an attorney-client relationship between GRV and Troutman continued through July 2011, when the Trustee proposed to retain the firm as his counsel. He asserts that if Troutman believed that its representation of GRV concluded at the end of 2008, then it should have said so at the time that it issued its retention letter and bill. The Trustee disagrees, and argues that Trout-man’s representation of GRV in connection with the China Project concluded in late December 2008, when the project was put on hold and the firm closed the file.
The record shows that GRV retained Troutman as its counsel in connection with the China Project in 2008. Troutman provided services to GRV over the course of several months from August to December 2008, and submitted invoices for its services through November 2008 and again through December 2008. Troutman also provided Mr. Klein with an engagement letter reflecting the engagement of the firm by GRV in connection with the China Project in November 2008 and again in December 2008, and Hershel Klein executed the engagement letter on behalf of GRV on December 29, 2008.
In late December 2008, Mr. Klein received an e-mail from the sponsor of the China Project indicating that the project was “on hold” because of the “global economic downturn.” 9/21/11 Tr. 37:6; 10/28/11 Tr. 77:22-24. The record does not indicate that there was any further activity among Troutman, GRV, Mr. Klein, and Hershel Klein in furtherance of the China Project in 2009 or thereafter. In accordance with Troutman’s practice, the file was closed after it had been inactive for one year.
Despite this lack of activity in 2009 and 2010, as the China Project remained dormant, “waiting for a global turnaround,” Mr. Klein testified that he considered the Troutman representation of him to be continuing. 10/28/11 Tr. 78:6-7. Mr. Klein further testified that he held the view that he remained a client of the firm until some time in 2011, when he received a communication from the firm saying that they were not his counsel. In Mr. Klein’s view, the China Project remains ongoing, and both he and GRV are current Troutman clients.
Here, the record shows that from late December 2008, the China Project was, at the very most, “on hold.” The record does *41not indicate that Troutman and GRV had communications about the China Project, or that Troutman and GRV undertook any activity in furtherance of it. And Trout-man did not record or bill time to the matter. Rather, in accordance with the firm’s practice, the file was closed after it had been inactive for a year. While it is unlikely that a client’s activity, in isolation from counsel, could unilaterally prolong an attorney-client relationship, the record similarly does not indicate that GRV actively pursued the China Project during this period.
Accordingly, based on the entire record, the Court concludes that GRV was not a current client of Troutman at the time that the Trustee sought to retain the firm.
Whether There Is a Substantial Relationship Between the Subject Matter of the Prior Representation and the Issues in the Present Retention
The third step in the Court’s inquiry is whether there is a substantial relationship between the subject matter of Troutman’s prior representation of GRV and potential representation of Mr. Klein, on the one hand, and the issues in this bankruptcy case, on the other. As noted above, in order for two matters to be substantially related, it must be shown that “the relationship between the two actions is ‘patently clear,’ or ... the actions are ‘identical’ or ‘essentially the same.’ ” Bennett Silvershein Assocs., 776 F.Supp. at 803 (quoting Gov’t of India, 569 F.2d at 740).
The interests protected by this rule include the interest of a client or prospective client in the attorney’s undivided loyalty and the preservation of any confidential information that was shared during the relationship. As New York Rule of Professional Conduct 1.9 states, a lawyer generally may not “use confidential information of the former client ... to the disadvantage of the former client.” N.Y.R. Profl Conduct 1.9(c)(1) (2011). The same rule applies to confidential information shared by a prospective client. See N.Y.R. Profl Conduct 1.18 (2011) (attorney may not use confidential information shared by prospective client). See Bennett Silvershein Assocs., 776 F.Supp. at 804.
Courts in this Circuit presume “that during the course of the former representation confidences were disclosed to the attorney bearing on the subject matter of the representation.” T. C. Theatre Corp. v. Warner Bros. Pictures, Inc., 113 F.Supp. 265, 268 (S.D.N.Y.1953). The party objecting to an attorney’s retention has the “burden of showing how this information [is] relevant to the present action.” Petroquimica de Venezuela, S.A v. M/T Trade Resolve (In re Maritima Aragua, S.A.), 847 F.Supp. 1177, 1182 (S.D.N.Y.1994).
One court described “substantially related” subject matter as follows:
[Subject matter] should be considered sufficiently related to a later case to warrant disqualification only to the degree that the information the client disclosed in that earlier consultation is useful in the later case. Information can be useful even if the two matters are not identical. However, the attorney must gain some advantage not otherwise available but for the prior confidential relationship, even if that advantage goes only to background matters.
Bennett Silvershein Assocs., 776 F.Supp. at 804. That court further explained that the “usefulness” of information communicated in the prior representation “can be ascertained by comparing [it] with the allegations in the current dispute.” Id.
Mr. Klein argues that there is a substantial relationship between the subject matter of Troutman’s prior represen*42tation and the issues in the present retention because Troutman gained access to confidential information about his business and financial arrangements that the Trustee may use to his advantage in this bankruptcy case. Mr. Klein asserts that “GRV will be harmed” if the Trustee is allowed to retain Troutman in connection with claims the Trustee may assert against Mr. Klein or GRV because, among other reasons, the Trustee may “use GRV’s own confidential information that it provided to [Troutman].” Klein Mem. 27, EOF No. 220.
The Trustee states that he and Trout-man “evaluated all the alleged conflict of interest issues raised by [Mr.] Klein,” and disputes that there is a substantial relationship between the subject matter of Troutman’s prior representation and the issues here. Trustee Mem. n.l, EOF No. 193.
It is plain from the record that the subject matter of Troutman’s actual representation of GRV and potential representation of Mr. Klein in 2008 was the China Project. As Mr. Klein testified, after “we retained” Troutman, he spoke with Mr. Epstein and Mr. Wang in the firm’s Shanghai office about legal due diligence, contract negotiations, and business issues related to the matter. 11/14/11 Tr. 10:19-11:25. Mr. Klein also consulted with Troutman’s Shanghai attorneys about the structure of a corporate entity under Chinese law, the information required by Chinese law for a valid letter of intent, and methods to fund a company in compliance with Chinese law.
Mr. Klein testified that he anticipated using one of his entities to finance the China Project, and that he, Hershel Klein, and Mr. Epstein and Mr. Wang in Trout-man’s Shanghai office discussed possible funding vehicles in general terms. According to Mr. Klein, they discussed “general information” about “different vehicles” for the investment, including Caring, in which Mr. Klein invested his personal funds, GRV, and another entity known as FlexoCraft. 11/14/11 Tr. 13:21-14:13, 25:7. And Mr. Klein declared that he does not want Troutman to represent the Trustee because “[essentially, I gave them a road-map to everything about my finances specifically related to Caring,” and he does not want the Trustee to “be able to use that information ... to take away my rights ... in Caring.” 11/14/11 Tr. 28:1-5.
But Mr. Klein also acknowledged that he did not provide Troutman with written documentation about his personal assets, or those of Caring, GRV, or FlexoCraft, including tax returns, balance sheets, personal income or other financial statements, or bank statements, brokerage statements, or credit card statements. And while Mr. Klein, Hershel Klein, Mr. Epstein, and Mr. Wang communicated frequently via e-mail, Mr. Klein stated that “much — a lot” of the communication among himself, Hershel Klein, and Troutman’s Shanghai attorneys about possible funding sources was oral. 11/14/11 Tr. 22:20.
Here, as noted above, the China Project was the subject matter of Troutman’s actual and potential retention in 2008. The record shows that the China Project, a real estate venture in China, is not substantially related to claims that the Trustee may assert against Mr. Klein or GRV. That is, Mr. Klein has not established that there is a relationship between these matters that is “ ‘patently clear,’ or ... that the actions are ‘identical’ or ‘essentially the same.’ ” Bennett Silvershein Assocs., 776 F.Supp. at 803.
Nor has Mr. Klein shown that “information ... disclosed in that earlier consultation is useful in the later case.” Bennett Silvershein Assocs., 776 F.Supp. at 804. While he aims to paint a different picture *43through his testimony and argument, Mr. Klein’s statement that he provided Trout-man with a “roadmap to everything about my finances specifically related to Caring” lacks credibility and is at odds with substantial and persuasive evidence to the contrary. This evidence includes contemporaneous e-mails, documents, and testimony. 11/14/11 Tr. 28:1-2.
Accordingly, based on the entire record, the Court concludes that there is not a substantial relationship between the subject matter of Troutman’s representation of GRV and potential representation of Mr. Klein, and the issues in the present retention.
For these reasons, and based on the entire record, the Court concludes that Mr. Klein has not shown that Troutman should be disqualified from serving as general and bankruptcy counsel for the Trustee on behalf of the Debtor’s estate as to claims that the Trustee may assert against him or GRV, and to that extent, Mr. Klein’s objection is overruled.
The Standards Governing Disclosure
A trustee’s application to retain a professional is subject to standards governing disclosure, as set forth in Bankruptcy Rule 2014. Rule 2014 requires the trustee to state, among other things, why the employment is necessary, the name of the professional selected and the reasons for the nominee’s selection, the services to be rendered, “and, to the best of the applicant’s knowledge, all of the person’s connections with ... creditors, any other party in interest, [and] their respective attorneys and accountants_” Fed. R. Bankr.P.2014(a). And the trustee must submit along with his or her application a “verified statement” made by the professional seeking to be retained “setting forth the person’s connections” to the debtor, creditors, and any other party in interest. Id. Disclosure requirements are construed strictly. Leslie Fay, 175 B.R. at 533. Facts that may bear on the disinterestedness of a professional must be disclosed, and the burden is on the professional, not the court, to assure that “all relevant connections have been brought to light.” Id.
As one court observed, “the obligation to disclose is not a subjective one, whereby the professional discloses only those ‘connections’ that he/she/it concludes are relevant.” In re Matco Elecs. Group, Inc., 383 B.R. 848, 853 (Bankr.N.D.N.Y.2008) (citing Fibermark, Inc., 2006 WL 723495 at *8 (Bankr.D.Vt. Mar. 11, 2006)). See In re WorldCom, Inc., 311 B.R. 151, 164 (Bankr.S.D.N.Y.2004) (noting that the Bankruptcy Rule 2014 disclosure requirement is strictly construed and that the professional seeking to be retained must disclose all facts that bear on disinterestedness); In re Mercury, 280 B.R. 35, 56 (Bankr.S.D.N.Y.2002), aff'd, 122 Fed.Appx. 528 (2d Cir.2004) (same) (citing cases).
Whether Troutman’s Disclosures Under Bankruptcy Code Section 327 and Bankruptcy Rule 20H Are Adequate
Mr. Klein contends that the Trustee does not adequately disclose Trout-man’s interests in this matter, including interests that are adverse to the estate. The Trustee disagrees, and contends that Troutman has complied with Bankruptcy Rule 2014 and does not hold an interest that is adverse to the estate. In particular, he argues that the disclosures made by Mr. Campo in his declarations adequately and accurately disclose that the firm does not represent an interest adverse to any creditor in this case.
Here, as the record reflects, Mr. Cam-po’s first Bankruptcy Rule 2014 declaration does not disclose Troutman’s prior representation of GRV or prospective representation of Mr. Klein. At the same *44time, the record also reflects that when these matters were brought to the Trustee’s attention, the Trustee promptly filed a supplemental Bankruptcy Rule 2014 declaration of Mr. Campo that set forth that information.
Accordingly, based on the entire record, the Court concludes that taken as a whole, the disclosures made by the Trustee and Troutman are sufficient to satisfy the requirements established by Bankruptcy Rule 2014. The Court also finds that the timing and circumstances of these disclosures do not provide a basis to dislodge the Trustee’s choice of counsel or to invoke the harsh remedy of disqualification.
For these reasons, and based on the entire record, the Court concludes that Mr. Klein has not shown that Troutman should be disabled from serving as general and bankruptcy counsel for the Trustee on behalf of the Debtor’s estate as to claims that the Trustee may assert against Mr. Klein or GRY, and to that extent, Mr. Klein’s objection is overruled.
Conclusion
This Court has already determined that the Trustee may retain Troutman as his general and bankruptcy counsel on behalf of the Debtor’s estate for all matters except as to claims that he may assert against Mr. Klein or GRV. For the reasons stated herein, and based on the entire record, the Court now concludes that Mr. Klein’s objection is overruled, and the Trustee may also retain Troutman as to claims that he may assert against Mr. Klein or GRY. The Court has considered all of the other arguments advanced by Mr. Klein and concludes that they are without merit. The Court will issue an order in conformity with this Memorandum Decision.
. On November 28, 2011, the Debtor sought relief from the automatic stay to permit the parties to proceed in New York Supreme Court, Kings County, on the issue of confirmation of the arbitration award. The Trustee opposed that motion on grounds that he, not the Debtor, has standing to seek that relief. This Court heard the motion on December 16, 2011, and entered an order on December 20, 2011 denying the motion "without prejudice to other applications to permit the determination of these issues in the State Court.” Order Denying Stay Relief, ECF No. 359. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494650/ | MEMORANDUM OPINION2
Related to Doc. No. 76, Plaintiffs Motion for Preliminary Injunction Related to Doc. No. 34, Motion for Preliminary Injunction3
Related to Doc. No. 1, Complaint
JUDITH K. FITZGERALD, Bankruptcy Judge.
Before the court are two motions brought by the Plaintiffs in Adversary No. 09-52854 seeking a preliminary injunction to enforce the terms of two general releases (the “Prosser Parties’ Release of RTFC” and the “Prosser Parties’ Release of Greenlight,” see Appendices A and B, respectively)4 and to enjoin further action *62against Plaintiffs by the Defendants (“the Prosser Parties”)5 that violates the Releases, including, but not limited to, the action filed at Adversary No. 10-50744 (“the RICO action”).6 The motions seeking a preliminary injunction filed in Adversary No. 09-52854 stem from a RICO action filed by the Prosser Parties against these Plaintiffs and others7 in the District Court of the Virgin Islands (St. Croix Division) (hereafter “VI District Court”), Case No. 08-cv-107. The VI District Court granted the Plaintiffs’ motion to refer the matter to the undersigned, concluding that the RICO action was a collateral attack on four related bankruptcy cases pending before the undersigned in the Bankruptcy Division of the VI District Court.8 The VI District Court found “of particular importance and significance” forum selection clauses in the two general releases at issue applicable to the Prosser Parties. The Releases identified the Bankruptcy Court for the District of Delaware as the forum in which “claims related to the releases must be brought.”9 Case No. 08-cv-107, *63Doc. No. 176, at 2. The VI District Court transferred the RICO action to the U.S. District Court for the District of Delaware (Delaware District Court) where it was assigned Case No. 10-201. The Delaware District Court referred the RICO and preliminary injunction actions10 to the Bankruptcy Court for the District of Delaware where they were assigned Adversary Nos. 10-50744 and 09-52854, respectively. The disposition of this motion for preliminary injunction resolves the RICO action as well. References herein to “Adv. Doc. No.” refer to Adversary No. 09-52854 unless otherwise stated.
The Delaware District Court, in referring this injunction matter to the undersigned, summarized the history leading to this adversary proceeding. Our recitation of the facts borrows heavily from the Delaware District Court’s narrative, see National Rural Utilities Co-op. Finance Corp. v. Prosser, 435 B.R. 27, 30-32 (D.Del.2009), (09-cv-111 (D. Del.)), reconsideration denied 2009 WL 4334815 (D.Del. Dec. 01, 2009), as well as from case history recited by the parties, and from proceedings before this court over the past five years.
The current matter arises from two intertwining sets of events. The first set of events stems from a 1998 transaction in which Debtor Innovative Communication Company, LLC, (“ICC”) (VI Bankr.No. 06-30008) took Debtor Emerging Communications, Inc., (“EmCom”) (VI Bankr.No. 06-30007)11 private. ICC, which, at the time, owned 52 percent of EmCom, bought EmCom’s publicly owned shares. After the privatization transaction was complete, the Greenlight Entities12 sued ICC, Debt- or Jeffrey Prosser, John P. Raynor,13 Em-Com, and others in the Delaware Court of Chancery for breach of fiduciary duty. The Greenlight Entities sought, inter alia, appraisal of their shares. In June 2004, the Chancery Court found Prosser and Raynor liable for breach of fiduciary duty and entered judgments against them (“the Greenlight judgments”). The Greenlight judgments, with interest, total more than $160 million. Case No. 09-111 (D. Del.), Doc. No. 55, Memorandum Opinion of August 7, 2009, at 5, published at 435 B.R. 27, 30 (D.Del.2009). In February 2006, after ICC, EmCom, and Prosser failed to pay the Greenlight judgments, the Greenlight Entities filed involuntary chapter 11 petitions against ICC, EmCom, and Prosser in the United States Bankruptcy Court for the District of Delaware. Venue of the *64proceedings was transferred to the Bankruptcy Division of the VI District Court.
The second set of events stems from loans made by Rural Telephone Finance Cooperative (“RTFC”) to ICC between 1987 and 2001. The Virgin Islands Telephone Corporation (“Vitelco”), a nondebtor and the largest and most significant source of revenue for ICC and related companies, is the sole provider of local wired telephone services for the U.S. Virgin Islands. Additionally, Vitelco provides certain long-distance and related telecommunication services in the U.S. Virgin Islands.14
Vitelco was a member of RTFC. RTFC made several loans to ICC (Vitelco’s parent) totaling in excess of $500 million. In connection with these loans, RTFC obtained various guaranties and security interests from others, including ICC, Em-Com, and Prosser. In April 2003, RTFC and ICC negotiated amended loan agreements and, in connection therewith, RTFC obtained additional guaranties and security interests from, inter alia, EmCom and Prosser.
In 2004, RTFC sued ICC for defaulting under the amended loan agreement. ICC and Vitelco countersued National Rural Utilities Cooperative Finance Corporation (“CFC”) and RTFC.15 Protracted litigation ensued between CFC/RTFC, on one side, and Prosser, Raynor, and others on the other side. By 2006, there were eight lawsuits pending in the VI District Court between CFC and/or RTFC and Prosser and/or his companies (“RTFC loan default litigation”).16
During the course of the RTFC loan default litigation, Prosser and his companies asserted claims against most of the Plaintiffs. The claims were premised on a core set of allegations: that CFC unlawfully “controls” and “manipulates” RTFC; that CFC and RTFC have engaged in a long-standing “scheme” to subsidize RTFC and to “misappropriate” RTFC’s and its members’ funds while interfering with ICC’s ability to perform its loan obligations to RTFC; and “retaliation” against Prosser and his companies as a result of Prosser’s having discovered this “scheme.” Vitelco and ICC also asserted claims against CFC, RTFC, and the Greenlight Entities premised on some of these same allegations along with allegations that the Greenlight Entities’ commencement of the Delaware bankruptcy proceeding was part of a “joint venture” between the Green-light Entities and RTFC to take over Vi-telco and ICC.
In 2006, the two sets of events became intertwined through a series of settlement agreements. On April 26, 2006, the parties involved in the RTFC loan default litigation and the Delaware bankruptcy proceedings executed the Terms and Conditions of Settlement of Claims of RTFC, CFC, Prosser Parties, and Greenlight Entities (the “Terms and Conditions”). In addition to the 2006 Terms and Conditions, two other agreements were executed: the Release in Full of RTFC, CFC, Lilly and List (the “Prosser Parties’ Release of RTFC”) and a release of the Greenlight Entities (the “Prosser Parties’ Release of Greenlight”).
Pursuant to the Terms and Conditions, Prosser and his companies’ claims in the *65RTFC loan default litigation were dismissed and a final judgment was entered whereby ICC was adjudged liable for $524 million with Prosser, jointly and severally. Prosser’s liability was limited to $100 million of the RTFC judgment. All appeals of the Greenlight judgment were dismissed, 435 B.R. at 31,17 and, at the request of Prosser and his companies, the stay was lifted in the Delaware bankruptcy proceeding to allow implementation of the settlement. Id. at 31. Finally, the Terms and Conditions provided that Prosser and his companies could discharge the RTFC and Greenlight judgments for a substantially discounted payment (in the amount of $402 million), if paid in full on or before July 31, 2006. If payment was not timely made, documents put into escrow by RTFC, CFC, and the Greenlight Entities, i.e., the Payment Documentation,18 which did not include the Prosser Parties’ Releases of Greenlight and RTFC which are at issue herein, would become void. If the discounted payment had been timely made, the RTFC and Greenlight would have executed a release of the Prosser Parties. See Adv. Doc. No. 76, Exhibit P-3 (void release). Prosser and his companies did not make the discounted payment on July 31, 2006, as required by the Terms and Conditions. Instead, Prosser, ICC, and EmCom filed voluntary bankruptcy petitions in the Bankruptcy Division of the VI District Court.19
Despite the 2006 settlement, much litigation followed, including an action to determine whether the Terms and Conditions agreement was an assumable contract. (This court’s determination that it was not assumable was affirmed on appeal). See In re Innovative Communication Co., LLC, 399 B.R. 152 (Bankr.D.V.I.2008); 2008 WL 2275397, (D.V.I, May 30, 2008). The VI District Court *66order was affirmed on appeal. See In re Prosser, 388 Fed.Appx. 100 (3d Cir.2010). In April 2008, Prosser and Raynor sued CFC and others in the United States District Court for the District of Columbia 20 ■ based on allegations similar to those made in the RTFC loan default litigation. Also in April 2008, in the Pros-ser bankruptcy case, Prosser filed objections to claims21 made by RTFC22 and the Greenlight Entities23 raising allegations similar to those made in the RTFC loan default litigation.24 On December 7, 2008, the Prosser Parties filed suit in the VI District Court against Plaintiffs, repeating the same or similar allegations.25
*67Most, but not all, of the defendants in the RICO action (the Plaintiffs26 herein) filed an action in the District Court for the District of Delaware seeking to enjoin the RICO action.27 The Delaware District Court referred the injunction action to the undersigned. For the reasons which follow we find that preliminary and permanent injunctions are appropriate. With respect to a preliminary or permanent injunction, Plaintiffs have the burden of proving the basis for a preliminary or permanent injunction. See, e.g., Campbell Soup Co. v. ConAgra, Inc., 977 F.2d 86, 90 (3d Cir.1992).
In order to issue a preliminary injunction, the court must find that the plaintiff is likely to succeed on the merits, that there is an imminent threat of irreparable harm, that the balance of the equities favors injunctive relief, and that the public interest is served by granting the relief. See Chester ex rel. NLRB v. Grane Healthcare Co., 666 F.3d 87, 89-90 (3d Cir.2011).
While the standard for a preliminary injunction requires the court to find a likelihood of success on the merits, in “deciding whether a permanent injunction should be issued, the court must determine if the plaintiff has actually succeeded on the merits (i.e. met its burden of proof.)” CIBA-GEIGY Corp. v. Bolar Pharmaceutical Co., Inc., 747 F.2d 844, 850 (3d Cir.1984).
In summary, because all the allegations in the RICO action fall within the purview of the Prosser Parties’ Releases of RTFC and Greenlight and, therefore, there is nothing to be tried, we find that the Plaintiffs have met their burden of proof as to their right to relief and thus grant a preliminary and a permanent injunction. A more detailed analysis follows.
With respect to the elements for finding a preliminary injunction, we find that the Plaintiffs in this action have established the right to the relief sought by virtue of the Releases they obtained from the Prosser Parties as a condition of granting Prosser a significantly discounted payment in satisfaction of their much larger judgments, on the condition that the discounted payment be paid by a date certain. That date passed without payment but the Releases of the RTFC and Greenlight by the Prosser Parties were in effect as of the time the settlement that provided for the *68discounted payment (the Terms and Conditions) was reached. Thus, the Plaintiffs have established not only a likelihood of success on the merits but have met their burden of proving actual success on the merits.
As to the next element, we find that permitting pursuit of a RICO action, or any other action based upon allegations that have been released, is clear and irreparable harm to those intended to benefit from the Releases. The expenditure of time by the Plaintiffs and their counsel in management of, and the effort and money spent in, litigating multiple suits commenced by the Prosser Parties is huge and the need to concentrate on those actions repetitiously cannot be justified.
Further, the balance of the equities favors ending the litigation at the earliest possible moment, given that numerous actions involving the same or substantially similar facts, theories, and actions have already been brought, litigated, and lost by the Prosser Parties.
Finally, the public interest is served by conserving judicial resources so that all of the judges and staff involved in these actions can concentrate on matters that, unlike these, have not already occupied the time and attention of courts in several jurisdictions. Moreover, the public interest is served by enforcing the Releases voluntarily entered into by the Prosser Parties who received the advantage of time to pay a judgment exceeding $524 million, plus accrued and accruing interest, for $402 million. The Prosser Parties’ inability to comply with their own bargain should not and does not invalidate the effect of the Releases they voluntarily gave to RTFC and Greenlight — i.e., the benefit of being relieved of nearly continuous litigation with the Prosser Parties.
Thus, having satisfied the standard for a grant of preliminary injunction, and having further met their burden of proof as to actual success on the merits, we find Plaintiffs are entitled to preliminary and permanent injunctive relief.
We note that the Prosser Parties contend that because they are alleging conduct by certain Plaintiffs herein that occurred after the Releases were executed, the Prosser Parties’ Releases of RTFC and Greenlight do not apply to the RICO action. However, the Releases by their terms apply to future conduct and the Prosser Parties’ allegations all relate, as stated above, to the same core facts and events that predate the Releases; i.e., the 1998 privatization of EmCom and the loans made by RTFC to ICC between 1987 and 2001. A release precluding future matters fairly within the contemplation of the parties at the time the release is given is enforceable. See Camiolo v. State Farm Fire and Cas. Co., 334 F.3d 345, 362 (3d Cir.2003).
The Prosser Parties contend that the Prosser Releases of the RTFC and Green-light were voided when the Terms and Conditions agreement became void because Prosser failed to make the payment under that agreement.28 That is not so. What became void when Prosser failed to make the payment under the Terms and Conditions was the RTFC and Greenlight *69release in favor of the Prosser Parties that was to be part of the Payment Documentation. Adv. Doc. No. 76, Exhibit P-3. The Payment Documentation was to be placed in escrow as part of the Terms and Conditions. See Escrow Agreement, Adv. Doc. No. 76, Exhibit P-2. See also note 18, supra. See also Declaration of William R. Greendyke, Esq., of Fulbright & Jaworski L.L.P. in Further Support of Plaintiffs’ Motion for Preliminary Injunction (“Greendyke Declaration”), Adv. Doc. No. 76, Exhibit P at 2-3, ¶¶ 10-14.29 The Payment Documentation was to be taken out of escrow only if the Terms and Conditions were met. Payment under the Terms and Conditions did not occur and the Payment Documentation was not released from escrow, has expired and is of no force and effect. The release of Jeffrey Prosser by the RTFC and Greenlight, Adv. Doc. No. 76, at Exhibit P-3, which was voided when the payment under the Terms and Conditions was not made, is not either of the two releases relied on by Plaintiffs here (the “Prosser Parties’ Release of RTFC,” Adv. Doc. No. 1, Exhibit 3, and the “Prosser Parties’ Release of Greenlight,” id. at Exhibit 4) and is not involved in this injunction action. See Greendyke Declaration, Adv. Doc. No. 76, Exhibit P, at 4-5, ¶¶ 11-14. The two Releases by the Prosser Parties of the RTFC and Greenlight that are relied on by the Plaintiffs in this action expressly provide that they are not contingent on Prosser’s payment under the Terms and Conditions. The Prosser Parties’ Releases of the RTFC and Greenlight were executed as consideration for the Plaintiffs’ agreement under the Terms and Conditions to limit Prosser’s personal liability on the final judgment to $100 million, regardless of any payments that may have been made by the corporate entities.
In denying Jeffrey Prosser’s motion to stay pending appeal of this court’s order converting his bankruptcy case to a chapter 7, this court explained the effect of the decision that the Terms and Conditions agreement was not assumable:
... this Court concluded that even if the Terms and Conditions were executory, Prosser could not assume the agreement because assumption under § 365 would require him to assume all the benefits and the burdens of the Terms and Conditions, including but not limited to, the self-effectuating termination provision which states “[i]f, however, the Payment is not made on or before the Payment Deadline, then effective upon 12:01 a.m. on August 1, 2006, the Payment Documentation shall be returned to RTFC and the Greenlight Entities and shall become void and of no further force or effect.” Terms and Conditions at 5. Prosser’s failure to meet the Payment Deadline nullified the releases of judgments and liens, leaving Prosser and New ICC liable for the full amount of the RTFC and Greenlight judgments. Consequently, any ostensible assumption of the Terms and Conditions would provide absolutely no benefit to the various bankruptcy estates. Even if the District Court were to conclude that this Court erred in holding that the Terms and Conditions is not executory, this Court’s alternative ruling that the Payment Documentation is void, constitutes an inde*70pendent ground for the District Court to affirm the Terms and Conditions Order.
In re Innovative Communications, 390 B.R. 184, 189 (Bankr.V.1.2008).
The Prosser Parties contend that their RICO allegations reflect “new events”30 and, therefore, the injunction sought by the Plaintiffs herein must be denied. The contention has no merit. The allegations in the RICO complaint all relate to the subject matter of the prior litigation, the resolution of which resulted in the execution of the Prosser Parties’ Releases of the RTFC and Greenlight. This is so, notwithstanding the reference in the RICO complaint to financial transactions between and among Prosser, his companies, and the National Rural entities, or the reference in the RICO complaint to “continuing acts” that allegedly fall under RICO. The RICO action at Adv. No. 10-50744 merely updates the old charges against the RTFC, Greenlight and others. The allegations are the same, based on. the 1998 privatization of EmCom and the 1987-2001 RTFC loans. They are just associated with more current dates.
The Prosser Parties allege wrongdoings occurring after the execution of the Releases, including, but not limited to, SEC filings by CFC, which the Prosser Parties contend violate security law requirements.31 The Prosser Parties argue that either their Releases of Greenlight and RTFC died with the expiration of the Terms and Conditions or that the Terms and Conditions settlement agreement remains viable is without merit. The Terms and Conditions matter has been adjudicated by this court, the District Court, and the Court of Appeals, all against the Pros-ser Parties.32 The Prosser Parties’ Releases of Greenlight and RTFC are alive and operative. They protect all of the Plaintiffs in this injunction action and all of the Defendants in the RICO action from further actions by Prosser and his co-parties.
Plaintiffs’ Opening Brief in Support of Motion for Preliminary Injunction, Adv. Doc. No. 76 at Attachment 1, accurately details the history of the parties’ relationship, the litigation, and the terms of the Prosser Parties’ Releases of Greenlight *71and RTFC. We adopt Plaintiffs’ recitation, including, but not limited to, the following:
• That the allegations in the Virgin Islands RICO Action are nearly identical to those asserted in complaints and counterclaims filed by Defendant Pros-ser and his companies in 2005 and 2006 in connection with the RTFC Loan Default Litigation — claims that were dismissed with prejudice and forever released. By way of example:
• In 2005, Prosser’s company ICC alleged that “RTFC and its management were misappropriating funds that should have been distributed to its [telephone] members.” In 2009, Defendants allege that “CFC embezzles funds legally belonging to RTFC and the RTFC Telephone members.”
• In 2005, Prosser’s company ICC alleged that “CFC and RTFC manipulated their financial statements for the benefit of CFC, including the consolidation of CFC’s and RTFC’s financial statements,” and that “CFC unjustifiably and improperly changed its segment reporting without sufficient explanation.” In 2009, Defendants allege that RTFC’s financial statements “are false and deceptive,” including because “the Consolidated Financial Statements” of National Rural and RTFC are “materially misleading,” and because the “change” in “Segment Methodology” created a “material and intentional departure from GAAP.”
• In 2005, Prosser’s company ICC alleged that “RTFC and certain officers decided to retaliate through litigation, ... [premised on] allegations] that ICC and Vitelco had defaulted on their loan obligations,” which had the intent of seeking to “wrest control of ICC from its Chairman and founder, Jeffrey Pros-ser.” Also in 2005, Prosser himself alleged in a counterclaim that “RTFC management decided it wanted to replace Prosser and the rest of ICC’s management,” and that RTFC sued ICC for defaulting on its loan as part of a “scheme to try to starve ‘Prosser’s companies’ of funds and cause ICC to collapse.” In 2009, Defendants allege that “[t]he June 2004 Foreclosure, itself a retaliatory action, coupled with a pattern of retaliatory and extortionary acts eventually resulted in the taking of ICC from the Prossers.”
• In 2006, Prosser’s company ICC alleged that “RTFC has (1) admitted to substituting pages in the Loan Agreement by and between ICC and RTFC, and (2) admitted to destroying the originals after doing so.” In 2009, Defendants allege that “[w]ithout the knowledge or consent of ICC,” RTFC’s general counsel “removed the signature pages from both originals of the Authentic 2001 Loan Agreement and attached them to a different version of the agreement, the False 2001 Loan Agreement.”
Adv. Doc. No. 76, Attachment 1, at 26-27. With respect to alleged securities laws violations, note the following:
• In 2005, Case No. 05-cv-168 (D.V.I.), Innovative Communication Corporation v. RTFC, et al, the amended complaint alleged, inter alia, that CFC, in its first quarterly SEC filing, improperly changed its segment reporting to falsely create the impression that CFC and not RTFC was operating at a profit. Pros-ser Party Raynor alleged in his motion to dismiss the motion for preliminary injunction that the way the CFC reported the ICC loan in 2009 in its 10-Q departed from Generally Accepted Accounting Principles constituted a fraud on CFC’s investors.
• In the District of Columbia action, Case No. 08-cv-687, filed by Prosser *72Parties Jeffrey J. Prosser and John P. Raynor against CFC and others, see note 20, supra, the Prosser Party plaintiffs in that action alleged improprieties in CFC’s 2002 10-K reports, departure from GAAP principles, and other similar actions. The RICO adversary at Adv. No. 10-50744 with respect to which the instant injunction action was filed makes the same allegations, only the year(s) of the alleged violations have been changed.
• In Case No. 08-cv-107 (D.V.I. RICO action) Doc. No. 1, and Adv. No. 10-50744 (Bankr. D. Del. RICO action) Adv. Doc. No. 25 (docketed as “Notice of Service Complaint for Civil RICO”), alleged various improprieties regarding 2001 and 2002 10-K and 10-Q statements, including noncompliance with GAAP principles and accusations regarding representation of aspects of the CFC/RTFC loans for years 2003-2005.33 In Case No. 10-cv-201 (D. Del.), Second *73Amended Complaint (253 pages), Exhibit 1 to Doc. No. 172, motion for leave to file second amended complaint, adds the same allegations but for the years 2008 and 2009.
Attached hereto is Exhibit I to the Motion for Preliminary Injunction, Adv. Doc. No. 76, which is a chart34 comparing claims made in the RICO complaint, to which this Motion for Preliminary Injunction applies, to those raised in prior dismissed actions.35
We find that, on the merits, Plaintiffs have established entitlement to both a preliminary and permanent injunction. The Prosser Parties’ Releases of RTFC and Greenlight are clear and are all-encompassing. The RICO action that the Pros-ser Parties seek to pursue is based only on those claims and causes of action that were the subject of those Releases. The fact that the Prosser Parties have updated their citations to, for example, Forms 10-K and 10-Q filed by CFC in more recent years and have alleged that the RTFC issued fraudulent financial statements in years after the date of the Releases does not change the fact that the conduct complained of relates only to the events and causes of action and claims that they released. We also find that imminent irreparable harm to Plaintiffs will result if the Prosser Parties pursue litigation with respect to released matters. The balance of the equities favors injunctive relief — a party should not have to continually defend conduct that was released. There is no harm to the Prosser Parties. The Prosser Parties are sophisticated litigants and they entered into the Releases of RTFC and Greenlight with the advice of counsel. The public interest is served by granting relief to Plaintiffs inasmuch as parties to releases are entitled to rely on the bargains they make. See Chester ex rel. NLRB v. Healthcare Co., 666 F.3d 87, 89-90 (2011). The standard for issuance of a preliminary injunction is met in this case.
Further, under the egregious circumstances of this case, the Plaintiffs have met their burden of proof as to the merits and thus a permanent injunction is in order. See ACLU v. Black Horse Pike Regional Bd. of Education, 84 F.3d 1471, 1477 (3d Cir.1996). The many actions that were settled and for which the Prosser Parties’ Releases of RTFC and Greenlight were issued were terminated long ago. Jeffrey Prosser has been removed from the management of the corporate Debtors and all the cases have trustees in place. There are no causes of action to pursue that were not released.
Inasmuch as there is no basis upon which the RICO action can be brought due to the Releases, we will grant both preliminary and permanent injunctions and dismiss the RICO action accordingly.
Appropriate orders will be entered.
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APPENDIX A
Prosser Parties’ Release of RTFC RELEASE IN FULL
(OF RTFC, CFC, LILLY AND LIST)
SECTION 1
Defínitions
1.1. “Release” means this release in full executed by the Releasing Parties (defined below).
1.2. “CFC” means National Rural Utilities Cooperative Finance Corporation, a District of Columbia cooperative association, and includes all of its subsidiary and affiliated corporations, companies, divisions, units, and each of their respective officers, directors, employees, shareholders, partners, agents, representatives, counsel, attorneys, assigns, administrators, successors, predecessors, d/b/a’s and assumed names, and insurers — whether specifically mentioned hereafter or not.
1.3.“RTFC” means Rural Telephone Finance Cooperative, a District’ of Columbia cooperative association, and includes all of its subsidiary and affiliated corporations, companies, divisions, units, and each of their respective officers, directors, em*77ployees, shareholders, partners, agents, representatives, counsel, assigns, attorneys, administrators, successors, predecessors, d/b/a’s and assumed names, and insurers — whether specifically mentioned hereafter or not.
1.4. “List” means John J. List individually, including, without limitation, any and all heirs, trustees, agents, successors, assigns, executors, administrators; and in his representative and/or official capacity, including, without limitation, as officer, employee, agent, attorney and/or representative of CFC and/or RTFC and/or any of their subsidiary and affiliated corporations, companies, divisions or units.
1.5. “Lilly” means Steven Lilly individually, including, without limitation, any and all heirs, trustees, agents, successors, assigns, executors, administrators; and in his representative and/or official capacity, including, without limitation, as officer, employee, agent and/or representative of CFC and/or RTFC and/or any of their subsidiary and affiliated corporations, companies, divisions or units.
1.6. “Greenlight Entities” means and includes Greenlight Capital L.P., Green-light Capital Qualified, L.P. and Greenlight Capital Offshore, Ltd. together with each of their respective subsidiary and affiliated corporations, companies, divisions, units, and their respective officers, directors, employees, shareholders, partners, agents, representatives, counsel, attorneys, assigns, administrators, successors, predecessors, d/b/a’s and assumed names, and insurers — whether specifically mentioned hereafter or not.
1.7. “Vitelco” means the Virgin Islands Telephone Corporation, a United States Virgin Islands corporation, and includes its subsidiary and affiliated corporations, companies, divisions, units, and each of their respective officers, directors, employees, shareholders, partners, agents, representatives, counsel, attorneys, assigns, administrators, successors, predecessors, d/b/a’s and assumed names, and insurers — whether specifically mentioned hereafter or not.
1.8. “ICC” means Innovative Communication Corporation, a United States Virgin Islands corporation, and includes its subsidiary and affiliated corporations, companies, divisions, units, and each of their respective officers, directors, employees, shareholders, partners, agents, representatives, counsel, attorneys, assigns, administrators, successors, predecessors, d/b/a’s and assumed names, and insurers — whether specifically mentioned hereafter or not.
1.9. “ICC-LLC” means Innovative Communication Company, LLC, a Delaware limited liability company, and includes its subsidiary and affiliated corporations, companies, divisions, units, and each of their respective officers, directors, employees, shareholders, members, partners, agents, representatives, counsel, attorneys, administrators, successors, predecessors, d/b/a’s and assumed names, and insurers, whether specifically mentioned hereafter or not, and also includes Innovative Communication Subsidiary Company, LLC, a U.S. Virgin Islands limited liability company, acting by and through its sole managing member ICC-LLC.
1.10. “ECI” means Emerging Communications, Inc., a Delaware corporation, and includes its subsidiary and affiliated corporations, companies, divisions, and each of their respective officers, directors, employees, shareholders, partners, agents, representatives, counsel, attorneys, administrators, successors, predecessors, d/b/a’s and assumed names, and insurers whether specifically mentioned hereafter or not.
1.11. “Guarantors, Pledgors, and Mortgagors” means and includes Prosser *78as personal guarantor of certain indebtedness of ICC and Innovative Communication Corporation (“Old ICC”), a dissolved Virgin Islands corporation, to RTFC and other guarantors, pledgors and mortgagors with respect to those loans, including, Innovative Communication Subsidiary Company, LLC, The Daily News Publishing Company, Inc., Caribbean Communications Company d/b/a St. Thomas-St. John Cable TV, BVI Cable TV, Ltd., Caribbean Teleview Services, NV a/k/a St. Maarten Cable TV, Ltd., St. Croix Cable TV, Inc. Atlantic Aircraft, Inc., IC Air, Inc., Vitel-com Cellular, Inc., East Caribbean Cellular, NV, St. Martin Mobiles, SA, Martinique Cable Multimedia, SARL, Group B-200, Inc., World Satellite Guadeloupe, S.A., Innovative Long Distance, Inc., ICC TV, Inc., Val Vision, SA, Cable Evasion 86, S.A., East Caribbean Communications, N.V. (Curacao), East Caribbean Communications, N.V. (Bonaire), East Caribbean Communications, N.V. (St. Maarten), ICC-LLC and Emerging Communications, Inc.
1.12. “Prosser” means Jeffrey J. Pros-ser individually, including without limitation, any and all heirs, trustees, agents, successors, assigns, executors, and administrators, and in his representative capacity as agent, employee, and/or shareholder of ICC, Vitelco, ICC-LLC, and/or ECI, including, but not limited to, his capacity as the indirect beneficial owner, Chief Executive Officer, President, and Chairman of the Board of ICC, member the Board of Vitelco, member and sole managing member of ICC-LLC, and as guarantor of ICC owing to RTFC.
1.13. “Prosser Subsidiaries” means each of the entities listed on Schedule I attached hereto, whether or not specifically included in any other definition herein.
1.14. “Releasing Directors” means each of John P. Raynor, Richard N. Goodwin, Michael Prosser, Sir Shridath Ram-phal, Lt. General Samuel Ebbesen, Sir Ronald M. Sanders, David Sharp and James J. Heying, individually, including without limitation, any and all of their heirs, trustees, agents, successors, assigns, executors, and administrators, and in their representative capacity as agent, employee, and/or shareholder of ICC, Vitelco, ICC-LLC, and/or ECI, including, but not limited to, their capacities as member of the Boards of ICC, Vitelco, and ECI.
1.15. “Releasing Parties” includes those entities and individuals included within the definition of ICC, Vitelco, ICC-LLC, ECI, the Prosser Subsidiaries, the Guarantors, Pledgors, and Mortgagors, and also includes Prosser and the Releasing Directors.
1.16. “Released Parties” include those entities and individuals included within the definition of RTFC and CFC, and also includes List and Lilly.
1.17. “Litigation” means the following actions pending in the District of the Virgin Islands:
(i.) Cause No. 2005evll5; Innovative Communication Corporation v. Rural Telephone Finance Cooperative;
(ii.) Cause No. 2004cvl54; Rural Telephone Finance Cooperative v. Innovative, Communication Corporation;
(iii.) Cause No. 2004evl55; Rural Telephone Finance Cooperative v. Jeffrey Prosser;
(iv.) Cause No. 2004evl32; Rural Telephone Finance Cooperative, for itself and on behalf of Innovative Communication Corporation and the Virgin Islands Telephone Corporation d/b/a Innovative Telephone v. Jeffrey J. Prosser, Lt. General Samuel E. Ebbesen, Richard N. Goodwin, Michael Prosser, *79Sir Shridath Ramphal, John P. Raynor, Sir Ronald M. Sanders, David Sharp, Innovative Communication Corporation, and Virgin Islands Telephone Corporation d/b/a Innovative Telephone;
(v.) Cause No. 2005cvl68; Innovative Communication Corporation v. Rural Telephone Finance Cooperative, John J. List, and Steven Lilly;
(vi.) Cause No. 2006cv011; Emerging Communication, Inc. and Innovative Communication Company, LLC v. Rural Telephone Finance Cooperative and National Rural Utilities Cooperative Finance Corporation;
(vii.) Cause No. 2006cv019; Rural Telephone Finance Cooperative v. Innovative Communication Corporation; and
(viii.) Cause No. 2006cv018; Virgin Islands Telephone Corporation v. Rural Telephone Finance Cooperative, National Rural Utilities Cooperative Finance Corporation, Greenlight Capital Qualified, L.P., Greenlight Capital L.P., and Greenlight Capital Offshore, Ltd.
1.18. “All Claims” shall mean and refer to any and all claims, demands, damages (including, without limitation, all actual damages, consequential damages, statutory damages, punitive and exemplary damages, prejudgment and post-judgment interest, attorneys’ fees and costs of court, and all other damages or losses recoverable now or at any later time under applicable law), actions of any character or type (including, but not limited to, class action or derivative lawsuits or proceedings, actions based on violations of local, state and/or federal statutes and regulations, malfeasance, non-feasance, fraud, intentional torts, malicious conduct, including, but not limited to, intentional interference with contracts or prospective business relations, libel, slander, defamation, wrongful use of civil proceedings and abuse of process, breach of contract, bad faith, breach of fiduciary duty, lender liability, contribution, conspiracy, retaliatory conduct, or any combination thereof), and causes of action of whatever nature, in law or equity (including declaratory and injunctive relief), known or unknown, that the Releasing Parties have, or ever have had, or may in the future have, against the Released Parties related to, directly or indirectly, any and all of the facts, events, transactions, occurrences, course of dealings and/or disputes between the Releasing Parties and the Released Parties occurring prior to the date of this Release or occurring after the date of this Release but which involve the same facts, events, transactions, occurrences, course of dealings and/or disputes existing as of the date of this Release whether known or unknown arising out of the relationships or alleged relationships between or among the Releasing Parties and the Released Parties as member, cooperative, borrower, lender, patron, third-party beneficiary, investor, issuer of security or any other relationship, as well as any and all consequences thereof, each and all, even though one or more of those consequences are not specifically identified herein, other than, in any such case, the Excluded Claims (as hereinafter defined).
1.19. “Excluded Claims” shall mean and refer to any obligations that the Released Parties may have under, and any rights, causes of action or other claims of any nature that the Releasing Parties may have against the Released Parties to enforce the terms and provisions of, that certain Terms and Conditions of Settlement of Claims of RTFC, CFC, Prosser Parties and Greenlight Entities, dated as *80of April 26, 2006, among Rural Telephone Finance Cooperative, National Rural Utilities Cooperative Finance Corporation, Greenlight Capital, L.P., Greenlight Capital Qualified, L.P., Greenlight Offshore, Ltd., Innovative Communication Corporation, Innovative Communication Company, LLC, Emerging Communications, Inc., Virgin Islands Telephone Corporation and Jeffrey J. Prosser (the “Terms and Conditions”) and any or all Payment Documentation (as defined in the Terms and Conditions) to which any of the Released Parties are a party.
SECTION 2
Release
2.1. The Releasing Parties hereby fully and forever RELEASE, ACQUIT and DISCHARGE, the Released Parties of and from any and All Claims and/or Litigation, with prejudice (other than the Excluded Claims).
2.2. The parties understand and acknowledge that the foregoing release:
(i.) IS A GENERAL RELEASE OF ALL CLAIMS (AS DEFINED HEREIN) — PAST, PRESENT, AND FUTURE AND WHETHER KNOWN OR UNKNOWN, OTHER THAN THE EXCLUDED CLAIMS (AS DEFINED HEREIN);
(ii.) is a full and complete release of any and all of the Releasing Parties’ Claims and/or Litigation (other than the Excluded Claims), and the Releasing Parties are precluded from seeking further money or other relief based upon such Claims and/or Litigation (other than the Excluded Claims);
(iii.) is to be interpreted liberally to effectuate maximum protection to the Released Parties; and
(iv.) is specifically intended to operate and be applicable even if it is alleged, charged or proven that some or all of the claims or damages released are solely and completely or partially caused by the negligent acts, gross negligence, fraud, misrepresentation, intentional conduct, breach of fiduciary duty, violation of statute or common law, or conduct of any type by the Released Parties.
SECTION 3
Covenant Not To Sue
3.1 The Releasing Parties covenant, warrant, and represent that they shall not hereafter sue, or bring or continue any action or proceeding against the Released Parties with respect to All Claims (other than the Excluded Claims) released herein.
SECTION 4
Consideration
4.1 The Releasing Parties enter into this Release for good and valuable consideration, the receipt of and sufficiency of which is hereby acknowledged.
SECTION 5
Representations
5.1 The Releasing Parties represent and warrant:
(i.) that the execution and delivery of this Release have been duly authorized by all necessary actions;
(ii.) that before executing this Release, they became fully informed of the terms, conditions, and contents, and effect of this Release;
*81(iii.) that they are legally competent to execute this Release;
(iv.) that no promise or representation of any kind has been made to them by the other, or by anyone acting for the other, except as expressly stated in this Release; and
(v.) they relied solely on their own judgment and the advice of their counsel in executing this Release.
SECTION 6
Full Knowledge and Voluntary Release
6.1 The Releasing Parties hereby represent and warrant that they have read this Release and they expressly acknowledge:
(i.) that they have entered into this Release of their own free choice based upon their own knowledge and judgment; and
(ii.) that they have not acted in reliance on any representation, advice or other action other than as included in this Agreement.
SECTION 7
Miscellaneous
7.1 This Release shall be governed by the internal substantive laws of the State of Delaware (without regard to its conflicts of law principles). The Parties irrevocably agree that in the event of any litigation enforcing the terms and conditions herein, or otherwise relating in any way to the matters addressed herein (but excluding matters solely between or among the Greenlight Entities and RTFC or CFC), any such litigation shall be brought exclusively in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”), or in the United States District Court for the District of Delaware (the “District Court”), to the extent that the Bankruptcy Court cannot or will not exercise jurisdiction. In the event that neither the Bankruptcy Court nor the District Court can or will exercise jurisdiction, the Parties irrevocably agree that any litigation enforcing the terms and conditions herein, or otherwise relating in any way to the matters addressed herein (but excluding matters solely between or among the Greenlight Entities and RTFC or CFC) shall be brought exclusively in the applicable state court (the “State Court”) for the State of Delaware. Each of the Parties irrevocably consents to the personal jurisdiction and venue in the Bankruptcy Court, the District Court and/or the State Court, as applicable, in connection with any actions to enforce the terms and conditions herein or otherwise relating in any way to the matters addressed herein (but excluding matters solely between or among the Greenlight Entities and RTFC or CFC) and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any Party anywhere in the world.
SECTION 8
Miscellaneous
8.1This Release may be executed in one or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. Each Releasing Party covenants, represents and warrants: that such counterparts need not include the signature/verification page for any other Releasing Party; that the Releasing Parties and the Released Parties may combine the signed counterparts into a single document by attaching all of the executed signature/verifieation pages to a single copy or original of this Release; and that the *82foregoing shall not affect the validity of this Release.
EXECUTED in multiple parts on this _day of May, 2006:
INNOVATIVE COMMUNICATION CORPORATION
By: /a/
Jeffrey J. Prosser
Chairman and Chief Executive Officer
INNOVATIVE COMMUNICATION CORPORATION, a United States Virgin Islands corporation that was dissolved in December, 1998
By: /s/
Jeffrey J. Prosser
Chairman and Chief Executive Officer
INNOVATIVE COMMUNICATION SUBSIDIARY COMPANY, LLC
By: /s/
Jeffrey J. Prosser
Chairman and Chief Executive Officer
VIRGIN ISLANDS TELEPHONE CORPORATION d/b/a INNOVATIVE TELEPHONE
By: /s/
David Sharp
Chairman and Chief Executive Officer
INNOVATIVE COMMUNICATION COMPANY, LLC
By: /s/
Its President
EMERGING COMMUNICATIONS INC. By: /s/
Jeffrey J. Prosser
Chairman and Chief Executive Officer By: /s/
Jeffrey J. Prosser, individually
BELIZE TELECOM LTD.
By: /s/
Its President
VITELCOM CELLULAR, INC.
By: /s/
Its President
ST. CROIX CABLE TV, INC.
By: /s/
Its President
CARIBBEAN COMMUNICATIONS CORP.
By: /s/
Its President
INNOVATIVE LONG DISTANCE, INC. By: /s/
Its President ICC TV, INC.
By: /s/
Its President
DAILY NEWS PUBLISHING CO., INC. By: /s/
Its President ICUSC, INC.
By: /s/
Its President
EXECUTIVE SECURITY SERVICES, INC.
By: /s/
Its President
WORLD SATELLITE GUADELOUPE S.A.
By: /s/
Its President
MARTINIQUE TV CABLE S.A.
By: /s/
Its President
*83MARTINIQUE CABLE MULTIMEDIA, SARL
By: /s/
Its President
B.V.I. CABLE T.V. LTD.
By: /a/
Its President
CARIBBEAN TELEVIEW SERVICES N.V.
By: /s/
Its President
ST. MARTIN MOBILES S.A.
By: /s/
Its President
SMB BOATPHONE HOLDINGS LIMITED
By: /s/
Its President
MOBARTON INVESTMENT N.V.
By: /a/
Its President
EAST CARIBBEAN CELLULAR N.V. By: /a/
Its President
EAST CARIBBEAN COMMUNICATIONS (ST. MAARTEN) N.V.
By: /a/
Its President
EAST CARIBBEAN COMMUNICATIONS (BONAIRE) N.V.
By: /a/
Its President
EAST CARIBBEAN COMMUNICATIONS (CURACAO) N.V.
By: /a/
Its President
TODD INTERNATIONAL LTD.
By: /s/
Its President ZUMBRO LIMITED By: /s/
Its President PINACLE LIMITED By: /s/
Its President
COMSYS INTERNATIONAL LTD.
By: /s/
Its President
K.I. MANAGEMENT LTD.
By: /s/
Its President
KC INTERNATIONAL INC.
By: /a/
Its President
TKH INTERNATIONAL LIMITED By: /s/
Its President
MINION CORPORATION N.V.
By: /s/
Its President
VAL VISION TELECOMMUNICATIONS B.V.
By: /s/
Its President
VAL VISION SAS (VALVISION)
By: /s/
Its President
AMZAK INTERNATIONAL LIMITED
By: /s/
Its President
H.M. BEUK BELEGGINGEN B.V.
By: /s/
*84Its President
ALTA B.V.
By: /s/
Its President
ICC FRANCE S.A.
By: /s/
Its President
CABLE EVASION 86 S.A.
By: /s/
Its President
ATLANTIC AIRCRAFT, INC.
By: /s/
Its President IC AIR, INC.
By: /s/
Its President
GROUP B-200, INC.
By: /s/
Its President
COMMUNICATIONS SYSTEMS & SERVICES, INC.
By: la/
Its President
/s/
Richard N. Goodwin, individually and as one of the Releasing Directors
Michael Prosser, individually and as one of the Releasing Directors
Sir Shridath Ramphal, individually and as one of the Releasing Directors
Lt. General Samuel Ebbesen, individually and as one of the Releasing Directors
Sir Ronald M. Sanders, individually and as one of the Releasing Directors
David Sharp, individually and as one of the Releasing Directors
John P. Raynor, individually and as one of the Releasing Directors
Richard N. Goodwin, individually and as one of the Releasing Directors
/s/
Michael Prosser, individually and as one of the Releasing Directors
Sir Shridath Ramphal, individually and as one of the Releasing Directors
Lt. General Samuel Ebbesen, individually and as one of the Releasing Directors
Sir Ronald M. Sanders, individually and as one of the Releasing Directors
David Sharp, individually and as one of the Releasing Directors
John P. Raynor, individually and as one of the Releasing Directors
Richard N. Goodwin, individually and as one of the Releasing Directors
Michael Prosser, individually and as one of the Releasing Directors
Sir Shridath Ramphal, individually and as one of the Releasing Directors
/s/
*85Lt. General Samuel Ebbesen, individually and as one of the Releasing Directors
Sir Ronald M. Sanders, individually and as one of the Releasing Directors
David Sharp, individually and as one of the Releasing Directors
John P. Raynor, individually and as one of the Releasing Directors
Richard N. Goodwin, individually and as one of the Releasing Directors
Michael Prosser, individually and as one of the Releasing Directors
/s/
Sir Shridath Ramphal, individually and as one of the Releasing Directors
Lt. General Samuel Ebbesen, individually and as one of the Releasing Directors
/s/
Sir Ronald M. Sanders, individually and as one of the Releasing Directors
David Sharp, individually and as one of the Releasing Directors
John P. Raynor, individually and as one of the Releasing Directors
Richard N. Goodwin, individually and as one of the Releasing Directors
Michael Prosser, individually and as one of the Releasing Directors
Sir Shridath Ramphal, individually and as one of the Releasing Directors
Lt. General Samuel Ebbesen, individually and as one of the Releasing Directors
Sir Ronald M. Sanders, individually and as one of the Releasing Directors
/s/
David Sharp, individually and as one of the Releasing Directors
John P. Raynor, individually and as one of the Releasing Directors
Richard N. Goodwin, individually and as one of the Releasing Directors
Michael Prosser, individually and as one of the Releasing Directors
Sir Shridath Ramphal, individually and as one of the Releasing Directors
Lt. General Samuel Ebbesen, individually and as one of the Releasing Directors
Sir Ronald M. Sanders, individually and as one of the Releasing Directors
David Sharp, individually and as one of the Releasing Directors
/s/
John P. Raynor, individually and as one of the Releasing Directors
*86
SCHEDULE 1
PROSSER SUBSIDIARIES
Innovative Communication Subsidiary Company, LLC (a U.S. Virgin Islands limited liability company)
Belize Telecom Ltd. (a Belize limited liability company)
Vitelcom Cellular, Inc. (a U.S. Virgin Islands corporation)
St. Croix Cable TV, Inc. (a U.S. Virgin Islands corporation)
Caribbean Communications Corp. (a U.S. Virgin Islands corporation)
Innovative Long Distance, Inc. (a U.S. Virgin Islands corporation)
iCC TV, Inc. (a U.S. Virgin Islands corporation)
Daily News Publishing Co., Inc. (a U.S. Virgin Islands corporation)
ICUSC, Inc. (a U.S. Virgin Islands corporation)
Executive Security Services, Inc. (a U.S. Virgin Islands corporation)
World Satellite Guadeloupe S.A. (a French corporation)
Martinique TV Cable S.A. (a French corporation)
Martinique Cable Multimedia, SARL (a French limited liability company)
B.V.I. Cable T.V. Ltd. (a British Virgin Islands corporation)
Caribbean Teleview Services N.V. (a Netherlands Antilles corporation)
St. Martin Mobiles S.A. (a French corporation)
SMB Boatphone Holdings Limited (a British Virgin Islands corporation)
Mobarton Investment N.V. (a Netherlands Antilles corporation)
East Caribbean Cellular N.V. (a Netherlands Antilles corporation)
East Caribbean Communications (St. Maarten) N.V. (a Netherlands Antilles corporation)
East Caribbean Communications (Bonaire) N.V. (a Netherlands Antilles corporation)
East Caribbean Communications (Curacao) N.V. (a Netherlands Antilles corporation)
Todd International Ltd., (a British Virgin Islands international business corporation)
Zumbro Limited (a British Virgin Islands international business corporation)
Pinacle Limited (a British Virgin Islands international business corporation)
COMSYS International Ltd. (a British Virgin Islands international business corporation)
K.I. Management Ltd. (a British Virgin Islands international business corporation)
KC International Inc. (a British Virgin Islands international business corporation)
TKH International Limited (a British Virgin Islands international business corporation)
Minion Corporation N.V. (a Netherlands Antilles corporation)
Valvision Telecommunications B.V. (a Dutch corporation)
Valvision SAS (Valvision) (a French corporation)
Amzak International Limited (a Bahamian company)
H.M. Beuk Beleggingen B.V. (a Dutch corporation)
Alta B.V. (a Dutch corporation)
ICC France S.A. (a French corporation)
Cable Evasion 86 S.A. (a French corporation)
*87Atlantic Aircraft, Inc. (a U.S. Virgin Islands corporation)
IC Air, Inc. (a Delaware corporation)
Group B-200, Inc. (a Puerto Rico corporation)
Communications Systems & Services, Inc. (a Florida corporation)
APPENDIX B
Prosser Parties’ Release of Greenlight GENERAL RELEASE AGREEMENT THIS GENERAL RELEASE AGREEMENT (this “Agreement” or this “Release”) is dated as of June 6, 2006 by INNOVATIVE COMMUNICATION CORPORATION, a United States Virgin Islands corporation (“Innovative New”), INNOVATIVE COMMUNICATION CORPORATION, a United States Virgin Islands corporation that was dissolved in December, 1998 (“Innovative Old”), VIRGIN ISLANDS TELEPHONE CORPORATION, a United States Virgin Islands corporation (‘Vitelco”), INNOVATIVE COMMUNICATION COMPANY, LLC, a Delaware limited liability company, (“ICC-LLC”), EMERGING COMMUNICATIONS, INC., a Delaware corporation, (“ECI”), JEFFREY J. PROSSER (“Mr. Prosser”), and each of the entities listed on Schedule I attached hereto (the “Pros-ser Subsidiaries” and together with Pros-ser, Innovative New, Innovative Old, Vitel-co, ICC-LLC, and ECI, collectively, the “Releasors”) to and in favor of GREEN-LIGHT CAPITAL, L.P., a limited partnership organized under the laws of Delaware (“Greenlight L.P.”), GREENLIGHT CAPITAL QUALIFIED, L.P., a limited partnership organized under the laws of Delaware (“Greenlight Qualified”), GREENLIGHT CAPITAL OFFSHORE, LTD., a corporation organized under the laws of British Virgin Islands (“Greenlight Offshore”), GREENLIGHT CAPITAL, INC., a corporation organized under the laws of Delaware (“Greenlight Corp.”), GREENLIGHT CAPITAL, LLC, a Delaware limited liability company (“Green-light LLC” and with Greenlight L.P., Greenlight Qualified, Greenlight Offshore and Greenlight Corp., collectively, with each of their respective subsidiaries and Affiliates (as defined herein), the “Green-light Parties”), DAVID EINHORN (“Mr. Einhorn”), and VINIT SETHI (“Mr. Se-thi”), and the directors, officers, shareholders, partners, members, managers, employees, agents and representatives of each of the Greenlight Parties and their respective subsidiaries and Affiliates (as defined herein), including, but not limited to, each of the attorneys and/or law firms listed on Schedule II attached hereto (collectively, with the Greenlight Parties, their respective subsidiaries and Affiliates, Mr. Einhorn and Mr. Sethi, the “Released Parties”). The Released Parties and the Re-leasors are referred to herein, collectively, as the “Parties”.
BACKGROUND
A. Mr. Prosser and Dawn Prosser, individually and/or collectively, directly and/or indirectly own or control 100% of the outstanding equity interests of ICC-LLC. ICC-LLC owns or controls, directly and/or indirectly, through one or more subsidiary entities, 100% of the outstanding stock or other equity interests of various entities, including, but not limited to, ECI, Innovative New, Vitelco, and each of the Prosser Subsidiaries.
B. As a result of various disputes among the Parties, certain judgments against one or more of Prosser, ICC-LLC and/or ECI have been previously entered in the Court of Chancery of the State of Delaware in favor of and/or are held by one or more of the Greenlight Parties (the “Greenlight Judgments”), and certain *88claims have been asserted and/or litigation instituted by or among one or more of the Greenlight Parties and one or more of the Releasors, including, but not limited to, (i) the following litigation or proceedings in the United States Bankruptcy Court for the District of Delaware (the “Delaware Bankruptcy Court”): (x) In re Jeffrey Prosser, Case Number 06-10135(JKF) pending in the United States Bankruptcy Court for the District of Delaware, (y) In re Innovative Communication Company, LLC, Case Number 06-10133(JKF) pending in the United States Bankruptcy Court for the District of Delaware and (z) In re Emerging Communications, Inc., Case Number 06-10134(JKF) pending in the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Proceedings”) and (ii) the following litigation outside of the Delaware Bankruptcy Court (collectively, the “Non-Bankruptcy Proceedings”): (A) Greenlight Capital Qualified. L.P., Greenlight Capital L.P. and Greenlight Capital Offshore, Ltd. v. Emerging Communications, Inc., Court of Chancery of the State of Delaware in and for New Castle County, Civil Action No. 16943, Consolidated Civil Action No. 16415, pending in the Supreme Court of the State of Delaware on appeal as Emerging Communications, Inc. v. Greenlight Capital Qualified. L.P., Greenlight Capital L.P. and Greenlight Capital Offshore, Ltd., No. 20, 2006, (B) Greenlight Capital Qualified, L.P., Greenlight Capital L.P. and Greenlight Capital Offshore, Ltd. v. Innovative Communication Corporation, Innovative Communication Company, LLC, and Jeffrey J. Prosser, Court of Chancery of the State of Delaware in and for New Castle County, Civil Action No. 18816, Consolidated Civil Action No. 16415, pending in the Supreme Court of the State of Delaware on appeal as Innovative Communication Corporation, Inno-votive Communication Company, LLC, and Jeffrey J. Prosser v. Greenlight Capital Qualified, L.P., Greenlight Capital L.P. and Greenlight Capital Offshore, Ltd., No. 21, 2006, and (C) each of the actions listed on Schedule III attached hereto.
C. Rural Telephone Finance Cooperative, a cooperative association organized under the laws of the District of Columbia (“RTFC”), National Rural Utilities Cooperative Finance Corporation, a cooperative association organized under the laws of the District of Columbia (“CFC”), the Green-light Parties, Innovative New, ECI, ICC-LLC, Vitelco and Mr. Prosser have entered into a certain Terms and Conditions of Settlement of Claims of RTFC, CFC, Prosser Parties and the Greenlight Entities, dated as of April 26, 2006 (the “Terms and Conditions”), pursuant to which the Parties agreed to enter into this Release.
D. Pursuant to the Terms and Conditions, it is a condition to the Released Parties’ obligation to deposit certain documentation into escrow that the Releasors execute and deliver this Release.
E. The Parties now wish to enter into this Release as provided in the Terms and Conditions.
NOW, THEREFORE, in consideration of the foregoing premises, the mutual covenants and agreements of the Parties contained herein, and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Releasors hereby agree as follows:
1. General Defínitions. For purposes of this Agreement, “Affiliate” of a person or entity means any other person or entity (a) that directly or indirectly through one or more intermediaries controls, is controlled by or is under common control with, the person or entity, (b) that directly or indirectly beneficially owns or holds 10% or more of any class of equity securi*89ty, partnership interests or other similar interests of the entity or (c) 10% or more of the equity securities, partnership interests or other similar interests of which is directly or indirectly beneficially owned or held by the person or entity. The term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person or entity, whether through the ownership of voting securities, by contract or otherwise. With respect to a natural person, such natural person’s Affiliates shall also include such natural person’s spouse, and their siblings, parents and lineal descendants. Other capitalized terms not otherwise defined in this Agreement shall have the definitions ascribed to them in the Terms and Conditions.
2. Release by the Releasing Parties. Effective as of the date of this Agreement, each of the Releasors, on behalf of the Releasor and the Releasor’s respective past, present and future parents, subsidiaries and Affiliates and the respective trustees, beneficiaries, directors, officers, shareholders, partners, members, managers, employees, attorneys, legal counsel, accountants, agents, representatives, administrators, insurers, transferees, heirs, executors, predecessors, successors and assigns of such Releasors and/or such Re-leasors’ past, present and future parents, subsidiaries and Affiliates (collectively, with the Releasors, the “Releasing Parties”) hereby releases, acquits and forever discharges, with prejudice, each of the Released Parties from past, present or future claims, costs, expenses, accounts, offsets, demands, causes of action, suits, debts, controversies, agreements, damages (including, without limitation, all actual damages, consequential damages, statutory damages, punitive and exemplary damages, prejudgment and post-judgment interest, attorney’s fees and costs of court, and all other damages or losses recoverable now or at any later time under applicable law), judgments, obligations, defenses, promises, covenants, reckoning, contracts, endorsements, bonds, specialties, trespasses, variances, extents, executions and liabilities of any kind or nature whatsoever, in law, equity, or otherwise, whether known or unknown to any Party at this time, asserted or unasserted, liquidated or unliquidated, absolute or contingent, which any of the Releasing Parties had, may have, now has or which may hereafter accrue or otherwise be acquired against any of the Released Parties on account of, arising out of, or relating to, or alleged or asserted or which could have been alleged or asserted or involving any matter occurring at any time from the beginning of the world up to and including the date of this Agreement (the “Claims”), of any kind or nature whatsoever, in law or equity (including, but not limited to, class action or derivative lawsuits or proceedings, actions based on violations of local, state and/or federal law and regulations, malfeasance, nonfeasance, fraud, intentional torts, malicious conduct, including, but not limited to, intentional interference with contracts or prospective business relations, libel, slander, defamation, wrongful use of civil proceedings and abuse of process, breach of contract, bad faith, breach of fiduciary duty, contribution, conspiracy, retaliatory conduct, or any combination thereof), including, but not limited to, any Claims (i) related in any way to ICC-LLC, ECI, Innovative Old, Innovative New, Vitelco, or any of the Prosser Subsidiaries or any of their respective businesses or operations, the Greenlight Judgments, the Bankruptcy Proceedings or the Non-Bankruptcy Proceedings (all of which Non-Bankruptcy Proceedings are being contemporaneously released and/or terminated by the parties thereto); (ii) related *90in any way to the subject matter of the Greenlight Judgments, the Bankruptcy Proceedings or the Non-Bankruptcy Proceedings; (iii) which were asserted or could have been asserted in the Non-Bankruptcy Proceedings or the Bankruptcy Proceedings, and/or (iv) which relate in any way or arise out of any one or more of their individual capacities and/or their capacity as an agent, attorney, legal counsel, accountant, employee, shareholder, member, director, officer, manager, representative of or consultant to any other of the Released Parties; 'provided, however, that this Agreement and the foregoing release is without effect on the obligations of Greenlight L.P., Greenlight Qualified, and Greenlight Offshore (i) to deposit a release of the Releasing Parties into escrow as provided in the Terms and Conditions or (ii) under any of the Payment Documentation as defined in and delivered pursuant to the Terms and Conditions. This Release shall (i) operate as a full and final settlement of the Released Parties’ past, present, and future liabilities to any of the Releasing Parties and (ii) be (a) effective immediately, (b) unconditional, and (c) irrevocable, regardless of whether, among other things, the Releasing Parties make the Payment and the Payment Documentation is released from escrow.
3. Releasors’ Representations and Warranties. Each of the Releasors on behalf of itself and each of its respective Related Parties, represents and warrants to the Released Parties (i) that the execution and delivery of this Release have been duly authorized by all necessary actions; (ii) that before executing this Release, they became fully informed of the terms, conditions, and contents, and effect of this Release; (iii) that they are legally competent to execute this Release; (iv) that no promise or representation of any kind has been made to them by any of the Released Parties, or by anyone acting for any of the Released Parties, except as expressly stated in this Release; (v) that they have not transferred to any person or entity any of their Claims or any interest thereunder; (vi) that this release constitutes the legal, valid and binding obligation of each Releasing Party enforceable against it in accordance with its terms; (vii) that they relied solely on their own judgment and the advice of their counsel in executing this Release; (viii) that they have entered into this Release of their own free choice based upon their own knowledge and judgment; and (ix) that they have not acted in reliance on any representation, advice or other action other than as included in this Release.
4. Entire Agreement; Parties; Predecessors, Successors and Assigns; Survival of Representations.
(a) This Agreement, together with the Terms and Conditions, constitutes the entire agreement between the Parties with respect to the subject matter hereof, supersedes any prior agreements and understandings between the Parties, whether written or oral, with respect to the subject matter hereof and shall bind the Relea-sors, and each of their respective Related Parties and benefit the Released Parties and their respective Related Parties, predecessors, successors and assigns.
(b) Notwithstanding and without limiting the foregoing, it is the intention that wherever in this instrument any Party shall be designated or referred to by name or general references (except where defining and/or identifying the parties to a specified agreement other than this Agreement) such designation is intended to and shall have the same effect as if the words “and each of their respective past, present and future parents, subsidiaries and affiliates and their respective trustees, benefi*91ciaries, directors, officers, shareholders, partners, members, managers, employees, attorneys, legal counsel, accountants, agents, representatives, administrators, insurers, transferees, heirs, executors, predecessors, successors and assigns” have been inserted after each and every such designation and all the terms, covenants and conditions herein contained shall be for and shall inure to the benefit of and shall bind the respective Parties hereto, and each of their respective past, present and future parents, subsidiaries and affiliates and their respective trustees, beneficiaries, directors, officers, shareholders, partners, members, managers, employees, attorneys, legal counsel, agents, representatives, administrators, insurers, transferees, heirs, executors, predecessors, successors and assigns.
(c) All representations made herein by the Releasors shall survive the execution and delivery hereof.
5. Governing Law; Jurisdiction.
(a) This Agreement shall be governed by and construed in accordance with the internal laws of the State of Delaware without giving effect to the principles of conflicts of law.
(b) The Parties irrevocably agree that in the event of any litigation enforcing the terms and conditions hereof, or otherwise relating in any way to the matters addressed herein (but excluding matters solely between or among the Releasors) any such litigation shall be brought exclusively in the Delaware Bankruptcy Court, or in the United States District Court for the District of Delaware (the “District Court”), to the extent that the Delaware Bankruptcy Court cannot or will not exercise jurisdiction. In the event that neither the Delaware Bankruptcy Court nor the District Court can or will exercise jurisdiction, the Parties irrevocably agree that any litigation enforcing the terms and conditions hereof or otherwise relating in any way to the matters addressed herein (but excluding matters solely between or among the Releasors) shall be brought exclusively in the applicable state court (the “State Court”) for the State of Delaware. Each of the Parties irrevocably consents to personal jurisdiction and venue in the Delaware Bankruptcy Court, the District Court and/or the State Court, as applicable, in connection with any actions to enforce the terms and conditions hereof or otherwise relating in any way to the matters addressed herein (but excluding matters solely between or among the Relea-sors) and waives any objection to venue laid therein. Process in any action or proceeding referred to in the preceding sentence may be served on any Party anywhere in the world.
6. Headings. The headings of the several sections of this Agreement are inserted for convenience only and shall not in any way affect the meaning or construction of any provision of this Agreement
7. Construction. Should any provision of this Agreement require interpretation or construction, it is agreed that because all Parties, by their respective attorneys, have fully participated in the preparation of all provisions of this Agreement, any arbitrator or judge who interprets or construes this Agreement shall not apply any presumption based upon the rule of construction that a document is to be construed more strictly against the party who itself or through its agents prepared such document.
8. Counterparts. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original but all of which taken together shall constitute but one and the instrument Each Releasor covenants, represents and war*92rants that such counterparts need not include the signature/verification page for any other Releasor, that the Releasors and the Released Parties may combine the signed counterparts into a single document by attaching all of the executed signature/verification pages to a single copy or original of this Release; and that the foregoing shall not affect the validity of this Release.
9. Acknowledgement of the Parties. The parties understand and acknowledge that the foregoing release:
(i.) IS A GENERAL RELEASE OF ALL CLAIMS (AS DEFINED HEREIN) — PAST, PRESENT, AND FUTURE AND WHETHER KNOWN OR UNKNOWN;
(ii.) is a full and complete release of any and all of the Releasing Parties’ Claims and/or Litigation, and the Releasing Parties are precluded from seeking further money or other relief based upon such Claims and/or Litigation;
(in.) is to be interpreted liberally to effectuate maximum protection to the Released Parties; and
(iv.) is specifically intended to operate and be applicable even if it is alleged, charged or proven that some or all of the claims or damages released are solely and completely or partially caused by the negligent acts, gross negligence, fraud, misrepresentation, intentional conduct, breach of fiduciary duty, violation of statute or common law, or conduct of any type by the Released Parties.
10. Covenant Not To Sue. The Relea-sors covenant, warrant, and represent that they shall not hereafter sue, or bring or continue any action or proceeding against the Released Parties with respect to all Claims released herein.
11. Consideration. The Releasors enter into this Release for good and valuable consideration, the receipt of and sufficiency of which is hereby acknowledged.
12. Further Assurances. The Relea-sors shall take, or cause to be taken, upon request by the Released Parties, all reasonably appropriate action, and do, or cause to be done, all things reasonably necessary, proper or advisable to consummate and make effective the releases contemplated hereunder, including, without limitation, executing and delivering all documents deemed reasonably necessary by the Released Parties to effectuate the releases contemplated hereby.
IN WITNESS WHEREOF, the undersigned have duly executed this General Release Agreement as of the date first above written.
INNOVATIVE COMMUNICATION CORPORATION
By: /s/
Jeffrey J. Prosser
Chairman and Chief Executive Officer
INNOVATIVE COMMUNICATION CORPORATION, a United States Virgin Islands corporation that was dissolved in December, 1998 By: /s/
Jeffrey J. Prosser
Chairman and Chief Executive Officer
VIRGIN ISLANDS TELEPHONE CORPORATION d/b/a INNOVATIVE TELEPHONE
By: -
David Sharp
Chairman and Chief Executive Officer
INNOVATIVE COMMUNICATION COMPANY, LLC
*93By: /s/
Jeffrey J. Prosser
Sole Managing Member
EMERGING COMMUNICATIONS INC.
By: /s/
Jeffrey J. Prosser
Chairman and Chief Executive Officer
INNOVATIVE COMMUNICATION CORPORATION, a United States Virgin Islands corporation that was dissolved in December, 1998
By: -
Jeffrey J. Prosser
Chairman and Chief Executive Officer
VIRGIN ISLANDS TELEPHONE CORPORATION d/b/a INNOVATIVE TELEPHONE
By: /s/
Samuel E. Ebbesen
Director and Secretary
INNOVATIVE COMMUNICATION COMPANY, LLC
By: -
Jeffrey J. Prosser
Sole Managing Member
EMERGING COMMUNICATIONS INC.
By: -
Jeffrey J. Prosser
Chairman and Chief Executive Officer
INNOVATIVE COMMUNICATION SUBSIDIARY COMPANY, LLC
By: /s/
Jeffrey J. Prosser
Its President
BELIZE TELECOM LTD
By: /s/
Jeffrey J. Prosser
Its President
VTTELCOM CELLULAR, INC.
By: /s/
Jeffrey J. Prosser
Its President
ST. CROIX CABLE TV, INC.
By: /s/
Jeffrey J. Prosser
Its President
CARIBBEAN COMMUNICATIONS CORP.
By: /s/
Jeffrey J. Prosser
Its President
INNOVATIVE LONG DISTANCE, INC.
By: /s/
Jeffrey J. Prosser
Its President
ICC TV, INC.
By: /s/
Jeffrey J. Prosser
Its President
DAILY NEWS PUBLISHING CO., INC.
By: /s/
Jeffrey J. Prosser
Its President
ICUSC, INC.
By: /s/
Jeffrey J. Prosser
Its President
EXECUTIVE SECURITY SERVICES, INC.
By: /s/
Jeffrey J. Prosser
Its President
*94WORLD SATELLITE GUADELOUPE S.A.
By: la/
Jeffrey J. Prosser
Its President
MARTINIQUE TV CABLE S.A.
By: /s/
Jeffrey J. Prosser
Its President
MARTINIQUE CABLE MULTIMEDIA, SARL
By: /s/
Jeffrey J. Prosser
Its President
B.V.I. CABLE T.V. LTD.
By: /s/
Jeffrey J. Prosser
Its President
CARIBBEAN TELEVIEW SERVICES N.V.
By: /s/
Jeffrey J. Prosser
Its President
ST. MARTIN MOBILES S.A.
By: /s/
Jeffrey J. Prosser
Its President
SMB BOATPHONE HOLDINGS LIMITED
By: /s/
Jeffrey J. Prosser
Its President
MOBARTON INVESTMENT N.V.
By: /s/
Jeffrey J. Prosser
Its President
EAST CARIBBEAN CELLULAR N.V.
By: /s/
Jeffrey J. Prosser
Its President
EAST CARIBBEAN COMMUNICATIONS (ST. MAARTEN) N.V.
By: Is/
Jeffrey J. Prosser
Its President
EAST CARIBBEAN COMMUNICATIONS (BONAIRE) N.V.
By: Is/
Jeffrey J. Prosser
Its President
EAST CARIBBEAN COMMUNICATIONS (CURACAO) N.V.
By: Is/
Jeffrey J. Prosser
Its President
TODD INTERNATIONAL LTD.
By: Is/
Jeffrey J. Prosser
Its President
ZUMBRO LIMITED
By: /s/
Jeffrey J. Prosser
Its President
PINACLE LIMITED
By: Is/
Jeffrey J. Prosser
Its President
COMSYS INTERNATIONAL LTD.
By: Is/
Jeffrey J. Prosser
Its President
K.I. MANAGEMENT LTD.
*95By: /s/
Jeffrey J. Prosser
Its President
KC INTERNATIONAL INC.
By: /s/
Jeffrey J. Prosser
Its President
TKH INTERNATIONAL LIMITED
By: /s/
Jeffrey J. Prosser
Its President
MINION CORPORATION N.V.
By: /s/
Jeffrey J. Prosser
Its President
VAL VISION TELECOMMUNICATIONS B.V.
By: /s/
Jeffrey J. Prosser
Its President
VAL VISION SAS (VALVISION)
By: /s/
Jeffrey J. Prosser
Its President
AMZAK INTERNATIONAL LIMITED
By: /s/
Jeffrey J. Prosser
Its President
H.M. BEUK BELEGGINGEN B.V.
By: /s/
Jeffrey J. Prosser
Its President
ALTA B.V.
By: /s/
Jeffrey J. Prosser
Its President
ICC FRANCE S.A.
By: /s/
Jeffrey J. Prosser
Its President
CABLE EVASION 86 S.A.
By: /s/
Jeffrey J. Prosser
Its President
ATLANTIC AIRCRAFT, INC.
By: /s/
Jeffrey J. Prosser
Its President
IC AIR, INC.
By: /s/
Jeffrey J. Prosser
Its President
GROUP B-200, INC.
By: /s/
Jeffrey J. Prosser
Its President
COMMUNICATIONS SYSTEMS & SERVICES, INC.
By: /s/
Jeffrey J. Prosser
Its President
By: /s/
Jeffrey J. Prosser, individually
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on his oath, deposed and made proof to my satisfaction that he executed the within instrument on behalf of himself, and there*96upon he acknowledged that he signed, sealed and delivered the same on behalf of himself as his voluntary act and deed, for the uses and purposes therein expressed,
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of INNOVATIVE COMMUNICATION CORPORATION and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of INNOVATIVE COMMUNICATION CORPORATION, a United States Virgin Islands corporation that was dissolved in December, 1998, and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared David Sharp who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the Chairman and Chief Executive Officer of VIRGIN ISLANDS TELEPHONE CORPORATION d/b/a INNOVATIVE TELEPHONE and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of INNOVATIVE COMMUNICATION COMPANY, LLC and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/s/
*97TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of EMERGING COMMUNICATIONS INC. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. THOMAS
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Samuel Eb-besen who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the Director and Secretary of VIRGIN ISLANDS TELEPHONE CORPORATION d/b/a INNOVATIVE TELEPHONE and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body, /s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of INNOVATIVE COMMUNICATION COMPANY, LLC. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of EMERGING COMMUNICATIONS INC. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. *98Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of INNOVATIVE COMMUNICATION SUBSIDIARY COMPANY, LLC and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body, /s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of BELIZE TELECOM LTD. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body, /s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of VITELCOM CELLULAR, INC. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body, /s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of ST. CROIX CABLE TV, INC. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body, /s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of CARIBBEAN COMMUNICATIONS CORP. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes there*99in expressed by virtue of authorization from its governing body.
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of INNOVATIVE LONG DISTANCE, INC. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of ICC TV, INC. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/a/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of DAILY NEWS PUBLISHING CO., INC. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of ICUSC, INC. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned sub*100scriber, personally" appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of EXECUTIVE SECURITY SERVICES, INC. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of WORLD SATELLITE GUADELOUPE 5.A. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of MARTINIQUE TV CABLE S.A. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body, /s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of MARTINIQUE CABLE MULTIMEDIA, SARL and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of B.V.I. CABLE T.V. LTD. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in *101such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body,
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of CARIBBEAN TELEVIEW SERVICES N.V. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of ST. MARTIN MOBILES S.A. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/a/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of SMB BOATPHONE HOLDINGS LIMITED and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/a/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of MOBARTON INVESTMENT N.V. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body. /a/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
*102BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of EAST CARIBBEAN CELLULAR N.V. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of EAST CARIBBEAN COMMUNICATIONS (ST. MAARTEN) N.V. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body. /a/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of EAST CARIBBEAN COMMUNICATIONS (BONAIRE) N.V. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body, /s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of EAST CARIBBEAN COMMUNICATIONS (CURACAO) N.V. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body, /s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of TODD INTERNATIONAL LTD. and is the person named in and who executed the *103within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body,
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of ZUMBRO LIMITED and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body, /s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of PINACLE LIMITED and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body, /s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of COMSYS INTERNATIONAL LTD. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of K.I. MANAGEMENT LTD. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body, /s/
TERRITORY OF THE VIRGIN ISLANDS
*104ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of KC INTERNATIONAL INC. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body. /a/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of TKH INTERNATIONAL LIMITED and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
M
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of MINION CORPORATION N.V. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body, /s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of VALVISION TELECOMMUNICATIONS B.V. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/a/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of VALVISION SAS (VALVISION) and is the person named in and who executed the within instrument on behalf of such entity, *105and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body,
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of AMZAK INTERNATIONAL LIMITED and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of H.M. BEUK BELEGGINGEN B.V. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body,
/s/
TERRITORY OF TOE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of ALTA B.V. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/a/
TERRITORY OF TOE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of ICC FRANCE S.A. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
*106BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of CABLE EVASION 86 SA. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body,
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of ATLANTIC AIRCRAFT, INC. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body, /a/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of IC AIR, INC. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of GROUP B-200, INC. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body, /s/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared Jeffrey J. Prosser who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the President of COMMUNICATIONS SYSTEMS & SERVICES, INC. and is the person named in and who executed the within instrument on behalf of such entity, and thereupon they acknowledged that they signed, sealed and delivered the same in such capacity on *107behalf of such entity as its voluntary act and deed, for the uses and purposes therein expressed by virtue of authorization from its governing body.
/a/
TERRITORY OF THE VIRGIN ISLANDS
ISLAND OF ST. CROIX
BE IT REMEMBERED, that on June 6, 2006, before me, the undersigned subscriber, personally appeared JEFFREY J. PROSSER who, being by me duly sworn on their oath, deposed and made proof to my satisfaction that he is the person named in and who executed the within instrument and thereupon acknowledged that they signed sealed and delivered the same as their voluntary act and deed for the uses and purposes therein expressed, /s/
SCHEDULE I
PROSSER ENTITIES
Innovative Communication Subsidiary Company, LLC (a U.S. Virgin Islands limited liability company)
Belize Telecom Ltd. (a Belize limited liability company)
Vitelcom Cellular, Inc. (a U.S. Virgin Islands corporation)
St. Croix Cable TV, Inc. (a U.S. Virgin Islands corporation)
Caribbean Communications Corp. (a U.S. Virgin Islands corporation)
Innovative Long Distance, Inc. (a U.S. Virgin Islands corporation)
iCC TV, Inc. (a U.S. Virgin Islands corporation)
Daily News Publishing Co., Inc. (a U.S. Virgin Islands corporation)
ICUSC, Inc. (a U.S. Virgin Islands corporation)
Executive Security Services, Inc. (a U.S. Virgin Islands corporation)
World Satellite Guadeloupe S.A. (a French corporation)
Martinique TV Cable S.A. (a French corporation)
Martinique Cable Multimedia, SARL (a French limited liability company)
B.V.I. Cable T.V. Ltd. (a British Virgin Islands corporation)
Caribbean Teleview Services N.V. (a Netherlands Antilles corporation)
St. Martin Mobiles S.A. (a French corporation)
SMB Boatphone Holdings Limited (a British Virgin Islands corporation)
Mobarton Investment N.V. (a Netherlands Antilles corporation)
East Caribbean Cellular N.V. (a Netherlands Antilles corporation)
East Caribbean Communications (St. Maarten) N.V. (a Netherlands Antilles corporation)
East Caribbean Communications (Bonaire) N.V. (a Netherlands Antilles corporation) East Caribbean Communications (Curacao) N.V. (a Netherlands Antilles corporation)
Todd International Ltd. (a British Virgin Islands international business corporation) Zumbro Limited (a British Virgin Islands international business corporation)
Pinacle Limited (a British Virgin Islands international business corporation)
COMSYS International Ltd. (a British Virgin Islands international business corporation)
K.I. Management Ltd. (a British Virgin Islands international business corporation)
*108KC International Inc. (a British Virgin Islands international business corporation)
TKH International Limited (a British Virgin Islands international business corporation)
Minion Corporation N.V. (a Netherlands Antilles corporation)
Valvision Telecommunications B.V. (a Dutch corporation)
Valvision SAS (Valvision) (a French corporation)
Amzak International Limited (a Bahamian company)
H.M. Beuk Beleggingen B.V. (a Dutch corporation)
Alta B.V. (a Dutch corporation)
ICC France S.A. (a French corporation)
Cable Evasion 86 S.A. (a French corporation)
Atlantic Aircraft, Inc. (a U.S. Virgin Islands corporation)
1C Air, Inc. (a Delaware corporation)
Group B-200, Inc. (a Puerto Rico corporation)
Communications Systems & Services, Inc. (a Florida corporation)
SCHEDULE II
LEGAL COUNSEL FOR THE GREEN-LIGHT ENTITIES INCLUDED WITHIN RELEASED PARTIES
Matthew J. Duensing
Stryker, Duensing, Casner & Dollison
Upper Level Drake’s Passage
P.O. Box 6785
St. Thomas, U.S. Virgin Islands 00804
Thomas J. Allingham II
Gregg M. Galardi
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
One Rodney Square
P.O. Box 636
Wilmington, Delaware 19899
SCHEDULE III
ADDITIONAL NON-BANKRUPTCY PROCEEDINGS
A. Each of the following actions pending in the United States District Court of the Virgin Islands, Division of St. Thomas and St. John:
1. Cause No. 2006-cv-018; Virgin Islands Telephone Corporation v. Rural Telephone Finance Cooperative, National Rural Utilities Cooperative Finance Corporation, Green-light Capital Qualified, L.P., Green-light Capital L.P., and Greenlight Capital Offshore, Ltd.
2. Cause No. 2006-cv-034; Emerging Communications, Inc. and Innovative Communication Company, LLC v. Greenlight Capital Qualified L.P., Greenlight, Capital, L.P., and Greenlight Capital Offshore, Ltd.
B. In Re Emerging Communications, Inc. v. Greenlight, No. 42 cv-06 and 43 cv-06, pending in the Superior Court of the Virgin Islands.
C. Emerging Communications, Inc., Innovative Communication Corporation, Innovative Communication Company, LLC, and Jeffrey J. Prosser v. Greenlight Capital Qualified L.P., Greenlight Capital L.P., and Greenlight Capital Offshore, Ltd., Case No. 2006CA000185, in the Circuit Court of the 15th Judicial Circuit in and for Palm Beach County, Florida, General Jurisdiction Division.
*109ORDER GRANTING PRELIMINARY AND PERMANENT INJUNCTIONS WITH RESPECT TO ALLEGATIONS IN ADVERSARY NO. 10-50744
AND NOW, this 15th day of December, 2011, for the reasons expressed in the foregoing Memorandum Opinion it, is ORDERED, ADJUDGED and DECREED that Plaintiffs’ Motions for Preliminary Injunction at Adv. Doc. Nos. 34 and 76 are GRANTED and Defendants are preliminarily enjoined from pursuing the action at Adv. No. 10-50744 and any and all claims, causes of action and actions asserted therein or which would violate the Prosser Releases of RTFC and Greenlight.
It is FURTHER ORDERED, ADJUDGED and DECREED that Defendants are permanently enjoined from pursuing the action at Adv. No. 10-50744 and any and all claims, causes of action and actions asserted therein or which would violate the Prosser Releases of RTFC and Greenlight. A separate order will be entered dismissing that adversary with prejudice.
ORDER DISMISSING ADVERSARY WITH PREJUDICE
AND NOW, this 15th day of December, 2011, for the reasons stated in the foregoing Memorandum Opinion, it is ORDERED, ADJUDGED and DECREED that the above captioned Adversary is dismissed with prejudice.
. This Memorandum Opinion constitutes our findings of fact and conclusions of law.
. The Greenlight Entities were added as mov-ants in the motion filed at Adv. Doc. No. 76 and were not parties to Adv. Doc. No. 34.
. All of the Prosser Parties involved in these two Adversary actions are “releasing parties” under both the Prosser Parties’ Release of RTFC, Appendix A hereto, and the Prosser Parties’ Release of Greenlight, Appendix B hereto.
The Prosser Parties' Release of Greenlight, Appendix B, provides:
1. General Definitions. For purposes of this Agreement, "Affiliate” of a person or entity means any other person or entity ... With respect to a natural person, such natural person’s Affiliates shall also include such natural person’s spouse, and their siblings, parents and lineal descendants.
Adv. Doc. No. 1 at Exhibit 4, at 2-3.
The Prosser Parties’ Release of Greenlight further provides:
2. Release by the Releasing Parties. Effective as of the date of this Agreement, each of the Releasors, on behalf of the Releasor and the Releasor’s respective past, present and future parents, subsidiaries and Affiliates and the respective trustees, beneficiaries, directors, officers, *62shareholders, partners, members, managers, employees, attorneys, legal counsel, accountants, agents, representatives, administrators, insurers, transferees, heirs, executors, predecessors, successors and assigns of such Releasors and/or such Re-leasors' past, present and future parents, subsidiaries and Affiliates (collectively, with the Releasors, the "Releasing Parties”).
Id. at 3.
The Prosser Parties’ Release of RTFC defines "Prosser” as
1.12. "Prosser” means Jeffrey J. Prosser and all heirs, trustees, agents, successors, assigns, executors, and administrators, and his representative capacity as agent, employee, and/or shareholder of ICC, Vi-telco, ICC LLC, and/or ECI, including, but not limited to, his capacity as the indirect beneficial owner, Chief Executive Officer, President, and Chairman of the Board of ICC, member [of] the Board of Vitelco, member and sole managing member of ICC LLC, and as guarantor of ICC owing to RTFC.
Adv. Doc. No. 1 at Exhibit 3, at ¶ 1.12.
. The Prosser Parties are Jeffrey Prosser, Dawn Prosser, L. Adrian Prosser, John P. Raynor. They are the plaintiffs in the RICO action at Adversary No. 10-50744 and are the defendants in Adversary No. 09-52854.
. In the brief filed by Plaintiffs, Adv. Doc. No. 36, in support of the first motion for preliminary injunction filed in this Adversary, Adv. Doc. No. 34, Plaintiffs asked that the Prosser Parties be enjoined "from prosecuting the Virgin Islands [RICO] Action, and the claims, causes of action, or actions asserted therein, during the pendency of the above-captioned lawsuit, and grant Plaintiffs all other relief to which they may be entitled.” Adv. Doc. No. 36, Brief in Support of Motion for Preliminary Injunction, at 34.
In the Brief in Support of the Motion for Preliminary Injunction filed at Adv. Doc. No. 76, Attachment 1, Plaintiffs broadened their request, seeking to "enjoin Defendants from prosecuting the Virgin Islands [RICO] Action, as well as any other claims, causes of action, or actions in violation of the Releases, and grant Plaintiffs all other relief to which they may be entitled.” Id. at 40.
. Defendants in the RICO action which are not party to this motion are Deloitte Touche USA, L.L.P., Ernst & Young, L.L.P., Rural Telephone Finance Cooperative and Glenn L. English.
. Those cases are Emerging Communications, Inc., Bankr.No. 06-30007, and Innovative Communication Company, LLC, Bankr.No. 06-30008, jointly administered at 06-30008, Jeffrey J. Prosser, Bankr.No. 06-30009, and Innovative Communication Corporation, Bankr.No. 07-30012.
. The Prosser Parties appealed the reference order and one entered by the District Court for the District of Delaware, Case No. 09-111, Doc. No. 56 (Motion for Reconsideration denied, Doc. No. 61), transferring this injunction action to the Bankruptcy Court for the District of Delaware. The Prosser Parties’ appeal to the Court of Appeals for the Third Circuit was dismissed for lack of jurisdiction. See Case Nos. 09-4683 (appeal from VI District Court), 09-4684 (appeal from Delaware District Court), order dated March 30, 2010, *63order denying petition for rehearing and rehearing en banc entered October 12, 2010. Certiorari was denied by the United States Supreme Court on March 21, 2011, Case No. 10-894.
. The injunction action in the Delaware District Court was assigned Case No. 09-cv-lll.
. ICC and EmCom have been administratively consolidated at Bankr.No. 06-30008.
. The "Greenlight Entities” are all those listed in the caption of Adversary No. 09-52854 and Adversary No. 10-50744: Greenlight Capital, Inc.; Greenlight Capital LP; Green-light Capital Qualified LP; and Greenlight Capital Offshore Ltd.
.John Raynor was a member of the Board of Directors of ICC, EmCom, New ICC, and the Virgin Islands Telephone Corporation (a wholly owned subsidiary of ICC). See Amended Complaint filed by Prosser Parties, 08-cv-107, Doc. No. 50, at 76, 78. He also was Prosser's attorney, and served as attorney and was a former director of Innovative Communication Corporation ("New ICC”), VI Bankr.No. 07-30012. See Adv. No. 09-52854, Adv. Doc. No. 18 at 2; 08-cv-107, Doc. No. 1 at 3. Raynor is a Chapter 7 debtor in another jurisdiction and, although he received a discharge in October of 2005, his case has not been closed. See Case No. 04-83112, Bankruptcy Court, District of Nebraska.
. See Bankr.No. 06-30008, Doc. No. 24 at 7, ¶ 11.
. RTFC is a member of CFC, a cooperative formed to make loans to its members to facilitate acquisition, construction and operation of electric distribution, generation and transmission facilities. See Adv. Doc. No. 1 at 3.
.See National Rural Utilities Co-op. Finance Corp. v. Prosser, 435 B.R. 27, 30-32 (Bnkr.D.Del.2009).
. The Greenlight Judgments were issued by the Delaware Chancery Court. See 435 B.R. at 30.
. The Payment Documentation was part of the Terms and Conditions. Under the heading of "Payment Documentation” the Terms and Conditions provided:
RTFC, CFC, and the Greenlight Entities shall execute and deliver into escrow such documents and other instruments as are necessary to permit the Prosser Parties to effect the Payment free and clear of any and all claims and liens of RTFC, CFC and the Greenlight Entities (collectively, the “Payment Documentation ”), including without limitation (a) mutual releases by the Parties, releasing, inter alia, the Parties, all subsidiaries, affiliates and their respective directors, officers, shareholders, partners, members, managers, employees, agents, and representatives, (b) Satisfactions of all judgments by the Greenlight Entities, RTFC and CFC, including those created herein, (c) releases and discharges of liens held by RTFC and the Greenlight Entities, (d) non-disparagement and confidentiality agreements by all Parties, (e) dismissals of the bankruptcy proceedings with prejudice and (f) in the sole discretion of the Prosser Parties, an assignment to the Prosser Parties or their designee of the judgments and liens of RTFC, provided that any such transfer shall be without any representations or warranties and without recourse. The Payment Documentation shall be released from escrow as provided above.
Bankr.No. 06-30009, Jeffrey J. Prosser, Debt- or, Doc. No. 29, at 9-10. See Adv. Doc. No. 76 at Exhibit A-6. Because the discounted payment was not made pursuant to the Terms and Conditions, the Terms and Conditions became void and the RTFC and Greenlight release of the Prosser Parties was never in effect. The voided release under the Terms and Conditions can be found at Adv. Doc. No. 76, Exhibit P-3.
.The Greenlight Entities subsequently filed an involuntary petition against New ICC in the Bankruptcy Division of the VI District Court. New ICC was adjudicated a debtor. It is not a party to this injunction action or the RICO action. It is, however, covered by the Prosser Parties’ Release of Greenlight and the Prosser Parties' Release of RTFC. See note 4, supra.
. Case No. 08-cv-687 (D.D.C.), Jeffrey J. Prosser and John P. Raynor v. Federal Agricultural Mortgage Corporation, U.S. Dept. of Agriculture, and National Rural Utilities Cooperative Finance Corporation. CFC’s unopposed motion to dismiss was granted on May 30, 2008. The motion to dismiss filed by the Federal Agricultural Mortgage Corporation and the U.S. Department of Agriculture was granted January 14, 2009, by the VI District Court which found that Prosser and Raynor had no standing and the court had no subject matter jurisdiction. The complaint in that action alleged, inter alia, that, since creating the RTFC, the CFC had controlled the RTFC through unlawful means. The District Court's opinion makes clear that the allegations in that action are based on the same facts as are the RICO adversary before the undersigned; i.e., that ICC discovered the CFC’s allegedly improper use of RTFC profits and that RTFC retaliated by foreclosing on the ICC loan, etc. The District Court in the D.C. action based its decision on, inter alia, Prosser’s and Raynor’s "speculative assumptions about the past and future acts and motives of strangers to this suit, and even about market forces.” Further, the court noted they had failed to sufficiently allege any of the required elements of standing and, "[wjithout standing, there is no subject matter jurisdiction. Without subject matter jurisdiction, the complaint must be dismissed.” Case No. 08-cv-687, Doc. Nos. 27 (Memorandum) and 28 (Order).
. Both objections should have been dismissed for failure to comply with the Case Management Order in effect in this case inasmuch as they failed to state hearing and objection dates. Nonetheless, the objection to claim at Doc. No. 1555 with respect to RTFC was heard and dismissed after the RTFC filed a motion for sanctions and other relief with respect to it. See Bankr.No. 06-30009, Doc. No. 1702, order entered July 29, 2008, Doc. No. 1888. No order was entered regarding Doc. No. 1554 but the objection to claim, filed by attorney Robert F. Craig on behalf of Pros-ser, should have been dismissed inasmuch as it was filed not in compliance with the Case Management Order in effect in this case. Nonetheless, after a discussion on the record on June 19, 2008, this court determined that the objection to claim had to be filed as an adversary proceeding. The adversary was filed, with Prosser’s counsel’s firm, Robert F. Craig, P.C., as the named plaintiff, at Adv. No. 08-3051. (Another law firm representing Prosser, Law Offices of Lawrence Schoen-bach, filed the adversary on behalf of Robert F. Craig, P.C.) This court dismissed the Adversary and an appeal was filed by the Schoen-bach firm on behalf of Robert F. Craig, P.C. Case No. 09-cv-109, D.V.I. That appeal is pending.
. Bankruptcy No. 06-30009, Doc. No. 1555, Jeffrey J. Prosser’s Objection ... to the Claim of the Rural Telephone Finance Cooperative. Order entered July 29, 2008, Doc. No. 1888, striking objection.
. Bankruptcy No. 06-30009, Doc. No. 1554, Jeffrey J. Prosser’s Objection to the Claims of Greenlight Capital Qualified, L.P., Greenlight Capital, L.P., and Greenlight Capital Offshore, LTD. A previous objection to the Greenlight Entities’ claim filed by Prosser and the corporate Debtors was dismissed. See Doc. Nos. 247, 380, 947 in Bankr.No. 06-30009.
. The RTFC loan default litigation claims were dismissed with prejudice.
. Case No. 08-cv-107, D.V.I. (St. Croix Division), Civil RICO Complaint. The matter was referred to the Delaware District Court (Case No. 10-201) which referred it to the Bankruptcy Court for the District of Delaware where it was assigned Adversary No. 10-50744. Adversary No. 09-52854 was filed in order to dispose of Adv. No. 10-50744. Note *67that the matter was dismissed as to NRECA and Glenn L. English by order dated September 30, 2009, Case No. 08-cv-107, District Court of the Virgin Islands (St. Croix Division), Doc. No. 162. Nonetheless, NRECA and Glenn L. English remained in the caption when the matter was transferred to Delaware. See Case No. 09-cv-l 11 (D. Del.).
. Ernst & Young, Deloitte Touche, Glenn L. English and NRECA did not join as Plaintiffs in the injunction action when it was refiled in Delaware after the transfer from the VI District Court. Glenn L. English and NRECA had been dismissed from the RICO action by the VI District Court. Nonetheless, the Pros-ser Parties named them as defendants when the RICO action was refiled in Delaware. Ernst & Young and Deloitte Touche had filed motions to dismiss in the RICO action but there is no record of adjudication of their motions. They did not file motions to dismiss in Adv. No. 09-52854 in which these motions for preliminary injunction are pending.
. See 09-cv-l 11 (D. Del.), related to 10-cv-201 (D. Del.) (transfer of RICO Case No. 08-cv-107 from VI District Court). The complaint filed in the Delaware District Court at 09-cv-l 11 was filed as an action for declaratory judgment, breach of contract, specific performance, and an All Writs Act Injunction. Upon transfer by the Delaware District Court to this court, certain Plaintiffs filed a motion for preliminary injunction at Adv. Doc. No. 34. A second motion for preliminary injunction was filed at Adv. Doc. No. 76 on behalf of all the Plaintiffs in Adv. No. 09-52854, although the docket entry itself does not name them all.
. Because the payment was not made, by order dated August 2, 2007, this court ruled that the Terms and Conditions agreement was not assumable. See VI Bankr.No. 06-30009, Doc. No. 725, Order dated August 2, 2007 (the Terms and Conditions are not assumable for reasons expressed on the record on July 19, 2007). The order was affirmed on appeal. In re Innovative Communication Co., LLC, 399 B.R. 152 (Bankr.D.V.1.2008); 2008 WL 2275397 (D.VL, May 30, 2008). The Court of Appeals affirmed the VI District Court order. See In re Prosser, 388 Fed.Appx. 100 (3d Cir.2010).
. The Greendyke Declaration was filed in the District Court for the District of Delaware, Case No. 09-cv-lll at Doc. No. 50. The reference in the Greendyke Declaration to "Exhibit C” is to the RTFC and Greenlight Release of the Prosser Parties, filed in Adv. No. 09-52854 at Adv. Doc. No. 76, Exhibit P-3. This is the release that was voided when payment was not made pursuant to the Terms and Conditions. See Greendyke Declaration, Adv. Doc. No. 76, Exhibit P, at 4-5, ¶¶ 11-14.
. We note that each of the Prosser Parties are "Releasing Parties” under the Prosser Parties’ Releases of RTFC and Greenlight because they are named in the Releases, signed them, or fit within the definition of "Releasing Parties.” That definition includes, inter alia, employees, shareholders, affiliates and members of Prosser’s companies. The Plaintiffs herein are each "Released Parties” either by name or by definition. For example, the CFC, RTFC, Lilly, List and Greenlight are specifically named as Released Parties. Petersen and Stratton as well as Lilly and List are included within the Release of CFC and RTFC officers, directors, employees, shareholders, agents, and representatives. Fulbright & Jaworski LLP, Greenlight’s counsel, are likewise released as agents, representatives, counsel and attorneys. See note 4 and accompanying text, supra.
. There is no basis asserted by the Prosser Parties that they have standing to bring such an action. Regardless, the propriety, or lack thereof, of filings with the SEC, or the applicability of, or adherence to, Generally Accepted Accounting Principles, have been raised before and have been released. These and other issues are raised in Raynor's Memorandum of Law Opposing Plaintiffs’ Motion for Injunction, Adv. Doc, No. 128. The Prosser Parties also argue that events such as 10-K filings by CFC and its related entities that pre- and post-date the Releases constitute new acts that fall outside of the Releases. The argument is without merit inasmuch as every fact, event or allegation raised by the Prosser Parties relates to the transactions between and among them and these Plaintiffs, all of which were released.
.In re Prosser, 388 Fed.Appx. 100 (3d Cir. 2010).
. The Prosser Parties’ Release of Greenlight applies to everything "from the beginning of the world up to and including the date of this Agreement.” See Appendix B, Prosser Parties’ Release of Greenlight, at ¶ 2. It also applies to release all past, present and future
claims, costs, expenses, accounts, offsets, demands, causes of action, suits, debts, controversies, agreements, damages (including, without limitation, all actual damages, consequential damages, statutory damages, punitive and exemplary damages, prejudgment and post-judgment interest, attorney’s fees and costs of court, and all other damages or losses recoverable now or at any later time under applicable law), judgments, obligations, defenses, promises, covenants, reckoning, contracts, endorsements, bonds, specialties, trespasses, variances, extents, executions and liabilities of any kind or nature whatsoever, in law, equity, or otherwise, whether known or unknown to any Party at this time, asserted or unassert-ed, liquidated or unliquidated, absolute or contingent, which any of the Releasing Parties had, may have, now has or which may hereafter accrue or otherwise be acquired against any of the Released Parties on account of, arising out of, or relating to, or alleged or asserted or which could have been alleged or asserted or involving any matter occurring at any time from the beginning of the world up to and including the date of this Agreement.
Id. The conduct complained of in the RICO matter relates to the subject matter of what was intended to be released — i.e., the litigation predating the filing of the bankruptcy petitions and the settlements which effected the resolution of those matters.
The Prosser Parties’ Release of RTFC is similarly all-encompassing. It defines "All Claims” as referring:
to any and all claims, demands, damages (including, without limitation, all actual damages, consequential damages, statutory damages, punitive and exemplary damages, prejudgment and post-judgment interest, attorneys’ fees and costs of court, and all other damages or losses recoverable now or at any later time under applicable law), actions of any character or type (including, but not limited to, class action or derivative lawsuits or proceedings, actions based on violations of local, state and/or federal statutes and regulations, malfeasance, non-fea-sance, fraud, intentional torts, malicious conduct, including, but not limited to relations, libel, slander, defamation, wrongful use of civil proceedings and abuse of process, breach of contract, bad faith, breach of fiduciary duty, lender liability, contribution, conspiracy, retaliatory conduct, or any combination thereof), and causes of action of whatever nature, in law or equity (including declaratory and injunctive relief), known or unknown, that the Releasing Parties have, or ever have had, or may in the future have, against the Released Parties related to, directly or indirectly, any and all of the facts, events, transactions, occurrences, course of dealings and/or disputes between the Releasing Parties and the Released Parties occurring prior to the date of this Release or occurring after the date of this Release but which involve the same facts, events, transactions, occurrences, course of dealings and/or disputes existing as of the date of this Release whether known or unknown arising out of the relationships or alleged relationships between or among the Releasing Parties and the Released Parties as member, cooperative, borrower, lender, patron, third-party beneficiary, investor, issuer of security or any *73other relationship, as well as any and all consequences thereof, each and all, even though one or more of those consequences are not specifically identified herein, other than, in any such case, the Excluded Claims (as hereinafter defined).
Adv. Doc. No. 1, Exhibit 3, Prosser Parties’ Release of RTFC at 3-4, ¶ 1.18.
. The chart was originally filed in Civil Action No. 08-cv-107 in the District Court of the Virgin Islands as Exhibit I to Doc. No. 77.
. This is the same chart filed in Civ. A. No. lO-cv-201 at Doc. No. 77-21, D. Del. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494652/ | MEMORANDUM OPINION
AUDREY R. EVANS, Bankruptcy Judge.
On September 27, 2011, the Court held a trial on the Amended Complaint filed by the Chapter 7 Trustee, Richard Cox (the “Trustee”), against the Debtors, Greg and Ronda Andrews, two brothers of Debtor Greg Andrews, Brian and Jeff Andrews, and other defendants. The Trustee originally sought avoidance of the transfer of the drag racing car called the “Big Nasty” (the “Race Car”) and turnover of the Race Car if it was in the same condition as when it was transferred. Since it has been established that the Race Car was taken apart, painted and transferred, the Trustee now seeks a joint and several judgment against Defendants Greg and Brian Andrews in the amount of $30,000 together with an award for the Trustee’s attorneys fees and costs, and damages for willful violation of the automatic stay.
At the September 27, 2011 Trial, Thomas Streetman appeared on behalf of the Trustee; Jeremy Bueker appeared on behalf of the Debtors; Thomas E. Fowler, Jr., appeared on behalf of Brian Andrews and Jeff Andrews; and Jimmy D. Eaton appeared on behalf of Harland Melton. Defendant Jake Aired is in default and made no appearance. At the close of trial, *176the parties elected to file closing briefs in lieu of closing arguments. At that time, the Court granted a pending Motion for Judgment on Partial Findings (referred to in Court as a “directed verdict”)1 in favor of Defendant Harland Melton. The Court still has under advisement similar motions with respect to Jeff and Brian Andrews. The parties filed their respective briefs on October 27, 2011, with the Trustee filing a very short reply brief on October 28, 2011. The September 27, 2011 Trial is hereinafter referred to as the “2011 Trial” to distinguish it from the October 27, 2009 trial (“2009 Trial”) held in a related matter concerning the same Race Car.
This matter is a core proceeding, as defined by 28 U.S.C. § 157(b)(2), over which this Court has jurisdiction pursuant to 28 U.S.C. § 1334(b).
BACKGROUND AND PREVIOUSLY FOUND FACTS
The Debtors filed their voluntary bankruptcy petition (the “Petition”) on February 19, 2009. On May 15, 2009, Debtors amended the Petition (the “First Amended Petition”) to disclose a tax refund, for which they claimed an exemption. On June 19, 2009, Randy and Renee Watson (the “Creditors”) filed a complaint (4:09-ap-1150) objecting to the Debtors’ discharge in which they alleged that the Debtors knowingly and fraudulently made false oaths in filing the Petition, and that they transferred and concealed their property within one year of the Petition. The Debtors’ Answer denied every material allegation in the Complaint. The Debtors filed another amended petition on October 23, 2009 (the “Second Amended Petition”), in which they disclosed information about transfers and property as alleged in the Complaint. The Court held the 2009 Trial on October 27, 2009. On February 2, 2010, the Court held a telephonic hearing, delivering a lengthy oral opinion (the “Oral Opinion”) denying the Debtors’ discharge, in part, because the Debtors failed to disclose Greg’s interest in the Race Car. In the Oral Opinion, the Court made a number of factual findings that were the basis of the ruling. In response to the Defendants’ Motion to Amend Judgment or For a New Trial (the “Motion to Amend”) in which the Debtors asserted that the Court made several findings of fact in its Oral Opinion that were not supported by the evidence at the 2009 Trial, the Court thoroughly reviewed the testimony and other evidence in the case again, and concluded that it was necessary to correct or amend some of the factual findings made in the Oral Opinion and entered an order correcting those facts on May 6, 2010 (docket #25, 4:09-ap-1150). The same day, the Court entered a Memorandum Opinion Denying Debtors’ Discharge (the “Memorandum Opinion”) (docket #26, 4:09-ap-1150) and an Amended Final Judgment (docket # 27, 4:09-ap-1150). In the Memorandum Opinion, the Court made amended and corrected factual findings. Those that relate to the Race Car and this proceeding are restated below:2
*1771. The Debtors have been married [since 1996]. Greg Andrews has raced cars since before that time. Drag racing has long been Greg’s great passion in life.
2. Some time in the early 1990s, Greg and his brother, Brian Andrews, built a drag racing car, called the “Big Nasty” (the “Race Car”), from a chassis.
3. Greg is undisputedly the driver of the Race Car. He has raced it at public events, appeared in television interviews ■with it, represented it belonged to him, worked on it, maintained it, named it, stored it, painted extensive detailed designs on it, and held himself out as its owner to both the Creditors and the general public.3
4. At races, Greg sold T-shirts. One of these T-shirts was introduced into evidence as Plaintiffs’ Exhibit # 8. The words “Greg Andrews” appear on the T-shirt, above the picture of the Race Car. Underneath the picture, the T-shirt reads “Outlaw Door Slammer.” Testimony indicated Greg is a member of a drag-racing club called the “Dixie Door Slammers.” The T-shirt makes no reference to any other person or business. The back of the T-shirt reads:
Greg Andrews Big Nasty First in the Fours Wynne, AR
5. Photographs of the Race Car were introduced into evidence. Defendants’ Exhibit # 2 and Plaintiffs’ Exhibit # 9 are both photographs of the Race Car that show the passenger side window. In these photographs, it is apparent that the Race Car has the words “Greg Andrews” on the passenger side window. Defendants’ Exhibit # 1 is an older photograph of the Race Car, taken before it was detailed and painted yellow; it shows the driver side window. At that unknown prior date, the Race Car had the words “Andrews Brothers” in the driver side window. There is no evidence before the Court as to whether the driver side window still has those words.
6. The uncontroverted testimony was that the Race Car cannot be legally driven on public roads, and therefore, no title to it exists. Additionally, the evidence was that the Race Car was never listed on any personal property assessment.
7. Greg worked at the Andrews Auto Body (the “Body Shop”), located in Wynne, Arkansas, and owned by Greg’s *178brother, Brian Andrews, for many years before leaving in 2007. Steve Wallin, whom the Court found to be particularly credible, testified that Greg left the Body Shop as a result of a falling out with Brian. Tony Sides corroborated Mr. Wallin’s testimony about the falling out and stated that the disagreement resulted in a physical altercation between the two brothers.4 Mr. Wallin further testified that after the falling out, Greg took possession of the Race Car and it was Mr. Wallin’s impression that the Race Car belonged to Greg after that. The other witnesses’ testimony did not contradict Mr. Wallin’s testimony, except as to the ownership of the Race Car following the Andrews brothers’ falling out. While the other witnesses generally corroborated Mr. Wallin’s testimony regarding possession of the Race Car after the falling out, they contradicted his testimony regarding ownership of the Race Car.
8. After leaving the Body Shop at some unknown date in 2007, Greg and Randy Watson formed A & W Extreme Painting, LLC (the “LLC”).
9. Mr. Watson testified that Greg said he owned the Race Car.
10. Greg and Mr. Watson both testified that Greg received money from Mr. Watson and that the money was used, as intended by both, for various expenses related to the Race Car. There was contradictory testimony as to whether Mr. Watson transferred the money to Greg as a gift or a loan.
11. Mr. Watson had a bus that was painted to match the Race Car. (Defendants’ Exhibit # 3.)
12.Both Greg and Mr. Watson testified that the LLC was dissolved in 2008 after Greg and Mr. Watson had financial disagreements.
15. Ronda, Brian, and Greg testified that Brian had been the exclusive owner of the Race Car until recently, when another Andrews brother, Jeff, also acquired an interest in it. Brian further testified that Jeff acquired a 25% interest in the Race Car.
16. The Debtors lived in Wynne until around the time they filed the Petition. While the precise location of each Debtor’s residence in early 2009 is unclear, Ronda testified that on February 12, 2009, Greg lived with Jeff in Searcy, Arkansas, and she lived with her mother. She also testified that on February 19, 2009, both Debtors resided at a rented house in Searcy, Arkansas. This house appears in photographs submitted into evidence as Plaintiffs’ Exhibits #6 & #7. Debtors still resided at this address on the date of the [2009] Trial.
22. The Race Car was listed for sale shortly before [the 2009] Trial. Tony Sides testified that Jeff instructed him to list the Race Car for sale. The list price was $33,000. The Debtors did not seek permission from the Court to sell the Race Car. Prior to the [2009] Trial, the Debtors did not disclose the Race Car’s existence.
23. On the day of the [2009] Trial, the Race Car and a trailer alleged to be owned by Brian Andrews were both stored at the Debtors’ home in Searcy. Plaintiffs’ Ex-*179Mbit #7 is a photograph, taken on an unknown date, showing the utility trailer stored in the Debtors’ attached garage. Neither the Race Car nor the trailer was listed on Debtors’ schedules and statement of financial affairs in any of their bankruptcy petitions.
24. In the Second Amended Petition, filed on the eve of the [2009] Trial and on the same day that the Creditors served subpoenas on the witnesses to be called at [the 2009] Trial, the Debtors added those possessions and transfers that were alleged in the Complaint,5 except that they did not add the Race Car (Complaint ¶ 8) or the utility trailer (Complaint ¶ 4). Debtors allege that they do not own either of these items, each testifying that the Race Car belongs to Brian and Jeff, their utility trailer was destroyed by a tornado, and the utility trailer currently in their possession belongs to Brian.
25. The Court did not find Greg or Brian’s testimony credible. The Court finds that Greg held an ownership interest in the Race Car.
FINDINGS OF FACT
Greg Andrews, Brian Andrews, Randy Watson, Jeff Andrews,6 Tony Sides, Bruce Mize, and Harland Melton testified at the 2011 Trial. Just as in the 2009 Trial, the Court did not find Greg or Brian credible. Both were evasive and repeatedly claimed they were bad with dates. For instance, Greg could not pin down when he lived where, could not recall when he painted the Race Car blue (which occurred between the October 27, 2009 trial and February 17, 2010, the date it was sold to Harland Melton), and was not very specific about who he drove for and whether or not his name was on the race cars he drove for others. More importantly, both testified inconsistently with prior testimony and each other, as described in more detail below. The Court also did not find Jeff, Tony Sides, or Bruce Mize particularly credible; they all appeared to be collaborating on the same story to protect the interests of Greg and Brian (a story that changed between the 2009 and 2011 Trials). The Court did find the testimony of Randy Watson and Harland Melton credible. Given the lack of credibility of all but two of the witnesses, the bulk of the testimony cannot be credited. However, based on documentary evidence and the testimony which the Court did find credible, the Court makes the following findings of fact:
1. The Race Car chassis was originally a 1982 Camaro which did not have a Vehicle Identification Number, an engine, a transmission, or a fire wall, and only contained the “housing” for the rear-end of the vehicle. Defendant’s Exhibit BA-1, BA-2 and BA-8 were photographs of the 1982 Camaro chassis when it was first purchased; in BA-3, Brian’s brothers, Jeff, Marcus and Greg, are pictured along with Brian’s son, Devon. Brian testified he paid $2,500 cash for the chassis. Defendant’s Exhibit BA-4 is a photograph of the 1982 Camaro chassis with a 454 Chevy Big Block engine installed just before bodywork began on the chassis, according to *180Brian’s testimony. Brian testified the 454 Chevy Big Block engine came out of his yellow Chevrolet truck which he owned since high school; a photograph of the truck and engine was accepted as Defendant’s Exhibit BA-5. (Transcript of 2011 Trial at 95.)
2. At some later date, the 1982 Camaro chassis was altered to look like a 1992 model Camaro by changing the front end (although it still had the steel frame body from the 1982 chassis). Greg painted this version of the Race Car black with green flames, and it had the 454 Chevy Big Block engine in it. (Transcript of 2011 Trial at 101-102.) At that time, the Race Car had the name “Andrews” painted on the window. Defendant’s Exhibit BA-13 is a 2004 photograph of the 1992 version of the Race Car. Brian testified that he drove the 1992 version of the Race Car a couple of times but did not like it; instead, Greg drove it. (Transcript of 2011 Trial at 102.)
3. At some point after the 2004 photo was taken, the Race Car’s metal body was replaced with a 2002 Camaro fiberglass body to reduce its weight and make the Race Car faster. The Race Car contained the same chassis, engine, and wheels. The window markings were changed to “Greg Andrews” because he was the driver, according to Brian’s testimony. (Transcript of 2011 Trial at 105.) Defendant’s Exhibit BA-14 is a photograph of the 2002 style Race Car painted bright yellow with intricate race checkered flag designs and the name “Big Nasty” on it. It was a beautifully painted car.
4. In the 2011 Trial, Brian testified that Jeff loaned him $2,500 to purchase the fiberglass body, although Brian could not remember what year or month this occurred. (Transcript of 2011 Trial at 106.) Jeff testified that he gave the money to Brian in or around April, 2005. (Transcript of 2011 Trial at 176.) Brian testified he paid Jeff back the $2,500 after he sold the Race Car to Harland Melton on February 19, 2010 (Transcript of 2011 Trial at 113-114), and Jeff testified he received the $2,500 (Transcript of 2011 Trial at 177). This testimony contradicts the testimony given by both Brian and Ronda in the 2009 Trial during which both Brian and Ronda testified that Jeff and Brian owned the car. (Transcript of 2009 Trial at 91, 191.) Specifically, when asked who owned the car in 2009, Brian responded: “I do. Me and my brother, Jeff, but I own 75% of it.” (Transcript of 2009 Trial at 191.) Brian testified that Jeff gave him $5,000 for his part in the car to obtain his interest. (Transcript of 2009 Trial at 192-93.) He also testified that if the car ever sold, his agreement with Jeff was that he would receive 75% of the sale proceeds and Jeff would receive 25% of the proceeds. (Transcript of 2009 Trial at 195.) This is in obvious contrast to both Brian and Jeffs testimony in 2011 in which Jeff supposedly loaned Brian $2,500 for the 2002 fiberglass body and received just $2,500 (far less than 25% of the sale proceeds) when the Race Car was sold.
5.During the 2011 Trial, Brian testified that with the exception of the $2,500 he borrowed from Jeff to purchase the 2002 fiberglass body, Jeff and Greg did not purchase any parts to build the Race Car. (Transcript of 2011 Trial at 95.) Receipts for some parts totaling $1,516.30 showing delivery to Brian were accepted into evidence as Defendant’s Exhibits BA-6 through BA-12. There was no indication on the face of the receipts that the parts were purchased specifically for the Race Car. Tony Sides, who owns a shop next door to Brian’s business, testified those parts would not have been appropriate for other vehicles Brian owned or worked on in his shop. (Transcript of 2011 Trial at 183-184.) Brian acknowledged owning be*181tween 40 and 50 race cars but stated that none were the same caliber as the Race Car (Transcript of 2011 Trial at 117), and Sides testified that the tires purchased for the Race Car would not fit under the other cars (Transcript of 2011 Trial at 184). Although these receipts show that specific parts were ordered by and delivered to Brian and that those parts were most likely put into the Race Car, the Court does not find these receipts or Sides’s testimony to be conclusive evidence that Brian paid for these parts or that the Race Car solely belonged to him. For example, Greg could have reimbursed him for the parts.
6. Greg, Brian, Jeff, Bruce Mize and Sides all reiterated that Greg was the driver of the Race Car. Greg testified that he had driven it since 1998 or 1999 until it was sold in 2010. (Transcript of 2011 Trial at 33.) Mize testified that Greg drove the Race Car and was the “face of the car” as far as the public was concerned. (Transcript of 2011 Trial at 192.) Greg testified he drove the Race Car because it was a speciality race car that required a special license, and he held the special license required. (Transcript of 2011 Trial at 45.) A copy of that license was accepted as Defendant’s Exhibit BA-20. Greg testified he also drove for several other people including Sides, Lennie Couch, Mickey Epps and some others whom he could not recall. (Transcript of 2011 Trial at 46.) He said he painted all those cars and his name was on some of them although he did not name any specific ones. (Transcript of 2011 Trial at 47.) Mize testified that he owns race cars and sometimes has others drive them including Greg, but for the most part, he liked to drive his own race cars and put his name on them. (Transcript of 2011 Trial at 191.)
7. Greg testified that some time in 2007 or 2008, he and his brother Brian had a “cuss fight” which was really just an argument or “getting our tempers up.” (Transcript of 2011 Trial at 37, 64.) He testified that they went to a race together just a few weeks later. He again acknowledged that he had possession of the Race Car both before and after the argument with Brian. (Transcript of 2011 Trial at 39.) Watson recalled the altercation between Greg and Brian occurring early in 2007 after a Memphis Motor Sports event called the “super chevy.” (Transcript of 2011 Trial at 125.) Greg told Watson that he and Brian had gotten into a heated argument, and that Brian grabbed Greg by the throat and then they parted. (Transcript of 2011 Trial at 125.) Watson also recalled that Brian attended races with Greg after this altercation. (Transcript of 2011 Trial at 139-140.) Whether the altercation was a mere “cuss fight” or a physical altercation, there is no conflict as to two facts: (1) Brian and Greg had an argument, and (2) Greg left the shop and no longer worked there but retained possession of the Race Car immediately after the argument.
8.As the Court previously found, Greg stopped working for Brian after their falling out, and Greg became business partners with Randy Watson. Together, they operated an LLC called A & W Extreme Paintworks located in Wynne. Watson testified that he and his wife owned the shop where the business was located, and Greg worked there, painting cars and overseeing the activities at the shop. (Transcript of 2011 Trial at 133-34.) Greg testified that Watson was also involved in the racing of the Race Car as a sponsor and as a friend. Greg testified that Watson provided money for parts for the car, and that Watson owned an RV that pulled the Race Car to racing events. Greg also testified that he painted the RV to match the Race Car in early 2008 but did not own an interest in the RV. (Transcript of 2011 Trial at 58-59.)
*1829. Watson testified that he was only associated with Greg, not Brian, in racing the Race Car. He paid for parts, paid for Greg to go to some races, and attended some races with Greg. Watson testified that Greg and Ronda always referred to the Race Car as their car. (Transcript of 2011 Trial at 161-163.) He also testified that he had heard Brian refer to the car as Greg’s. Watson’s testimony that he paid for parts for the Race Car is consistent with Greg’s testimony during the 2011 Trial (Transcript of 2011 Trial at 58-59); the Court finds that Brian did not purchase all the parts for the Race Car as he testified.
10. Brian claimed that he had a conversation with Watson at his shop regarding Watson’s sponsorship of the Race Car, and that he allowed the sponsorship but informed Watson that he owned the car. (Transcript of 2011 Trial at 194; Transcript of 2009 Trial at 194.) In 2009, Watson testified that once Brian and Greg had their fight and split up, he had no conversations with Brian and either he or Greg had possession of the Race Car and it was his understanding that Brian no longer had an interest in the Race Car.7 (Transcript of 2009 Trial at 182-83.) In 2011, Watson testified he never had a specific conversation with Brian about ownership of the Race Car. (Transcript of 2011 Trial at 140, 162.) On redirect in 2011, Brian became angry and said that he told Watson he owned 110% of the car. (Transcript of 2011 Trial at 194.) The Court does not believe Brian’s testimony regarding this conversation.
11. Jeff claimed with certainty that Greg never owned the Race Car. (Transcript of 2011 Trial at 176.) Sides and Mize each said that they had no knowledge of Greg ever having any ownership interest in the Race Car. (Transcript of 2011 Trial at 182-83, 188). Mize testified that he often teased Brian about the car belonging to Greg, and that Brian became very upset about that. Mize said that he had worked on the car some and stored it at his house; he testified Brian paid him for the work done to the car. (Transcript of 2011 Trial at 188-89).
12. On June 17, 2008, Greg applied for a loan with the First National Bank of Wynne in order to buy a motorcycle. A copy of the credit application was introduced as Defendant’s Exhibit BA-23. Under the description of assets section, there is a box labeled “Automobile.” In that box, a 2000 Pontiac Grand Prix and a 2000 GMC Truck are listed. Immediately above the automobile box, is a box labeled “Life Insurance.” In this box, a 2002 Cá-maro race car is listed with a value of $30,000. Greg testified that Matt Boone, the loan officer, filled out the application after asking Greg for the information, and when he asked if he had life insurance, he answered yes. Greg testified that Boone then asked him why he had life insurance and he explained it was because he drove a fast 2002 Camaro race car, and his wife *183made him get it. Greg said he believed Boone then listed the Camaro instead of the life insurance policy by mistake. Greg further explained that he had obtained a $25,000 life insurance policy in 1999 at his wife’s insistence because the Race Car was so fast. (Defendant’s Exhibit BA-24 is a printout for the life insurance policy showing it was current through May 2011.) Greg also testified that he may have made a mistake and told Boone the insurance policy was for a $30,000 benefit instead of $25,000. (Greg’s testimony regarding the listing of the car on the loan application is found at Transcript of 2011 Trial at 54-57.) Greg’s explanation for why the Race Car is listed in the insurance box is implausible. The plausible explanation is that there was not enough room to put it in the automobile box with the other vehicles so it was written directly above those in the life insurance box. The Court does not find Greg’s explanation credible, and finds that Greg listed the Race Car on the credit application as one of his assets.
13. The Race Car was listed for sale on www.RacingJunk.com on August 26, 2009, by Tony Sides. The car was listed as an '02 Camaro and included a picture of it painted yellow with the “Big Nasty” name on it at, and the asking price was $35,000. Tony Sides’s phone number was listed as the seller phone number. At the 2009 Trial, Tony Sides testified that Jeff instructed him to list the Race Car for sale. (Transcript of 2009 Trial at 39.) Brian also testified in 2009 that he told Jeff to have Sides list the car. (Transcript of 2009 Trial at 195.) In the 2011 trial, Sides testified that Brian instructed him to list the Race Car for sale. (Transcript of 2011 Trial at 180.) Brian testified that he asked Sides to place the internet ad, and that he had sold three or four cars for him before. Brian explained that he was computer illiterate and would pay Sides $100-200 if the listing resulted in a sale. (Transcript of 2011 Trial at 86.)
14. Greg testified that the Race Car was stored wherever it was convenient, including: his house, Brian’s shop, the shop at Brian’s house, Mize’s house, and at the home of another man who worked on the chassis at one point. (Transcript of 2011 Trial at 37.) Watson testified that the morning of the 2009 Trial, he saw the tongue of the trailer that held the Race Car sticking out from under Greg’s garage at his home in Searcy; he assumed the Race Car was there at that time. (Transcript of 2011 Trial at 127.) During the 2009 Trial, a picture showing the tongue of the trailer sticking out from under Greg’s garage door was admitted into evidence. (Transcript of 2009 Trial at 86.) Watson also testified he had seen the Race Car at Greg’s house at least two and possibly three other times prior to the 2009 Trial. (Transcript of 2011 Trial at 128.) At the 2009 Trial, Greg testified that the Race Car was at his home that day (Transcript of 2009 Trial at 141); the Court specifically found in its prior findings of fact that it was at Greg’s home that day. (Memorandum Opinion, Finding of Fact No. 23.) At the 2011 Trial, Greg specifically testified that the Race Car was not at his home that day.8 (Transcript of 2011 Trial at 212.)
*18415. Although Jeff and Brian were not parties to Watson v. Andrews, Brian testified at the 2009 Trial, and Jeff was present according to Greg. (Transcript of 2011 Trial at 39.) Both knew that ownership of the Race Car was an important issue at the 2009 Trial.
16. Greg testified that he and Ronda were at his lawyer’s office when the Court gave its oral ruling on February 2, 2010. He testified that he called his brothers afterwards and told them about the ruling. (Transcript of 2011 Trial at 40.)
17. On February 19, 2010, just 17 days after Court entered its oral ruling, Brian sold the Race Car to Harland Melton. Brian testified he was unaware of this Court’s ruling regarding Greg having an interest in the Race Car. He acknowledged that there was “some confusion” about who owned the Race Car. (Transcript of 2011 Trial at 78-79.) When asked why he did not file a motion with the Court requesting authority to sell the Race Car, Brian testified that he did not think he had to because he owned it and should be able to do what he wanted to with it. (Transcript of 2011 Trial at 79.) He stated that about five to ten minutes after the 2009 Trial, he talked to Greg’s lawyer, Jeremy Bueker, and asked him, “what about my car?” and Bueker replied, “it’s your car — do what you want with it.”9 (Transcript of 2011 Trial at 80.) Brian testified that Greg, Ronda and several others were standing around when this conversation took place. (Transcript of 2011 Trial at 84.) The Court finds that Brian knew, as a result of his involvement as a witness at the 2009 Trial and as a result of his close relationship with Greg (and Greg’s admission that he told Brian about the ruling the same day it was made), that ownership of the Race Car was an issue before this Court but nevertheless reduced its value by repainting it and taking it apart, and then arranged the sale of the Race Car to Melton.
18. Brian sold the Race Car to Melton without an engine or transmission for $16,000. He accepted $2,000 in cash and a Nova worth $14,000 as a trade-in. Copies of the Bill of Sale were accepted into evidence as Plaintiff’s Exhibit 2 and Defendant’s Exhibit BA-22. Brian testified that they negotiated the sale of the Race Car for approximately six to eight weeks before they closed the sale. This amount of time was necessary to allow Melton to get the money and for Brian to take out the engine and transmission and paint the car blue. (Transcript of 2011 Trial at 87.) Greg testified that he painted the car blue for Brian but could not remember when, but that it was cold. (Transcript of 2011 Trial at 42.) Brian testified that he wanted it painted blue because the car had become a sore in his side and he did not want anyone to know that it was his car. (Transcript of 2011 Trial at 87.) No photograph of the Race Car after it was taken apart and repainted was introduced into evidence.
19. Melton testified that he was not aware of any dispute over ownership of the Race Car and believed Brian to be the owner. (Transcript of 2011 Trial at 209.) *185He knew that Greg was the driver. He was familiar with the Race Car and the Andrews brothers, but was not close friends with them. (Transcript of 2011 Trial at 208.) The Court finds that Melton was unaware of the pending bankruptcy or that ownership of the Race Car was an issue before this Court. Melton paid what he thought was a fair price for the shell of the car he was buying.
ANALYSIS
The Trustee filed this lawsuit to avoid the transfer of the Race Car and recover damages for the benefit of the Debtors’ bankruptcy estate. Because it has been established that the Race Car was taken apart, painted, and transferred just 17 days after this Court found that Greg held an interest in the Race Car on the day he filed bankruptcy, the Trustee now seeks a joint and several judgment against Greg and Brian Andrews in the amount of $30,000 together with an award for the Trustee’s attorneys fees and costs as damages for willful violation of the automatic stay. Accordingly, the Court must determine whether the transfer of the Race Car is avoidable under 11 U.S.C. § 549, and if so, whether damages for willful violation of the automatic stay are appropriate.
Avoidable Transfer Under 11 U.S.C. § 549
“A transfer ... may be avoided under 11 U.S.C. § 549(a) if: (1) the subject property was property of the bankruptcy estate; (2) the property was transferred; (3) the transfer was made post-petition; and (4) the transfer was not authorized by the bankruptcy code or the bankruptcy court.” In re Hecker, 459 B.R. 6, 10 (8th Cir. BAP 2011) (citing Nelson v. Kingsley (In re Kingsley), 208 B.R. 918, 920 (8th Cir. BAP 1997); Schnittjer v. Burke Construction Co. (In re Drahn), 405 B.R. 470, 473 (Bankr.N.D.Iowa 2009)). The party seeking to validate the transfer has the burden of proof. Fed. R. Bankr.P. 6001. See generally In re Beshears, 196 B.R. 464 (Bankr.E.D.Ark.1996). A debtor’s bankruptcy estate consists of all legal and equitable interests of the debtor existing at the commencement of the bankruptcy case. 11 U.S.C. § 541(a). The debtor’s interest in property is determined under state law. See In re Stanley, 182 B.R. 241, 243 (Bankr.W.D.Ark.1994).
In this case, there is no question that the Race Car was repainted, taken apart, and the bulk of it transferred post-petition without the Trustee’s knowledge and without Court approval or authorization under the Bankruptcy Code. Further, as previously noted, this Court already found that Greg’s bankruptcy estate held an interest in the Race Car at the conclusion of the 2009 Trial, based on the evidence received during that Trial. Now the Court must decide what the Debtors’ interest was in the car in order to determine liability under § 549 for transfer of the Race Car. Brian and Jeff were named defendants in this case and had the opportunity to prove exactly what their ownership interest was. Although the Court cannot find Jeffs testimony completely credible, as already explained, no evidence was presented to show that Jeff held an ownership interest in the car or that he participated in its destruction and transfer other than his testimony that he recouped his $2,500 investment (if that is even true). Accordingly, the Court grants the Motion for Judgment on Partial Findings with respect to Jeff Andrews. However, as explained below, the evidence presented is not sufficient to find that Brian Andrews owned the Race Car (particularly given that Brian Andrews’ testimony could not be credited).
In Arkansas, “[i]t is well settled ... that possession of personal property is *186prima facie evidence of ownership.” Velder v. Crown Exploration Co., 10 Ark.App. 273, 274-275, 663 S.W.2d 205, 207 (1984) (citing Golenternek v. Kurth, 213 Ark. 643, 212 S.W.2d 14 (1948); Norton v. Elk Horn Bank, 55 Ark. 59, 17 S.W. 362 (1891)). “Prima facie evidence is deemed sufficient to establish a given fact if not contradicted, rebutted or explained by other evidence.” Id. Further, “[w]hen a fact is peculiarly within the knowledge of a party, the burden is on him to prove such fact....” Texas Company v. Mattocks, 211 Ark. 972, 979, 204 S.W.2d 176, 180 (1947).10 Greg acknowledged that as the driver of the Race Car since 1998 or 1999, he often had possession of it; in the 2009 Trial he testified that it was mostly kept at his house. He had possession of it both before and after the altercation with Brian, and as previously found by this Court, he had possession of it the day of the 2009 Trial. Greg’s possession of the Race Car establishes a prima facie case that he owned the Race Car, and it was up to the Defendants to prove otherwise.
Although the racing of the “Big Nasty” seems to have been some kind of family joint venture at some point in time,11 the only people who really knew who owned the Race Car, and in what proportion if there were more than one owner, when Greg filed bankruptcy were the Andrews brothers. Accordingly, it was their burden to come forward with the evidence to prove their ownership. Only Greg, Brian, and possibly Jeff know who contributed what to the Race Car over the many years as well as which contributions, if any, were considered a gift to one of the others. In the 2009 Trial, Brian claimed that he owned 75% of the car while Jeff owned 25% of it. In the 2011 Trial, Brian claimed to own “110%” of the car. To show Brian’s ownership interest, Brian attempted to show that he built the car from scratch. He claims to have purchased the 1982 Camaro chassis for $2,500, to have put his 454 Big Block engine12 from an old yellow truck in the Race Car, and to have purchased at least $1,516.30 in parts for the Race Car. The problem with this evidence is that its validity is entirely dependent on the word of Brian and Greg and two of their friends, Sides and Mize (and even Sides and Mize acknowledge that they do not know who owns the Race Car). The Court cannot rely on the testimony of these parties. As pointed out in the Court’s findings of fact, there were multiple inconsistencies between Greg and Brian’s testimony during both the 2009 and the 2011 Trials. They contradicted themselves and each other, specifically as follows:
• In the 2009 Trial, Brian and Ronda testified that both Brian and Jeff owned the Race Car with Jeff owning a 25% interest in it as a result of him paying $5,000 for some part for the car. In the *1872011 Trial, Greg, Brian, and Jeff all testified that only Brian owned the car, and that Jeff had paid only $2,500 for the 2002 fiberglass body style put on the Race Car.
• In the 2011 Trial, Brian testified he purchased all the parts for the Race Car but both Greg and Watson testified that Watson contributed to the purchase of some parts for the car. Brian claimed he had a specific conversation with Watson about the sponsorship of the car, while Watson testified that he never discussed sponsoring the car with Brian. It is unlikely any such conversation would have occurred once Watson was sponsoring Greg and the Race Car given the testimony about Brian and Greg’s falling out, and Greg’s subsequent possession of the Race Car.
• Greg listed the $30,000 Race Car on a loan application but claimed through sworn testimony that it was listed as a reference to a $25,000 life insurance policy on his life.13
• In the 2009 Trial, Tony Sides testified that Jeff had him list the Race Car for sale on www.RacingJunk.com, but at the 2011 Trial, Sides testified that Brian instructed him to post the listing.
• At the 2009 Trial, Greg testified that the Race Car was at his home that day. At the 2011 Trial, Greg specifically testified that the Race Car was not at his home that day.
• Despite his knowledge that there was “some confusion” about ownership of the Race Car, and specific knowledge that the ownership of the Race Car was an issue before this Court, Brian (according to his own testimony) dismantled the Race Car, painted it blue, and sold it to Melton just 17 days after this Court found that Greg had an ownership interest in the car. Greg admitted that he told Brian and his other brothers about the Court’s ruling the same day it was made; Brian admitted there was “some confusion” about who owned the Race Car. He was present as a witness at the 2009 Trial and was questioned about who owned the Race Car. According to his testimony, he asked Greg’s counsel what he should do with the car, showing that he understood the car’s ownership was an issue. Furthermore, Greg certainly knew that ownership of the Race Car was an issue before this Court— an issue that might cost him his discharge — and yet, even according to his version of events, he helped Brian paint the car blue (although Brian testified he painted the car blue, Greg specifically testified that he had been the one to paint it).
• Finally, notwithstanding the effort by Greg, Brian, and their friends, Mize and Sides, to downplay the importance of Greg’s name on the window, and to explain that only drivers get their names on the windows, and that having one’s name on the window is not evidence of ownership, according to the testimony of these parties, and particularly Brian himself, Brian was extremely defensive about his ownership of the car. Specifically, he testified he told Watson that he owned 110% of the Race Car (not that the Court believes such *188a conversation took place), and Mize testified that he often teased Brian about the car belonging to Greg and that Brian got very upset about it.
• Further, Watson testified that Greg held himself out as the Race Car’s owner and Watson therefore believed that Greg owned the Race Car. In the 2009 Trial, Greg also acknowledged that he frequently told people it was his car. He also listed the Race Car as one of his assets on the loan application he submitted when financing a motorcycle in 2008. Watson and Greg owned and operated a business together after Greg’s falling out with Brian — it was during this time that Watson helped sponsor the Race Car and even bought an RV which Greg painted to match the Race Car. Watson testified he had no dealings with Brian concerning the Race Car. The logical conclusion this Court must reach, given that it finds Watson credible and Brian incredible, is that Greg owned the Race Car and Brian was not asserting an ownership interest in it at the time Greg filed bankruptcy.
In sum, the Court has limited evidence before it regarding ownership of the Race Car. On one hand, it has Greg’s possession of the Race Car, his own assertion to others that he owned the Race Car, and a loan application where Greg listed the Race Car as an asset. On the other hand, the Court has the testimony of the Andrews’ brothers and their friends that Brian purchased the chassis and parts to build the Race Car, put his own engine in the Race Car, and considered himself its owner. In order for the Court to find that Greg had no ownership interest in the Race Car, as the Defendants insist, the Court would have to:
(1) treat its prior findings of fact as if those facts did not exist;
(2) ignore Greg and Brian’s 2009 testimony, but credit their testimony about the exact same subject in 2011; and
(3) believe Greg’s “story” about why a loan application which he signed to borrow money to buy a motorcycle stated that he owned a race car worth $30,000.
The Court cannot do what the Defendants ask and ignore their prior testimony or Greg’s implausible explanation about the loan application. As a result of their inconsistent and contradictory testimony, the Court cannot rely on Greg or Brian’s testimony. Therefore, the Court must conclude that the Race Car was entirely property of Greg’s bankruptcy estate. There is no question that Greg and Brian took apart the Race Car, repainted it, and partially transferred it post-petition without the Trustee’s knowledge or approval and without permission from this Court. Accordingly, the Court must decide what the appropriate remedy is for the dismantling and transfer of the Race Car.
“The appropriate damages [under § 549] are measured by the value lost by the estate [on the date] the transfer was made.” In re Beshears, 196 B.R. 464, 468 (Bankr.E.D.Ark.1996). The Defendants listed the Race Car for sale for $35,000 shortly before the Debtors filed bankruptcy; Greg listed the Race Car as a $30,000 asset on the loan application; and the Trustee seeks a $30,000 joint and several judgment against Greg and Brian. The Court finds those damages to be an appropriate measure of the loss to the estate on the date the transfer was made, and hereby enters a joint and several judgment against Brian and Greg for $30,000.14
*189
Damages for Violation of the Automatic Stay
The Court next considers whether the Trustee may receive an award for his costs and attorney’s fees in bringing this action as damages for violation of the automatic stay. The automatic stay applies to property of the estate until it is no longer property of the estate. 11 U.S.C. § 362(c)(1). The party seeking damages for a stay violation must establish that: “(1) a violation occurred; (2) the violation was committed willfully, (3) the violation caused actual damages.” Rosengren v. GMAC Mortg. Corp., No. CIV. 00-971(DSD/JMM), 2001 WL 1149478, at *2 (D.Minn. Aug. 7, 2001) (citing Lovett v. Honeywell, Inc., 930 F.2d 625, 628 (8th Cir.1991) (further citations omitted)). “A willful violation of the automatic stay occurs when the creditor acts deliberately with knowledge of the bankruptcy petition.” Knaus v. Concordia Lumber Co., Inc. (In re Knaus), 889 F.2d 773, 775 (8th Cir.1989) (citations omitted). See also Fleet Mortgage Group, Inc. v. Kaneb (In re Kaneb), 196 F.3d 265, 269 (1st Cir.1999) (“A willful violation does not require a specific intent to violate the automatic stay. The standard for a willful violation of the automatic stay under § 362[ (k) ] is met if there is knowledge of the stay and the defendant intended the actions which constituted the violation.”).
There is no question that the stay was violated when Brian and Greg dismantled and sold the Race Car while administration of the Debtors’ case was ongoing. The Court further finds, as previously explained, that Brian and Greg knew of the bankruptcy and that ownership of the Race Car was an issue before this Court, and that the Court had already decided that Greg held an interest in the Race Car when he filed bankruptcy. In fact, according to Brian’s own testimony, he left the courtroom after the 2009 Trial fully aware that he may not be able to do as he pleased with the car. If his testimony on this point is true, he was concerned enough to ask Greg’s attorney what he was allowed to do with the car. The Court therefore finds that Brian and Greg’s actions in dismantling and selling the Race Car constituted a willful violation of the automatic stay. See generally In re Lickman, 297 B.R. 162, 194 (Bankr.M.D.Fl. 2003) (internal citations omitted) (“ ‘Knowledge of the bankruptcy petition has been held to be the legal equivalent of knowledge of the automatic stay.’ ... Notice of the bankruptcy petition ‘does not have to come through formal means.’ ”). See also In re Knaus, 889 F.2d at 775.
While it is clear that Brian and Greg willfully violated the automatic stay, it is not clear to what extent the Trustee may recover damages for that violation. Brian and Jeff’s post-trial brief asserts that the Trustee does not have standing to pursue damages for violation of the automatic stay under 11 U.S.C. § 362(k). Section 362(k) states that “an individual injured by any willful violation of a stay provision by this section shall recover actual damages, including costs and attorney fees, and in appropriate circumstances, may recover punitive damages.” 11 U.S.C. § 362(k)(l). Brian and Jeff argue that the Trustee is not an “individual” and, therefore, cannot pursue damages under this provision.
There is a divergence in the courts as to whether the term “individual” is expansive enough to encompass the trustee of a debtor’s estate. See 2B Bankr.Service L.Ed. § 19:1299 (providing a list of cases). See also In re Lickman, 297 B.R. 162, 194 (Bankr.M.D.Fl.2003). The Eighth Circuit has not specifically addressed this issue. However, in a case interpreting that same provision of § 362(k), the Eighth Circuit stated that *190the “plain meaning” of the term “individual” prohibits use of the statute by a corporate debtor. See Just Brakes Corp., Inc., 108 F.3d 881, 884-85 (8th Cir.1997). Accordingly, it is unclear whether the Eighth Circuit may afford a similar “plain meaning” interpretation and find that the meaning of “individual” as used in § 362(k) does not encompass the trustee. Nonetheless, all of the authority on this issue states that the trustee may find a remedy for intentional violations of the automatic stay through 11 U.S.C. § 105(a) which provides, in part, that the bankruptcy court
may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of this title [and] ... no provision ... 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.
See In re Ibach, 399 B.R. 61, 71 (Bankr.D.Minn.2008) (“[T]he general equitable powers under the Bankruptcy Code’s ‘all-writs’ provision, 11 U.S.C. § 105(a), unquestionably give the court the power to redress intentional violations of the automatic stay that injure a bankruptcy estate.”); Just Brakes Corp., 108 F.3d at 885 (“[Section] 362(a), buttressed by § 105(a), confers broad equitable power to remedy adverse effects of automatic stay violations.”). The only limitation on this power is that the trustee is not able to recover punitive damages under § 105. Just Brakes Corp., 108 F.3d at 885 (“We conclude that Congress has conferred no power to punish for a violation of § 362(a), other than the punitive damage authority in § 362[ (k) ].”); In re Lickman, 297 B.R. at 195 (“Section 105(a), on the other hand, provides no authority for the imposition of punitive damages for violations of the automatic stay.”).
Because it is unclear whether a trustee will qualify as an individual for purposes of § 362(k), which allows for the award of both compensatory and punitive damages for willful violations of the automatic stay, and punitive damages may not be awarded under § 105(a), the Court awards the Trustee his attorney’s fees and costs in bringing this action to recover the value of the Race Car for the benefit of Debtors’ bankruptcy estate as compensatory damages. The Trustee is directed to submit a separate application which shall include an itemization of his fees and costs incurred in prosecuting this adversary proceeding. This application must be filed with the Court within 14 days of the entry of this Order, and served on counsel for Defendants Brian and Greg Andrews who will then have an additional 14 days in which to file a response.
CONCLUSION
Greg and Brian want the Court to find that the Race Car belongs entirely to Brian; and that Greg had no ownership interest in the car whatsoever. It appears their strategy was to say anything necessary to reach that end. But in executing this strategy, they created so many inconsistencies that the Court cannot determine that Brian and Greg own the car in specific percentages. Only Greg and Brian have the necessary information to make such a determination if it needs to be made, and if that is the case, they can compensate each other based on that information and any prior agreements they had (but did not provide to this Court). Because of their contradictions, their determination that the monetary value of the Race Car not be subject to the claims of Greg’s creditors, and their lack of respect for the oaths they took, the Court did not receive sufficient information to overcome the presumption that Greg owned the Race Car, and that *191he and Brian should be held liable for its dismantling and transfer.
For the reasons stated herein, the Court will award the Trustee a joint and several judgment against Defendants Brian Andrews and Greg Andrews in the amount of $30,000 plus the Trustee’s reasonable attorney’s fees and costs. A final judgment in accordance with this Memorandum Opinion will be entered once the Trustee’s fees and costs have been determined.
. See Fed. R. Bankr.P. 7052 incorporating Fed.R.Civ.P. 52(c) which provides in part:
(c) Judgment On Partial Findings. If a party has been fully heard on an issue during a nonjury trial and the court finds against the party on that issue, the court may enter judgment against the party on a claim or defense that, under the controlling law, can be maintained or defeated only with a favorable finding on that issue....
. Although the Debtor did not appeal the Court's Memorandum Opinion which made numerous specific findings of fact to support the conclusion that the Debtor, Greg Andrews, held an ownership interest in the Race Car, Brian, Jeff, and Greg's attorneys present*177ed evidence during the 2011 Trial as if nothing had previously been decided in this Debt- or’s case. In contrast, the trustee's counsel did not prepare to "reprove” the precise findings of facts that the court had already made and relied upon in concluding that Greg held an ownership interest in the Race Car (as restated here). As a consequence of the differing approaches, during the 2011 Trial, the Trustee presented evidence to supplement the findings made at the conclusion of the 2009 trial, while the Defendants’ attorneys treated the prior findings as if their clients had not previously testified under oath about this Race Car even though the relevant important facts which were the subject of their testimony had all occurred prior to the 2009 Trial, and were therefore not subject to change through the passage of time. The Court recognizes that Brian and Jeff were not parties to the original action, but the Court will not ignore its prior findings or the testimony it previously heard. The prior testimony and findings are particularly relevant to this case in that the parties conveyed one story about who owned the Race Car in the 2009 Trial and orchestrated a different story for purposes of the 2011 Trial. Inconsistencies between a witness’s testimony in each trial is relevant for purposes of establishing that witness’ credibility.
. Greg testified that he did not discuss the ownership of the car in the television interviews, but acknowledged that people generally have a tendency to assume he is the owner.
. Upon a review of the transcript of the 2009 Trial, the Court notes that it was Randy Watson who testified regarding the altercation and that it was physical in nature. (Transcript of the 2009 Trial at 167.) Sides did not testify regarding the altercation. Regardless, the Court’s determination that Greg had an ownership interest in the Race Car was based on his maintaining possession of it after the altercation with Brian. Whether the altercation was physical or not had no bearing on the Court’s decision.
. The Debtors did not add possessions and transfers exactly as alleged in the Complaint. For example, the Complaint alleges that the Debtors possess a number of items, such as the Motorcycle, that are listed in the Second Amended Petition as past transfers rather than current possessions. However, the Second Amended Petition does respond to the allegations pertinent to each material possession and transfer except the Race Car and the utility trailer.
. The Andrews brothers will be referred to by their first names for the remainder of this Memorandum Opinion.
. Specifically, when asked whether such a conversation took place, Watson testified:
No. He ain’t — he ain’t — I mean, we’ve had no conversation since — since Greg left and, I mean, like I said, it stayed — it stayed on my property probably for the biggest part of '08. I know at least several months. And what time it wasn’t there, it stayed under his carport. I mean, there — and we went to the races. I mean, yes, out of pocket, me and my wife and our family, yes, we used an RV; yes, we do carry it to the track — we spent a lot of money carrying it back and forth to the track and had a great time doing it, but he was always, always — and he was adamant about this- — that it was his car. I mean, there — there was never, after the point that he — him and Brian broke up, the car was always in his possession and he was adamant to me, my family, my friends, this was his car.
. During the 2011 Trial, Debtors’ counsel attempted to discredit Watson’s testimony by questioning him about the time of day he saw the trailer sticking out of Greg’s garage. Watson thought it must have been very early in the morning in order to allow him time to get to Little Rock for court. Mr. Bueker questioned Watson whether he drove by Greg’s house before sunrise, implying that he could not have adequately seen the trailer sticking out of Greg's garage. The Court takes judicial notice of its docket, and notes that the 2009 Trial was scheduled for 10 a.m.; the Court also takes judicial notice that Sear-*184cy is at most an hour and a half drive from Little Rock, and accordingly, Watson would not have necessarily been driving by Greg's house in Searcy before sunrise that morning. Further, Watson’s memory about the car being there on that day is irrelevant given that Greg admitted that it was there during the 2009 Trial.
. This testimony, if true, raises professional issues for Mr. Bueker. However, Mr. Bueker refrained from questioning Brian about it during trial. The Court assumes Mr. Bueker showed this restraint out of consideration for the interests of his client Greg.
.The Court in Texas Company stated:
No one but the producer could [have] possibly known the amount of oil production. The principle applicable here was thus stated by Mr. Wharton (Evidence, sec. 367): 'When a fact is peculiarly within the knowledge of a party, the burden is on him to prove such fact, whether the proposition be affirmative or negative.’ Hopper v. State, 19 Ark. 143; Williams v. State, 35 Ark. 430; Flower v. State of Arkansas, 39 Ark. 209; City of Fort Smith v. Dodson, 51 Ark. 447, 11 S.W. 687, 4 L.R.A. 252, 14 Am.St.Rep. 62.
211 Ark. at 979, 204 S.W.2d at 180.
. From a generous point of view, the Court can only conclude that some of Brian and Greg’s testimony was true some of the time, and that Brian and Greg may have jointly owned the Race Car at some point prior to their falling out.
. The Defendants provided no evidence as to the value of this engine.
. The Court has never been asked to believe anything as unlikely as Greg’s explanation of why the Race Car was listed on this loan application. In order to believe his story, the Court would have to believe that when Greg applied for a bank loan to buy a motorcycle, the loan officer (who was not called to testify, but who filled out the application for the loan) put the Race Car valued at $30,000 in the life insurance slot NOT because the transportation slots on the form had room for only two entries, while Greg had three such assets, but because the loan officer meant to list the $25,000 life insurance policy which Greg purchased because he owned the Race Car. This implausible explanation is evidence that Greg would say anything to disclaim his ownership of the Race Car.
. The Court finds a joint and several judgment to be appropriate in that only Greg, Brian, and Jeff know who received the funds from the sale of the Race Car, as well as who still has possession of the engine or other parts. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494653/ | THURMAN, Bankruptcy Judge.
Can there ever be too much charity? In the bankruptcy context, Congress generally responds, “when the charity exceeds 15% of a debtor’s gross annual income.” How that response is to be interpreted is the subject of the present appeal. Here, the Bankruptcy Court concluded, pursuant to 11 U.S.C. § 548(a)(2)(A),1 that the trustee in bankruptcy (“Trustee”) was entitled to avoid a portion of the charitable contributions made by debtors Lisa and Scott McGough (“Debtors”) during the two-year period prior to their bankruptcy filing, which was only the amount by which those contributions exceeded 15% of their gross annual income. On appeal, the Trustee argues that § 548(a)(2)(A) mandates that the Debtors’ contributions, which exceeded the 15% threshold in both preceding years, be avoided in their entirety. For the reasons set forth herein, we affirm the Bankruptcy Court’s decision.
*222I. BACKGROUND
The Debtors filed for Chapter 7 relief on December 31, 2009. On November 18, 2010, the Trustee initiated an adversary proceeding by filing a complaint against the Word of Life Christian Center (“Church”) seeking to avoid and recover all of the charitable contributions it had received from the Debtors during 2008 and 2009, which totaled $4,758. In its answer to the complaint, the Church admitted its receipt of donations in the specified amounts, but argued that they were excepted from avoidance as charitable contributions within the “safe harbor” provided by § 548(a)(2).2
Both parties filed motions for summary judgment, and each responded to the other’s motion.3 The Trustee argued that, because the contributions exceeded 15% of the Debtors’ gross annual income in each year, the total amount of the contributions made to the Church should be avoided and recovered for the estate. The Church responded that none of the contributions could be avoided because no individual contribution exceeded 15% of the Debtors’ gross annual income for the relevant year. Alternatively, the Church argued that, if individual contributions are required to be aggregated on an annual basis, then only that portion of the total contributions that exceeded 15% of the Debtors’ gross annual income was avoidable.
Based on the pleadings, the Bankruptcy Court concluded, for purposes of § 548(a)(2)(A), that: 1) social security benefits are not included in the determination of the Debtors’ “gross annual income;” 2) charitable donations are aggregated annually in determining whether they exceed 15% of annual income; and 3) only that portion of the aggregated transfers that exceeds the 15% threshold may be avoided. Applying these principles, the Bankruptcy Court partially granted the Trustee’s motion, avoiding only the amount of the Debtors’ annual charitable contributions that exceeded 15% of their gross annual income, for a total avoidance of $2,614.95.4 The Trustee timely appealed, and the Church did not cross-appeal.
II. APPELLATE JURISDICTION
This Court has jurisdiction to hear timely filed appeals from “final judgments, orders, and decrees” of bankruptcy courts within the Tenth Circuit, unless one of the parties elects to have the district court hear the appeal.5 In this case, the Trustee asserted four causes of action in his adversary complaint, all of which allege fraudulent conveyance and seek recovery of donations made to the Church by the Debtors. The Trustee’s first claim is *223made pursuant to § 548(a)(1)(B) for constructive fraud; the second is pursuant to § 548(a)(1)(A) for actual fraud; and the third and fourth claims are made pursuant to Colorado state law.6 The Church filed its motion for partial summary judgment pursuant to the “safe harbor” provision of § 548(a)(2), which is specifically a defense only to a § 548(a)(1)(B) constructive fraud claim. The Trustee countered with his own motion for partial summary judgment on both his federal and state constructive fraud claims.7 Neither party addressed the Trustee’s second or fourth claims in their motions, and the only issue considered by the Bankruptcy Court was how to interpret the safe harbor clause, which specifically only applies to a § 548(a)(1)(B) claim.
The Bankruptcy Court’s decision awarded judgment to the Trustee solely on the basis of constructive fraud, left pending the Trustee’s actual fraud claims, and was therefore not a final order that could be appealed.8 However, pursuant to this Court’s directive to the parties to address the issue of appellate jurisdiction at oral argument, the parties stipulated to dismissal of the Trustee’s second, third, and fourth causes of action, and an order dismissing those claims was entered by the Bankruptcy Court on February 9, 2012. By this action, the adversary proceeding was fully resolved, and the issue of appellate jurisdiction was “cured.” Since neither party elected to have this appeal heard by the United States District Court for the District of Colorado, they have consented to appellate review by this Court, and this Court has jurisdiction to consider this appeal.
III. ISSUE AND STANDARD OF REVIEW
The issue in this appeal is whether § 548(a)(2)(A) protects charitable donations up to 15% of a debtor’s gross annual income, even when the total of the donations exceeds that threshold, or whether exceeding the threshold removes the entire donation from protection.9 The facts of this case are undisputed, and the Trustee contests only the Bankruptcy Court’s *224interpretation of § 548(a)(2)(A). Statutory-interpretation is a legal issue that is reviewed by this Court de novo.10 De novo review requires an independent determination of the issues, giving no special weight to the bankruptcy court’s decision.11
IV. DISCUSSION
Section 548 of the Bankruptcy Code allows bankruptcy trustees to avoid and recover certain transfers made by debtors prior to the filing of their bankruptcy petition on the ground that the transfers were either actually or constructively fraudulent.12 Thus, a trustee may recover, from the transferee, any transfer made by the debtor within two years of filing of the bankruptcy petition, if the debtor either: 1) actually intended to defraud creditors in making the transfer (“actual” fraud); or 2) received less than “a reasonably equivalent value” in exchange, and was insolvent when the transfer was made (“constructive” fraud).13 There are no exceptions to avoidance of a transfer that a trustee establishes was made with actual fraudulent intent. However, a debtor’s constructively fraudulent charitable donation cannot be avoided by the trustee if the transferee establishes that: 1) it is a qualified religious or charitable entity; and 2) the amount of the donation is not more than 15 percent of the debtor’s gross annual income in the year of the transfer.14
In the two-year “reachback” period, the Debtors’ non-social security gross annual income was $6,800 in 2008, and $7,487 in 2009. The Debtors made several charitable donations to the Church in that period, the totals of which were $8,478 in 2008, and $1,280 in 2009.15 Thus, without the social security income, 15% of the Debtors’ gross annual income is $1,020 for 2008, and $1,123.05 for 2009, and the Debtors’ total contributions to the Church exceeded these threshold amounts by $2,458 in 2008, and by $156.95 in 2009.16
*225This Court now considers whether the Bankruptcy Court correctly concluded that § 548 allowed the Trustee to avoid only that portion of the Debtors’ charitable contributions that exceeded the 15% threshold. The Trustee asserts that § 548(a)(2)(A) is clear and unambiguous on its face, and its plain reading “provides a safe harbor only if the contributions do not exceed a minimum threshold, but provides no safe harbor if the threshold is exceeded.” 17 The safe harbor provision, enacted as part of the Religious Liberty and Charitable Donation Protection Act of 1998 (“Donation Protection Act”),18 provides as follows:
(2) A transfer of a charitable contribution to a qualified religious or charitable entity or organization shall not be considered to be a transfer covered under paragraph (1)(B) in any case in which[ — ]
(A) the amount of that contribution does not exceed 15 percent of the gross annual income of the debtor for the year in which the transfer of the contribution is made[.]19
The legislative history behind this provision elaborates on it, as follows:
The 15 percent safe harbor is necessary to protect the tithing practices of certain religious faiths. It is intended to apply to transfers that a debtor makes on an aggregate basis during the [two]-year reachback period preceding the filing of the debtor’s bankruptcy case. Thus, the safe harbor protects annual aggregate contributions up to 15 percent of the debtor’s gross annual income.20
The Trustee maintains that the legislative history of this provision should not be considered by this Court because the statute itself is plain and unambiguous.21 The Church counters that the Trustee’s own interpretation of the statute is also not a literal reading since the statute does not state that the entire amount of the contributions may be avoided if the 15% threshold is exceeded.22
The Trustee cites In re Zohdi23 in support of his assertion that § 548(a)(2)(A) is clear and unambiguous on its face. In Zohdi, a bankruptcy court addressed the safe harbor provision in the context of a debtor’s single contribution of $10,000 to Louisiana State University during a year in which his gross annual income was $43,669. The Zohdi court concluded that the trustee could avoid the entire $10,000 transfer, as opposed to $3,450, which was the amount by which the donation exceeded 15% of the debtor’s gross annual income.
*226The Bankruptcy Court in the present case acknowledged that Zohdi concluded that a plain reading of § 548(a)(2)(A) requires the entire amount of a charitable donation to be avoided, noting that Zohdi “reasoned that Congress would have included more precise language if it had intended for just the amount over the 15% to be voidable.”24 The Zohdi decision appears to be the only published opinion that has directly addressed the specific issue before us now, but we agree with the Bankruptcy Court that Zohdi is factually distinguishable from this case because it involved a single large donation. We likewise view Zohdi’s statement, in dicta, that § 548(a)(2) does not require aggregation not particularly persuasive. Finally, and most importantly, Zohdi is not binding precedent in this jurisdiction.
We conclude that the language of § 548(a)(2)(A) is susceptible to different interpretations and, as such, is ambiguous. Therefore, we may look beyond the statutory language itself in order to interpret it in accordance with Congressional intent. In that respect, we need not look far. We consider the statement in the House Report that accompanied this statute’s revision in 1998 that “the safe harbor protects annual aggregate contributions up to 15 percent of the debtor’s annual income” to be particularly instructive. We read the statute’s provision of protection “up to” a threshold amount to mean that is the most that will be given. We do not read that to mean that, once the threshold is crossed, all protection disappears. As the Bankruptcy Court noted, it is “doubtful that Congress would protect a debtor’s right to donate 15% of their [gross annual income] to a charitable organization, but allow a trustee to avoid all donations if one cent over the 15% threshold is donated.”25 Interpreting the statute to provide up to, but no more than, 15% is both more logical and more likely to effectuate Congress’ actual intent than is the Trustee’s interpretation.
In addition, our interpretation of § 548(a)(2) is more compatible with § 1325(b)(2)(A), another provision added to the Bankruptcy Code by the Donation Protection Act, than is the Trustee’s. Thus, in Chapter 13 cases, when determining a debtor’s disposable income for the purpose of its Chapter 13 plan payments, § 1325(b)(2)(A)(ii) states:
For purposes of this subsection, the term “disposable income” means current monthly income received by the debtor ... less amounts reasonably necessary to be expended ... for charitable contributions ... in an amount not to exceed 15 percent of gross income of the debtor for the year in which the contributions are made[.]26
Thus, when computing their disposable income, Chapter 13 debtors may deduct their charitable donations “in an amount not to exceed” 15% of their gross income. This provision plainly reduces disposable income in Chapter 13 cases by an amount up to 15% of gross income. As such, Chapter 13 debtors’ post-filing charitable contributions are deductible up to the threshold amount and are considered to be beyond the bankruptcy court’s scrutiny.27 Similarly interpreting § 548(a)(2) to allow a charitable organization to retain contributions up to 15% of the debtor’s gross annual income harmonizes these two provisions by protecting both pre- and postpeti*227tion charitable donations up to a maximum of 15% of an individual debtor’s gross annual income.28 On the other hand, the Trustee’s interpretation would result in different treatment of pre- and post-filing charitable contributions.
V. CONCLUSION
The Bankruptcy Court’s order, which permits the Trustee to avoid only the amount of “reachback” period charitable contributions that exceeded 15% of the Debtors’ gross annual income, is AFFIRMED.
. Unless otherwise noted, all further statutory references in this decision will be to the Bankruptcy Code, which is Title 11 of the United States Code.
. This provision was first labeled a "safe harbor” in the House Report that accompanied it prior to its enactment, and § 548(a)(2) is now widely known by this moniker. See H.R.Rep. No. 105-556, 1998 WL 285820, at *4-5 (1998).
. In its response to the Trustee's motion for summary judgment, the Church disputed that the Debtors were insolvent at the time the charitable contributions were made, which the Trustee has the burden of proving in order to avoid the transfers as constructively fraudulent under § 548. The Bankruptcy Court’s memorandum opinion does not make any findings regarding the Debtors’ insolvency at the time the contributions were made, but the Church did not raise this issue on appeal and we therefore deem the issue waived.
. Memorandum Opinion and Order on Plaintiff's Motion for Partial Summary Judgment and Defendant’s Motion for Partial Summary Judgment, in App. at 114, published at Wadsworth v. Word of Life Christian Ctr. (In re McGough), 456 B.R. 682, 687 (Bankr.D.Colo.2011) (“Appealed Decision”).
. 28 U.S.C. § 158(a)(1), (b)(1), and (c)(1); Fed. R. Bankr.P. 8002; 10th Cir. BAP L.R. 8001-1 (2002).
. The Trustee’s third claim, under Colo.Rev. Stat. § 38-8-106 (2007), mimics his first federal claim of constructive fraud, while his fourth claim, under Colo.Rev.Stat. § 38-8-105 (2007), mimics the second federal claim of actual fraud.
. The Trustee's third cause of action, asserting a state law claim of constructive fraud, succeeds or fails along with his § 548(a)(1)(B) claim.
. A final order "ends the litigation on the merits and leaves nothing for the court to do but execute the judgment.” In re Durability, Inc., 893 F.2d 264, 265 (10th Cir.1990). In this case, the Bankruptcy Court apparently considered its decision to be a final resolution of the adversary proceeding, as it struck the previously set trial date in this matter upon the issuance of its decision. However, this Court has a duty to determine the existence of appellate jurisdiction for itself. Id.
.The Church did not cross-appeal the Bankruptcy Court's decision. This Court therefore does not address the following § 548(a)(2)(A) issues: 1) whether social security benefits are included in calculation of a debtor’s "gross annual income”; and 2) whether charitable transfers are aggregated on an annual basis in determining whether they exceed the 15% threshold. Likewise, we do not consider whether contributions to different charitable organizations are aggregated, as this was not an issue below, and we do not consider whether § 548(a)(2)(B), which insulates all contributions if consistent with past practices of a debtor, prevents avoidance of Debtors’ transfers, as that issue does not appear to have been considered by the Bankruptcy Court and has been waived by the Church on appeal. Thus, in connection with this decision, we accept as underlying facts that the Debtors made donations to a qualified charitable organization that exceeded 15% of their gross annual income in both 2008 and 2009.
. In re Annis, 232 F.3d 749, 751 (10th Cir.2000); In re Duffin, 457 B.R. 820, 822 (10th Cir. BAP 2011).
. Salve Regina Coll. v. Russell, 499 U.S. 225, 238, 111 S.Ct. 1217, 113 L.Ed.2d 190 (1991).
. Specifically, § 548(a)(1) provides:
The trustee may avoid any transfer ... of an interest of the debtor in property, or any obligation ... incurred by the debtor, that was made or incurred on or within 2 years before the date of the filing of the petition, if the debtor voluntarily or involuntarily—
(A) made such transfer or incurred such obligation with actual intent to hinder, delay, or defraud any entity to which the debtor was ... indebted; or
(B)(i) received less than a reasonably equivalent value in exchange for such transfer or obligation; and
(ii)(I) was insolvent on the date that such transfer was made or such obligation was incurred, or became insolvent as a result of such transfer[.]
§ 548(a)(1)(A) and (B).
. Id.
. § 548(a)(2)(A) (the "safe harbor” provision). Another exception protects charitable contributions, even when they do exceed 15% of the debtor's gross annual income, if they are "consistent with the practices of the debt- or in making charitable contributions.” § 548(a)(2)(B). Although the Church raised the Debtors' past donation practice as a defense to avoidance in the Bankruptcy Court, no evidence was presented, and counsel for the Church specifically waived that defense at oral argument before this Court. We therefore do not address it.
. These facts were set out in the Trustee’s motion for summary judgment, and were stipulated to by the Church in its response. See App. at 41 and 85.
. As previously noted, the parties stipulated to the accuracy of these facts, and the Church did not appeal the Bankruptcy Court’s rulings that social security income is not part of "gross annual income,” or that donations are aggregated for the year.
. Appellant’s Brief at 6.
. Pub.L. No. 105-183, 112 Stat. 517.
. § 548(a)(2)(A).
. H.R.Rep. No. 105-556, 1998 WL 285820, at *9 (1998) (emphasis added) (footnote omitted).
. See Lamie v. U.S. Trustee, 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004) (when statute is Plain, court’s sole function is to enforce its terms); In re Geneva Steel Co., 281 F.3d 1173, 1178 (10th Cir.2002) ("statute clear and unambiguous on its face must be interpreted according to its plain meaning”).
. We note also that the statute does not expressly state that contributions are aggregated. In fact, it specifically references a singular "transfer of a charitable contribution.” However, the singularity of the language used in § 548(a)(2) was addressed by the Second Circuit in Universal Church v. Geltzer, 463 F.3d 218, 223-24 (2d Cir.2006), concluding that § 102(7) ("In this title — the singular includes the plural”) both keeps the individual/aggregate issue alive and renders § 548(a)(2) ambiguous.
. Murray v. La. State Univ. Found. (In re Zohdi), 234 B.R. 371 (Bankr.M.D.La.1999).
. Appealed Decision at 686.
. Id.
. § 1325(b)(2)(A)(ii).
. In re Gamble, No. 11-80131, 2011 WL 2971406, at *2 (Bankr.M.D.N.C. June 15, 2011).
. See In re Turner, 84 F.3d 1294, 1298 (10th Cir.1996) (statutes should be construed to harmonize their provisions); U.S. W. Commc’ns, Inc. v. Hamilton, 224 F.3d 1049, 1053 (9th Cir.2000) (duty to harmonize statutes enacted together as part of same Act is “particularly acute”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494654/ | ORDER DENYING MOTION TO DISMISS OR CONVERT
MARY GRACE DIEHL, Bankruptcy Judge.
In this case the Court considers whether a chapter 11 Debtor’s obligation under a divorce decree to maintain a life insurance policy is a domestic support obligation that first becomes payable post-petition, when the requisite life insurance policy lapsed pre-petition. The case came before the Court on Virginia R. Perlis’s (“Movant”) Motion to Dismiss or Convert Case Pursuant to 11 U.S.C. § 1112 (“Motion”). (Docket No. 29). Debtor filed his chapter *24211 case on September 1, 2011, and Movant filed her Motion on November 4, 2011. Movant asserts that Debtor’s case is subject to conversion or dismissal under 11 U.S.C. § 1112(b)(4)(F). That section provides there is cause to convert or dismiss a case if a debtor fails “to pay any domestic support obligation that first becomes payable after the date of the filing of the petition.” 11 U.S.C. § 1112(b)(4)(P).
A divorce decree obligated Debtor to make monthly child support payments to Movant. Debtor is current on these payments. In addition, the divorce decree required Debtor to maintain a life insurance policy for $1,000,000.00 to protect against Debtor deceasing before the child support payments were completed. That insurance policy lapsed pre-petition when Debtor failed to pay monthly premiums, and Debtor’s failure was addressed by the state court in a divorce decree compliance hearing. Movant argues that Debtor’s failure to maintain the insurance policy is cause under § 1112(b) to convert or dismiss Debtor’s case.
FACTUAL HISTORY
Debtor and Movant were married until November 2008, when a Final Judgment and Decree of Divorce (“divorce decree”) was entered in the Fulton County Superior Court (“state court”). The divorce decree incorporated a Settlement Agreement (“settlement agreement”). Movant Exh. 2. In addition to dividing property, the settlement agreement required Debtor to make monthly child support payments to Mov-ant. The settlement agreement further required Debtor to maintain a life insurance policy (already owned by Debtor at that time) for $1,000,000.00:
It is acknowledged and agreed that Husband is the owner of an unencumbered life insurance policy on his life with death benefits of ONE MILLION DOLLARS ($1,000,000)....
Additionally, it is acknowledged that Husband’s child support obligations as provided in this Agreement shall continue after his death and be binding upon his estate. In order to provide and assure that there will be sufficient funds in Husband’s estate upon his death to satisfy the above obligations under this Agreement and any Judgment into which this Agreement may be incorporated, Husband shall maintain the aforementioned policy and designate each child as a beneficiary for a death benefit of TWO HUNDRED FIFTY THOUSAND DOLLARS ($250,000) to be held in Trust by Wife.
Husband shall be solely responsible for and shall cause to be timely paid on said life insurance policy all dues, premiums and assessments as the same shall become due. Husband agrees that within ten (10) days of execution of this Agreement, and by May 1st of each year thereafter, he shall provide Wife with written certification that all premiums are and have been paid and that the insurance afforded hereunder is in full force and effect and that the beneficiary designations are correct. Movant Exh. 3, ¶ 27.
Movant was also to be designated as a beneficiary, but for a death benefit of $240,000.00. Id. The purpose of the life insurance policy was to insure that Debt- or’s equitable division and child support payments would be made even if Debtor deceased completion of the payments. Id
In October 2010, the state court entered a consent order modifying the divorce decree. Movant Exh. 8. The consent order (1) required Debtor to provide written verification of the insurance policy to Movant and (2) provided for a compliance hearing in February 2011. The compliance hear*243ing revealed that Debtor’s life insurance policy had lapsed because Debtor failed to pay the premiums. Debtor’s Reply ¶ 12. Debtor had also defaulted on other obligations in the divorce decree. Movant Exh. 4. Consequently, an order on the compliance hearing (“compliance order”) held that Debtor was in willful contempt of the divorce decree, in part because of his failure to maintain complying life insurance. Movant Exh. No. 6.
To purge himself of contempt with respect to the life insurance, the compliance order required Debtor to “exercise his best efforts to secure conforming life insurance coverage” and to verify his efforts and acts to Movant. Id. A final order was issued on the compliance hearing in March 2011 (“final order”). Debtor’s Exh. I. The final order provides that the requisite sums have been paid to Movant and that the “instant contempt is dismissed.” Id. No mention is made of Debtor’s obligation to pursue a life insurance policy in accordance with the compliance order. Id.
Sometime after the final order was issued, Debtor was incarcerated for again defaulting on obligations (unrelated to the life insurance) under the divorce decree. Debtor filed the present chapter 11 case on September 1, 2011. Movant’s Motion came on for hearing on December 12, 2011. Debtor asserted that he was current on all child support obligations. The only issue before the Court is whether Debtor’s failure to maintain life insurance under the divorce decree constitutes cause to dismiss or convert Debtor’s case under 11 U.S.C. § 1112(b)(4)(P).
DISCUSSION OF LAW
Section 1112(b)(1) of the Bankruptcy Code provides that the court shall convert or dismiss a case if the movant establishes cause. An exception to this rule arises when the court specifically identifies the presence of unusual circumstances that establish conversion or dismissal is not in the best interest of creditors and the estate, and the debtor or a party in interest objects and meets the requirements of § 1112(b)(2). Section 1112(b)(4)(P) defines “cause” to include the “failure of the debt- or to pay any domestic support obligation that first becomes payable after the date of the filing of the petition.” 11 U.S.C. § 1112(b)(4)(P).
In order for Debtor’s failure to maintain the life insurance policy to constitute cause for dismissal or conversion, Movant must show (1) that the obligation to maintain the life insurance policy is a “domestic support obligation” under 1112(b)(4)(P), and (2) that it is an “obligation that first becomes payable after the filing of the petition.”
1. The obligation to maintain life insurance a domestic support obligation.
Regarding the first issue, the statutory language defining “domestic support obligation” is in 11 U.S.C. § 101(14A):
“a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, that is—
(A) owed to or recoverable by—
(i) a spouse, former spouse, or child of the debtor ...
(B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated;
*244(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of&emdash;
(i) a separation agreement, divorce decree, or property settlement agreement;
(ii) an order of a court of record; or
(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and....
Courts have interpreted 11 U.S.C. § 101(14A) broadly, finding that it includes more than just the traditional debts stemming from alimony or child support. See, e.g., In re Baer, 2009 WL 3296140 (Bankr.E.D.La.2009) (determining a debt related to a prenuptial contract to be a domestic support obligation for purposes of the automatic stay). A broad interpretation is warranted by the strong congressional policy favoring the enforcement of obligations for spousal and child support. See, e.g., Shaver v. Shaver, 736 F.2d 1314, 1315-16 (9th Cir.1984). This policy is evidenced by § 523(a)(5) (excepting domestic support obligations from discharge) and numerous amendments to the Bankruptcy Code. Cavalli v. Cavalli (In re Cavalli), 2009 WL 3125549, *2 (Bankr.N.D.Ga.2009). However, no other court has held that the obligation to maintain a life insurance policy in these circumstances is a domestic support obligation under § 101(14A).
But other bankruptcy courts have addressed whether the obligation to maintain a life insurance policy for the benefit of children pursuant to a divorce decree is a nondischargeable debt for purposes of 11 U.S.C. 523(a)(5). Indeed, several courts have held that the obligation to maintain a life insurance policy under a divorce decree is domestic support obligation and thus a nondischargeable debt. Powell v. Shealey (In re Shealey), 2006 WL 6592071 (Bankr.N.D.Ga.2006); Klayman v. Klayman (In re Klayman), 234 B.R. 151 (Bankr.M.D.Fla.1999) (decided before BAPCPA). Domestic support obligations under BAPCPA are broader than the scope of former § 523(a)(5). The purpose of maintaining life insurance is to provide for child support payments. The Court therefore holds that the obligation is a domestic support obligation. To obtain the relief sought under § 1112(b)(4)(F), however, Movant must still show that this obligation first becomes payable after the date the petition was filed.
2. The obligation to maintain life insurance does not first becomes payable after the petition-date.
The obligation to maintain the life insurance policy does not first become payable after the petition-date. The language “first becomes payable after the date of the filing of the petition” is generally thought to include any domestic support obligation that first matures post-petition. CollieR on Bankruptcy ¶ 1112.04(6)(P) (Alan N. Resnick & Henry J. Sommer eds., 16th ed.). Here, Movant notes that if Debtor failed to make a post-petition child support payment, cause would undoubtedly exist under § 1112(b)(P)(4) to convert or dismiss Debt- or’s case. And Movant argues that the obligation to maintain a life insurance policy is similar to making monthly child support payments, as maintaining life insurance requires the recurring payment of monthly premiums. Because Debtor did not pay a monthly premium on a complying life insurance policy after the petition was filed, Movant contends that cause exists for conversion or dismissal. Debtor, on the other hand, argues that the obligation to maintain a life insurance policy first became due before the petition-date and is not owed post-petition.
The Court is unconvinced that § 1112(b)(4)(F) was meant to include the *245particular situation now before the Court, for two reasons. First, no payments are currently due under the life insurance policy designated in the divorce decree. Second, there are no other life insurance obligations which are currently payable.
As to the first reason, the divorce decree obligates Debtor to maintain a specific life insurance policy that was already in force when the divorce decree was entered. That policy lapsed. Consequently, no payments are currently due on that policy. To obtain complying life insurance, Debtor must obtain a new policy. But the divorce decree does not provide for the event of a policy lapse. Thus, Debtor is not explicitly required to obtain a different or new policy if the one described in the divorce decree lapses. The divorce decree only requires Debtor to maintain the policy designated under it. Thus, no premiums are currently payable under the life insurance policy designated in the divorce decree.
As to the second reason, the use of the word “payable” suggests that Congress intended § 1112(b)(4)(P) to apply to payments of money, whether for child support, alimony, etc. Although premium payments might fit this definition, a general obligation to obtain a life insurance policy does not. At present, there are no payments Debtor is obligated to make under the original life insurance policy or a new life insurance policy. Nor has Movant shown that there are any monetary payments whatsoever that Debtor is required to make in relation to life insurance that mature post-petition. Debtor could have satisfied the life insurance obligation pre-petition by paying for life insurance in a single lump-sum payment. Rather, Debt- or and Movant reached a settlement agreement obligating Debtor to maintain a specific life insurance policy that was already in force. No monthly premiums are due and payable post-petition on that life insurance policy, as it lapsed pre-petition.
Movant argues that Debtor’s life insurance obligation under the divorce decree is ongoing, and that Movant could once again move in state court to hold Debtor in contempt. Thus, Movant is essentially asking the Court to dismiss Debtor’s case because Debtor has not replaced the lapsed policy; but replacing the life insurance policy is not an obligation that is payable. Moreover, it is an obligation that should be addressed by the state court. Movant has already sought relief in state court for Debtor’s failure to maintain a complying life insurance policy. Debtor was found in contempt, and the compliance order required Debtor to exercise his best efforts to secure conforming life insurance coverage. The compliance order did not require Debtor to make payments on a policy. Indeed, none was in place. Debt- or’s contempt was ultimately dismissed in the final order, which did not explicitly state whether Debtor satisfied the obligation to use his best efforts to secure conforming life insurance. Regardless, the state court dismissed the contempt, thereby resolving the issues raised in the compliance order.
Movant may go back to state court and obtain an order holding Debtor in contempt and requiring him to obtain a new life insurance policy. A premium for that policy would then become due at some point. But that is not the situation here. Under the current posture of litigation in the state court, no life insurance policy is in force or required to be in force. Rather, Debtor was found to be in contempt, was required to use his best efforts to obtain complying life insurance, and the contempt was then dismissed. Thus, there are no other obligations related to obtaining a new life insurance policy that are currently payable.
Because the life insurance policy designated in the divorce decree is not currently *246in force, and because there is no state court order requiring Debtor to obtain a new policy post-petition, the Court finds that there are no obligations related to a life insurance policy that are payable post-petition.
3. Conclusion
In sum, Congressional policy favors the enforcement of family support obligations under divorce decrees. But the plain language of 11 U.S.C. § 1112(b)(4)(P) does not entitle Movant to conversion or dismissal of Debtor’s case. No life insurance policy is presently in force with payments coming due — that is, payable — post-petition. And the obligation to obtain life insurance — which under the state court litigation is not required of Debtor at present — is not an obligation that is payable. While Movant is not entitled to relief under § 1112(b), Movant may have remedies in various other Bankruptcy Code sections designed to protect parties owed domestic support obligations. Accordingly, it is
ORDERED that Movant’s Motion to Dismiss or Convert Case is DENIED. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494655/ | MEMORANDUM DECISION
(Interim ruling on piercing the corporate veil)
ROBERT E. GROSSMAN, Bankruptcy Judge.
Before the Court is the limited issue of whether the corporate veil should be pierced in this case and the Debtor held liable for the debts of five related corporations, of which he was the sole shareholder, officer and director. The Plaintiffs hold a $2 million judgment against those corporations. They are seeking to establish the Debtor’s liability for the corporations’ obligations, and if successful seek to have that obligation declared non-dis-chargeable under section 523(a).1
The Court recognizes the importance of preserving an owner’s limited liability in the corporate context. However, there is a countervailing equitable principle which requires this Court to pierce the shield that insulates individuals from the liabilities of a corporation so as to prevent the shield from becoming a sword. In order to succeed in piercing the corporate veil, the Plaintiffs must show that the Debtor “exercised complete domination of the corporation in respect to the transaction attacked” and “such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiffs injury[.]” Morris v. State Dep’t of Taxation & Fin., 82 N.Y.2d 135, 141, 603 N.Y.S.2d 807, 623 N.E.2d 1157 (1993).
The Court finds that in the context of his dealings with the Plaintiffs, the Debtor manipulated the corporations in an orchestrated scheme designed to insulate himself from liability and leave only under-capitalized shell entities that would never be able to pay their obligations. The Court also finds that the Plaintiffs were injured as a direct result of the Debtor’s domination and conduct of the corporations. Thus, the Court finds that the Plaintiffs have sustained their burden of piercing the corporate veil to hold the Debtor liable for the debts of his corporations. The Court is not, at this time, determining the amount of the Debtor’s liability.
Facts
Prior to filing bankruptcy, the Defendant, Stewart Adler (“Debtor”), was the sole officer, director, and shareholder of several related corporations. Among those corporations were J.U.N.K. Jean-swear Corporation (“J.U.N.K.”), Just Jeanswear Corporation (“Just I”), Just Jeanswear Corporation II (“Just II”), Just Jeanswear Corporation III (“Just III”) and Seruchi Jeanswear Corporation (“Ser-uehi”) (each referred to as a “Corporation,” and collectively the “Corporations”)2 . The Corporations were engaged in the business of importing and selling wholesale jeans and other garments into the United States.
The Plaintiff, Lisa Ng (“Ng”), was the principal of co-Plaintiff, Charming Trading Company (“Charming Trading”) (collectively ' the “Plaintiffs”). From 1997 through 2000, the Debtor, through the *283Corporations, worked with the Plaintiffs to import garments from Hong Kong to the United States. Originally, the Plaintiffs acted as the Corporations’ agent for the purchase of merchandise from Hong Kong manufacturers. This agency relationship changed and the Plaintiffs ultimately used their own credit to purchase merchandise and pay shipping costs. Plaintiffs then invoiced the Corporations for the goods. The Corporations failed to pay the Plaintiffs in full for the merchandise, which ultimately caused the Plaintiffs to default on their obligations to the Hong Kong manufacturers.
On July 25, 2003, Plaintiffs commenced a lawsuit against the Debtor and the Corporations in Supreme Court of New York County (“State Court”) asserting claims based on, inter alia, breach of contract, fraud and piercing the corporate veil (“State Court Lawsuit”).
While the State Court Lawsuit was pending, the Debtor filed a chapter 7 bankruptcy petition on July 28, 2004, and Andrew Thaler was appointed as chapter 7 trustee (“Trustee”). As a result of the Debtor’s bankruptcy filing, on August 19, 2004, the State Court severed and stayed the State Court Lawsuit against the Debt- or individually, including the cause of action seeking to pierce the corporate veil. The lawsuit continued as against the Corporations only. According to the Debtor, the Corporations had no money to defend the lawsuit and for that reason they failed to comply with discovery demands. The Corporations’ answer was stricken, and they were found liable to the Plaintiffs by default.
Following the Corporations’ default, the State Court conducted a six-day inquest on damages in June and July of 2005. The Debtor appeared at the inquest on behalf of the Corporations. During the inquest, the State Court admitted into evidence exhibits relating to the shipment of merchandise to the Corporations including purchase orders, invoices, bills of lading and other documents. The State Court considered disputes between the parties relating to nonconforming goods and various claims for offsets or credits by the Corporations. The State Court issued a written decision dated, August 4, 2005, making various findings relating to the business relationship among the Corporations, including that the Corporations were alter egos of each other, and their relationship with the Plaintiffs. The State Court found that:
Mr. Adler, acting on behalf of the defendant corporations and as their sole owner, placed orders and received shipments under the different corporate names, whichever had better credit or less debt at the moment. Mr. Adler, on the corporations’ behalf, authorized and approved all the styles and shipments. Whatever company name was on the order, the current existing companies all received the benefits and agreed to be responsible for the payments, based on the documents in evidence and plaintiff Ms. Ng’s testimony. The companies had the same owner, shared the same office spaces, tax number and equipment and were inadequately capitalized. By clear and convincing evidence each defendant corporation was the alter ego of the others.
State Court Decision after Inquest and Assessment of Damages (“State Court Decision”) at 2. The State Court also found that the Plaintiffs were damaged as a direct result of fraud committed by the Corporations at the direction of the Debtor. According to the State Court,
[P]laintiff Lisa Ng is entitled to an additional recovery as a direct result of the defendant corporations[’] fraud on her. Mr. Adler, on behalf of the corporations, *284represented to Ms. Ng that if she paid manufacturers and shipping and other costs to send the garments to the United States, his corporations would not only reimburse her but also pay past due commissions because the corporations had the present capacity to complete the transactions....
The evidence shows that Mr. Adler and the corporations had no intention of carrying out these representations or the present capacity to do so. In reliance on these misrepresentations, Ms. Ng had a mortgage placed on her home, allowed companies to invoice to plaintiff Charming Trading Company, paid many of the invoices, was threatened when she could no longer pay, was sued in China and Hong Kong and fled to the United States.... The credible evidence establishes that, as a direct result of the fraud and resulting debt ... Ms Ng’s total income loss caused by defendants’ fraud is $209,675.
State Court Decision at 7. Based on these findings, on September 14, 2005, the State Court entered a judgment (the “State Court Judgment”) against the Corporations in the amount of $2,025,849.97.
On April 25, 2005, Plaintiffs filed an adversary proceeding against the Debtor, seeking to have their claim3 against the Debtor deemed non-dischargeable pursuant to 11 U.S.C. § 523(a)(2)(A), (a)(4), and (a)(6); and seeking to deny the Debtor’s discharge pursuant to 11 U.S.C. § 727(a)(2), (a)(3), (a)(4)(A) and (a)(5).
On December 18, 2006, the Plaintiffs filed a motion for summary judgment seeking judgment against the Debtor on the section 523(a)(2)(A) and 727(a)(4)
causes of action. By Order, dated June 13, 2007, the bankruptcy court granted the Plaintiffs’ motion for summary judgment and granted nondischargeability under 11 U.S.C. § 523(a)(2)(A), giving collateral es-toppel effect to the State Court Judgment. The bankruptcy court found that even if collateral estoppel were not appropriate under the circumstances, “it seems ... independently the judge’s findings in state court would be admissible and are admissible in this summary judgment, and I think as a matter of law the debtor’s claim that a stay prevented this from happening is not correct, and ... once those findings are in ... it’s very clear to me that we now follow the necessary elements for 523(a)(2)(A), and that the claim ... which I believe exists, .... will be excepted from discharge.” Transcript (“Tr.”) 6/13/07 at 21-22. The bankruptcy court also denied the Debtor’s discharge under section 727(a)(4), finding that the undisputed facts surrounding omissions and inaccuracies in the Debtor’s schedules and statements gave rise to a claim to deny the discharge as a matter of law. The Debtor appealed.
On appeal, the District Court reversed and held that the State Court findings against the Corporations should not be given preclusive effect against the Debtor as an individual in this adversary proceeding. Adler v. Ng (In re Adler), 395 B.R. 827, 830 (E.D.N.Y.2008). The District Court also found that if the State Court findings were found to be binding upon the Debtor under an alter ego or veil piercing theory, then those findings would be void ab initio as having been entered in violation of the section 362(a) stay. Id. at 839-40; see also Rexnord Holdings, Inc. v. *285Bidermann, 21 F.3d 522, 527-28 (2d Cir.1994). Specifically, the District Court found:
The Bankruptcy Court erred in giving collateral estoppel effect to the state court findings because Debtor was severed from the case when he filed for bankruptcy and, therefore, did not have a full and fair chance to litigate the issues in the state court proceeding. Contrary to plaintiffs’ suggestion that Debtor participated in the state court proceeding because he appeared as a representative of the company, Debtor did not participate in the state court action in his individual capacity and any such participation would have violated the automatic stay. Therefore, if the state court’s findings of fraud are made binding against the Debtor with respect to any alleged debt owed to plaintiffs, those findings would violate the automatic stay and would be void ab initio.
Adler, 395 B.R. at 830. The District Court also found that genuine issues of material fact existed with respect to the section 727(a)(4) claim which should be resolved at trial rather than on summary judgment. The District Court remanded the ease for further proceedings on the merits of the Plaintiffs’ section 523 and 727 claims, and also on the matter of whether the Plaintiffs held a valid claim against the Debtor, and if so, in what amount. Id. at 841 n. 10.
On October 15, 2008, the Trustee filed a notice of discovery of assets and January 16, 2009 was set as the last day to file proofs of claim. On February 28, 2009, the Plaintiffs filed a late proof of claim against the Debtor in the amount of $2,025,841.91, i.e., the full amount of the State Court Judgment against the Corporations.4 Shortly thereafter, the Debtor filed an objection to the Plaintiffs’ proof of claim arguing that the Debtor has no personal liability for the debts of the Corporations (“Claim Objection”), thus raising the issue of whether the corporate veil should be pierced to hold the Debtor liable for the Corporations’ debts.
This Court scheduled a combined evi-dentiary hearing on the Claim Objection and trial on the adversary proceeding to commence September 20, 2010. The proceedings were combined so that the Debt- or’s liability could be established, or not, prior to or contemporaneous with, a ruling on whether such liability should be non-dischargeable. The Plaintiffs’ claims for repayment by the Debtor are based on two theories: primarily, they claim that the Debtor should be held liable for the debts of the Corporations under a veil-piercing theory; secondarily, they argue that the Debtor has separate liability based upon his personal promise to pay the corporate debts to Plaintiffs.
The proceedings commenced on September 20, 2010 and continued for seven nonconsecutive days until February 3, 2011. The Court heard testimony by the Debtor, Ms. Ng, and the Corporations’ accountant, Mr. Portnoy, and admitted Plaintiffs’ Exhibits 1-86, 91, 92, 95, 96, and Debtor’s Exhibits A-Q, S and U-W, into evidence without objection.5
*286On February 3, 2011, prior to the conclusion of the Plaintiffs’ case, the Court determined, with the agreement of the parties, that it would be the best course of action to adjourn the trial without date so that the Court could rule on the threshold issue of whether the corporate veil should be pierced such that the Debtor should be liable for the Corporations’ debts. The parties filed post-trial memoranda of law on March 25, 2011, at which time the matter was taken under submission. Piercing the corporate veil is the sole focus of this Memorandum Decision.
Discussion
As a general rule, a corporation exists independently of its owners as a separate legal entity and a corporation’s owners are not liable for the debts of the corporation. See Anderson v. Abbott, 321 U.S. 349, 361-63, 64 S.Ct. 531, 88 L.Ed. 793 (1944); Morris v. State Dep’t of Taxation & Fin., 82 N.Y.2d 135, 140, 603 N.Y.S.2d 807, 623 N.E.2d 1157 (1993). Formation of a corporation by its owner for the purpose of limiting liability of the owner is perfectly legal and valid. Morris, 82 N.Y.2d at 140, 603 N.Y.S.2d 807, 623 N.E.2d 1157. However, New York courts will disregard the corporate form, or pierce the corporate veil, to hold a corporation’s owners liable for the debts of the corporation whenever necessary to prevent an injustice or to achieve equity. Id. at 142, 603 N.Y.S.2d 807, 623 N.E.2d 1157.
Under New York law, a party seeking to pierce the corporate veil bears the burden of showing that “(1) the owners exercised complete domination of the corporation in respect to the transaction attacked; and (2) that such domination was used to commit a fraud or wrong against the plaintiff which resulted in plaintiffs injury[.]” Id. at 141, 603 N.Y.S.2d 807, 623 N.E.2d 1157. “The party seeking to pierce the corporate veil must establish that the owners, through their domination, abused the privilege of doing business in the corporate form to perpetrate a wrong or injustice against that party such that a court of equity will intervene.” Id. at 142, 603 N.Y.S.2d 807, 623 N.E.2d 1157.
The Second Circuit has enumerated a non-exhaustive list of factors relevant to determining whether a corporation has been “dominated” by its owners:
(1) the absence of the formalities and paraphernalia that are part and parcel of the corporate existence, i.e., issuance of stock, election of directors, keeping of the corporate records and the like, (2) inadequate capitalization, (3) whether funds are put in and taken out of the corporation for personal rather than corporate purposes, (4) overlap in ownership, officers, directors, and personnel, (5) common office space, address and telephone numbers of corporate entities, (6) the amount of business discretion displayed by the allegedly dominated corporation, (7) whether the related corporations deal with the dominated corporation at arms length, (8) whether the corporations are treated as independent profit centers, (9) the payment or guarantee of debts of the dominated corporation by other corporations in the group, and (10) whether the corporation in question had property that was used by other of the corporation as if it were its own.
Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 139 (2d Cir.1991).
No one factor is determinative and courts must conduct a broad-based inquiry into the totality of the facts to determine whether the party seeking to pierce the corporate veil has established the domination prong of the test. See id.; see also Pergament v. Precision Sounds DJ’s, Inc. *287(In re Oko), 395 B.R. 559, 564-65 (Bankr.E.D.N.Y.2008) (finding defendant abused the corporate form based on the totality of the circumstances).
Under the second prong of the New York standard, the party seeking to pierce the corporate veil must also establish that the domination was used to commit “a wrongful or unjust act toward the plaintiff’ which caused injury to the plaintiff. Morris, 82 N.Y.2d at 141-42, 603 N.Y.S.2d 807, 623 N.E.2d 1157. Actual or common law fraud need not be proven. See DER Travel Servs. v. Dream Tours & Adventures, No. 99-2231, 2005 WL 2848939, at *9 (S.D.N.Y. Oct. 28, 2005). A plaintiff may be considered “injured” by the defendant’s actions when “a company is rendered unable to pay the claims pending against it by third parties because of another company or individual’s domination of the business.” Balmer v. 1716 Realty LLC, No. 05-839, 2008 WL 2047888, at *6 (E.D.N.Y. May 9, 2008) (citing Austin Powder Co. v. McCullough, 216 A.D.2d 825, 827, 628 N.Y.S.2d 855 (N.Y.App.Div.1995)); see also DER Travel Servs., 2005 WL 2848939, at *11 (citing JSC Foreign Econ. Ass’n Technostroyexport v. Int’l Dev. & Trade Servs., Inc., 306 F.Supp.2d 482, 486 (2004) (“stripping of corporate assets by shareholders to render the corporation judgment proof constitutes a fraud or wrong justifying piercing the corporate veil[ ]”)).
The Court will first analyze the “domination” element of piercing using the factors set forth in Wm. Passalacqua Builders, 933 F.2d at 139.
Absence of corporate formalities
The Plaintiffs argue that the Debtor failed to produce stock certificates for the Corporations; and the Corporations held no board of director meetings, kept no corporate minutes or other evidence of corporate formalities, kept no financial records, did not file corporate tax returns until after they ceased doing business and after the State Court litigation was commenced, and did not issue W-2 or 1099 tax forms to employees and independent sales people.
The Debtor claims that he “did his best” to adhere to corporate formalities in that each Corporation was separately incorporated by an attorney, each had its own employer identification number, a separate bank account with its own corporate checks, its own letterhead and a separate factoring agreement. The Debtor admits that he never issued stock to himself, he failed to retain the original corporate kits from the time of incorporation, and the Corporations held no board meetings. According to the Debtor, each Corporation— under their separate corporate names— received separate monthly factoring statements, invoices and purchase orders, and issued separate corporate invoices to customers. He also testified that he hired a bookkeeper to keep the books of each Corporation separately and add a layer of oversight. The Debtor claims that the Corporations’ accountant, Mr. Portnoy, prepared “review statements” for the Corporations every six months to a year which was required by the factors.
Although the Debtor claims that contemporaneous financial reports were prepared by the Corporations’ bookkeeper, he never produced those records in connection with this litigation and did not produce the bookkeeper as a witness at trial. In 2004 or 2005, at least four years after the Corporations ceased operations, the Debtor asked Mr. Portnoy to re-create the Corporations’ financial statements for litigation purposes. Tr. 9/22/10 at 44. Mr. Portnoy testified that he created his analy-ses using only check stubs, and other information provided to him by the Debtor, but he had no means of independently *288verifying any of the information, Tr. 9/22/10 at 88-95, and audits were not performed. Tr. 9/22/10 at 31. The Debtor did not provide him with the alleged contemporaneous records kept by the Corporations’ bookkeeper, or the Corporations’ banking records.
Mr. Portnoy testified that tax returns were never prepared for at least two of the Debtor’s wholly-owned corporations. According to his testimony, the Debtor “opened and closed companies very frequently” and since the companies did not make a profit, it was not worth it to file a tax return. Tr. 9/22/10 at 42-43. He also testified that the Corporations’ “bookkeeper never put the books together completely to file the tax return.” Tr. 9/22/10 at 42-43. Mr. Portnoy testified that the 1998 through 2000 tax returns were only prepared for Just I, Just II and Just III, for litigation purposes, in December of 2004— long after those Corporations ceased operations. Tr. 9/22/10 at 43-44; Exhs. 53-59. Mr. Portnoy testified that he prepared the tax returns based upon information provided to him by the Debtor, and his own “estimates,” and he had no personal knowledge of whether the information contained in the returns was correct. Tr. 9/22/10 at 47-49. According to the tax returns and the other financial analyses prepared by Mr. Portnoy for Just I, Just II and Just III, none of those Corporations had annualized net operating profit from 1998 through 2000. Exhs. 53-59 and Q.
The general ledgers of Just I, Just II and Just III, prepared by Mr. Portnoy in 2004/2005, contain entries for payment of payroll expenses and/or commissions to at least five individuals, including the Debtor. Exhs. E, F and G. However, Mr. Portnoy testified that the Corporations did not issue W-2s or 1099s to any employee or independent contractor, including the Debtor. When asked why the Corporations did not issue income tax forms, he replied, “It was just never done. I can’t give you a forthright answer.” Tr. 9/22/10 at 120.
In addition, while the evidence shows that the Corporations did keep separate checking accounts and separate factoring arrangements, Exhs. A, B and H, the evidence also shows that the Debtor, at times, directed the invoices of one Corporation to be paid by another, and the overhead for all of the Corporations, at times, to be paid by a single Corporation. See discussion infra.
The Court understands that in the context of closely-held corporations, corporate formalities are more relaxed than in a large public corporate setting, and this should be taken into consideration as a factor in the “domination” analysis. See Directors Guild of Am., Inc. v. Garrison Prods., Inc., 733 F.Supp. 755, 760 (S.D.N.Y.1990) (citing William Wrigley Jr. Co. v. Waters, 890 F.2d 594, 601 (2d Cir.1989)). It is, however, clear that in the instant case the Corporations, under the sole control of the Debtor, failed to exercise even the most basic corporate formalities of contemporaneous bookkeeping, maintenance of financial records, issuance of income tax forms to employees and independent contractors, and the filing of timely tax returns. Standing alone this fact would not necessarily be dispositive of the issue. However, this is not the only factor weighing in Plaintiffs’ favor, and the Court’s analysis continues.
Inadequate capitalization
The Plaintiffs maintain that the Corporations were inadequately capitalized. It is uncontroverted that the Corporations’ operations were funded mainly, on factor financing guaranteed by the Debtor. According to the Plaintiffs, neither the factor financing arrangement, nor the Debtor’s *289personal guaranty of the factor financing, constitute adequate capitalization.
The Debtor argues that the funding of the Corporations through factor arrangements, common in the industry, constitutes “adequate capitalization.” According to the Debtor, each of the Corporations had a separate factoring agreement with purchase order financing and letters-of-credit to fund the purchase of merchandise. The Corporations’ factors would take an assignment of the Corporations’ account receivable, and either pay the manufacturer directly or issue a letter of credit to cover payment for merchandise. When goods were delivered, and the accounts receivable paid, the factor would deduct a percentage and forward the balance to the Corporation. At no time did the Corporations contribute any of its own capital towards purchases. In fact, the Corporations had no capital. In addition to the factoring arrangement, the Debtor cites to his accountant’s testimony that the Debtor contributed funds to the Corporations for costs of incorporation, attorney fees and other start up costs as further evidence of adequate capitalization. Finally, the Debt- or argues that the Plaintiffs were aware of the manner in which the Corporations were financed and did business with the Corporations on that basis for several years. See Brunswick Corp. v. Waxman, 599 F.2d 34, 36 (2d Cir.1979) (finding that plaintiff knew or should have known that the corporation’s principal intended to avoid personal liability).
Inadequate capitalization is integral to the veil-piercing analysis, particularly in the context of a closely-held corporation. See Anderson v. Abbott, 321 U.S. 349, 362, 64 S.Ct. 531, 88 L.Ed. 793 (1944) (“An obvious inadequacy of capital, measured by the nature and magnitude of the corporate undertaking, has frequently been an important factor in cases denying stockholders their defense of limited liability.”); see also DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 684-85 (4th Cir.1976). The benefit of limited liability for corporate shareholders does not come without responsibility. Typically, corporations which are undercapitalized in such a way as to ensure that entities doing business with the corporation will have no way to recover damages against the corporation, will not receive the benefit of limited liability.
To permit the creation of an inadequately capitalized corporation as a separate entity is incompatible with the concepts underlying an independent existence. Where it is sought on the one hand to make available to general or tort creditors only an illusory amount compared with the size of the business and the public responsibility inherent in its very nature, while on the other hand advancing necessary expenses through secured devices, it would be a gross inequity to allow such a flimsy organization to provide a shield for personal liability. Courts will not tolerate arrangements which throw all the risks on the public and which enable stockholders to reap profits while being insulated against losses.
Mull v. Colt Co., 31 F.R.D. 154, 164-65 (S.D.N.Y.1962) (denying motion to dismiss).
The Debtor relies on the factor financing to constitute adequate capitalization. However, financing, by its very nature, is not capital. See Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 139-140 (2d Cir.1991) (finding funds loaned to the corporation, and personally guaranteed by principal, did not constitute “adequate capitalization”) (citing Fletcher, Cyc. Corp. §§ 5079-5080.1 for the definition of “capital” of a corporation). A corporation’s *290“capital” is defined as “the money, property or means contributed by stockholders as the fund or basis for the business or enterprise for which the corporation was formed. The term generally implies that such money, property or means have been contributed in payment for stock issued to the contributors.” United Grocers, Ltd. v. United States, 186 F.Supp. 724, 729 (N.D.Cal.1960).
The Debtor’s argument that he contributed capital to the Corporations in that he paid for the initial start up costs to incorporate the Corporations, also fails. Such contributions do not constitute “capital.” Rather, the funds were contributed for start up costs, not to fund operations of the Corporations. The Debtor admits that he invested none of his own money or capital to the Corporations from 1997 through 2000. Tr. 9/21/10 at 88-89.
In addition to the Debtor’s failure to contribute capital to the Corporations, the evidence prepared by the Debtor’s accountant shows that the Corporations never realized an annualized net operating profit, and were likely at all times, insolvent. This fact weighs in the Plaintiffs’ favor. See Atateks Foreign Trade v. Private Label Sourcing, LLC, 402 Fed.Appx. 628, 626 (2d Cir.2010) (fact-finder may also consider insolvency in determining whether to pierce the corporate veil) (citing William Wrigley Jr. Co. v. Waters, 890 F.2d 594, 601 (2d Cir.1989)).
The Court is unpersuaded by the Debt- or’s argument that the Plaintiffs knew or should have known the nature of Corporations’ finances and did business with the Corporations at their peril. There is evidence in the record, discussed infra, that on more than one occasion the Debtor assured the Plaintiffs that they would be paid, and those assurances were made in order to induce the Plaintiffs to continue to do business with the Debtor and his Corporations. See DeWitt, 540 F.2d at 686 n. 18.
Based upon the foregoing, the Court finds that the Corporations were inadequately capitalized and this factor will weigh heavily in favor of piercing the corporate veil.
Personal use of corporate assets
The Plaintiffs argue that the Debtor utilized the Corporations’ assets for his personal benefit. The Plaintiffs cite to evidence showing that the Corporations issued numerous checks to, or for the benefit of, the Debtor and his wife, Cindy Speiser, who was not an employee of the Corporations.
The Debtor does not dispute that corporate checks were issued to Ms. Speiser; nor does he dispute that Ms. Speiser was not an employee of the Corporation entitled to wages. By way of explanation, the Debtor testified that during the time he did business with the Plaintiffs continuing up to the time he filed bankruptcy in 2004 he did not have a personal bank account and did not hold any assets in his name. Tr. 9/20/11 at 78-84. This was done intentionally and as a result of an acrimonious divorce from his first wife and certain problems with the Internal Revenue Service. Tr. 9/21/11 at 162-167. He also did not have any credit, nor did his Corporations have sufficient credit to obtain financing to fund operations. Tr. 9/20/11 at 145. For this reason, his wife, Cindy Speiser, functioned as a “credit line” of sorts paying for business expenses and receiving reimbursement from the Corporations. According to the Debtor, additional funds were deposited into Ms. Speiser’s bank account, either via checks made out to him, cash or Ms. Speiser, which represented the Debtor’s salary. According to the Debtor, Ms. Speiser, in turn, would pay the Debtor’s personal expenses *291from those funds. In defense of this practice of passing funds through Ms. Speiser’s bank account, the Debtor claims that all of the transfers to Ms. Speiser were documented and all corporate funds accounted for. Tr. 9/20/11 at 142-46.
The Court is not aware of any evidence of contemporaneous records which document the exact nature of the funds that were paid to Ms. Speiser and “Cash” by the Corporations’ and thus there is no way of verifying that these were valid corporate expenses. As discussed later in this Decision, the Debtor did not maintain any contemporaneous books or records of the Corporations except for a check register. Likewise, the Debtor did not produce any loan documents or other written evidence of the arrangement that the Debtor describes. In total, from 1998 to 2000, almost 100 checks were written to Ms. Speiser or to cash, mostly in amounts varying from $1,000 to $3,000 each, from Just I, Just II and Just III, totaling over $150,000. The Court finds that this method of corporate accounting by the Debtor, at best, is evidence of the Corporations’ failure to observe corporate formalities normally associated with the payment of salaries and/or commissions and the extension of credit or loans to a corporation. At worst, it suggests that the Debtor directed corporate funds to his wife for improper purposes. The Court is not prepared to find that such is the case. However, the arrangement with Ms. Speiser does demonstrate the Corporations’ failure to observe the most fundamental corporate formalities. The Debtor’s system of using his wife’s credit for corporate purposes and repaying her from corporate funds, appears to have been orchestrated solely for the Debtor’s benefit, not the benefit of the Corporations. Tr. 9/22/10 at 120-127. As such this factor weighs in favor of piercing the corporate veil.
Overlap in ownership, officers, directors; common office space, address and telephone numbers; amount of business discretion displayed by the alleyedly dominated corporation
It is undisputed that the Debtor was the sole owner, officer, employee and director of each of the Corporations, and the Corporations all operated out of the same office and had the same telephone and fax numbers. It is also undisputed that the Debtor was the sole decision-maker for the Corporations.6 Tr. 9/21/10 at 100. However, in the case of closely-held corporations these facts are not uncommon, and often create a scenario where a sole principal dominates corporate decision-making. As such, these facts are neutral in the context of closely-held corporations and are not enough to pierce the corporate veil. See Wrigley, 890 F.2d at 601 (application of domination factors to small privately held corporations can be difficult “where the trappings of sophisticated corporate life are rarely present”). These factors must be considered in the context of other factors showing domination of the Corporations by the Debtor, and the abuse of “the privilege of doing business in the corporate form to perpetrate a wrong or injustice” against the Plaintiffs. See Morris v. State Dep’t of Taxation & Fin., 82 N.Y.2d 135, 142, 603 N.Y.S.2d 807, 623 N.E.2d 1157 (1993).
Whether the Corporations were treated as independent profit centers
7
The Plaintiffs argue that the Corporations were not treated as independent *292profit centers, but rather the evidence shows that the Debtor transferred assets among the Corporations without documentation, and orders were placed and shipments received and paid for under different corporate names depending on which had better credit at the time. The Plaintiffs also argue that the Debtor caused the assets of the Corporations to be cross-pledged without regard to any benefit received by the respective Corporation.
The Debtor believes that the Corporations were treated as independent profit centers and were operated in conformity with regular practices in the garment industry. This is especially so, he argues, because the Corporations’ factors “highly scrutinized” the operations of each Corporation. The Debtor claims that when funds were transferred among Corporations, the transaction was noted and recorded in the books and records of the affected Corporation. According to the Debtor, the letters of credit matched purchases orders and the amounts to be paid on the purchase orders, and the Corporations could not split purchase orders, invoices or accounts receivable; nor could the Corporations choose which Corporation would pay.
Whether the Corporations were treated as independent profit centers with respect to each other is not the critical issue. The Plaintiffs are seeking to pierce the corporate veil to hold the Debtor liable for Corporations’ debts, not to hold each of the Corporations liable for the debts of the other. The issue is whether the Debtor, through his domination and control of the Corporations, created a network of entities that were never intended to be independent profit centers.8 This Court finds that such is the case in the matter at hand.
First, the Debtor admittedly assured the Plaintiffs that they would be re-paid what they were owed from the Corporations’ operations, regardless of which of the Corporations owed the money. Exhs. 13, 14 and 27; Tr. 9/21/10 at 24-25, 90. Second, the Debtor allocated invoices and shifted liabilities among the Corporations without regard to which Corporation issued the original purchase order. For example, in 1997 when the Debtor’s corporation, Fresh New Clothing, Co., Inc. ran into unexpected liability from a lawsuit against it, the Debtor shifted Fresh New Clothing’s outstanding invoices over to Just I and asked the Plaintiffs to issue a duplicate invoice to Just I, instead of Fresh New Clothing, for the exact same goods. Exh. 7; Tr. 9/20/19 at 175-79. Despite moving the invoice over to Just I, the Debtor directed payments on the invoice to be made by Fresh New Clothing, thus transferring the asset but not the liability from Fresh New Clothing, to Just I. Exh. 7. With respect to a different shipment, the Debtor admitted that payment on a single invoice was made by three different entities, Just I, Just II and Just III. Tr. 9/21/10 at 19-20. When asked why three different entities made payment on one shipment, the Debtor responded “[S]ince I was the principal ... of the company — the—the corporations, I was able to allocate the monies where they would go with the factor. When monies came in, a lot of the receivables the factor would tell me how much availability would be available and I would have the capabili*293ties of directing the funds to the receivables or the payables of the accounts.” Tr. 9/21/10 at 110. This directly contradicts the Debtor’s argument that the Corporations’ each maintained a separate identity which was monitored and ensured by the factoring arrangement. Third, the Debtor also testified that he did not allocate overhead expenses equally among the Corporations. Rather, he would pay overhead expenses from whichever Corporation had funds to pay the expense at the time. Tr. 11/17/10 at 43.
The Court finds that this factor also weighs in favor of piercing the corporate veil.
Payment or guarantee of debts of the Corporations by the Debtor
It is undisputed that the Debtor personally guaranteed the Corporations’ obligations to the factors. In addition the Plaintiffs allege that the Debtor personally promised to pay the Corporations’ obligations to the Plaintiffs, Exhs. 13 and 27, and this fact should weigh in favor of piercing the veil.9 The Debtor denies having guaranteed payment of the Corporations’ obligations to the Plaintiffs.
Exhibits 13 and 27 were introduced into evidence to support the Plaintiffs position. The first page of Exhibit 13 is a handwritten note on Just I letterhead, from the Debtor to Ng, “re: Charming Trading”, in which the Debtor wrote, “As per agreement Just Jeanswear Corporation will be responsible to Charming Trading all open invoices to Just Jeanswear Corp. All com-panys labels Junk, Defrost and Avirex10 will be responsible for payment due Charming Trading.” The next page of Exhibit 13 is a similar handwritten note from the Debtor which appears to have been sent to Ng in November 1998. In that letter, the Debtor gives Ng assurances that she will be paid by the factor, Geneva Capital. He wrote, “You do not understand how the factor works ... Geneva Capital gives you all available monies advanced and collected. They only deduct interest and payroll. You get all the balance of monies collected.” Later in that letter the Debtor wrote “I will pay you back from both company’s ... Junk, Defrost & Avirex.” He then wrote, “You must try to get a 30% discount from the factories. If you have to lie to them do it?? Tell them the quality is bad, the goods are late and unsaleable. Mr. Adler has to give a 30% discount to customer_” Finally, he writes, “As long as I am in business I will pay you all your money.” Exh. 13. Exhibit 14 is a letter, dated December 9, 1998, from the Debtor to Ng on “J.U.N.K. Jeans/Defrost Jeans” letterhead which contains further assurances of repayment. The Debtor stated that, “all our corporations involved with J.U.N.K., Defrost, and Avirex licensee will be responsible to pay back the open invoice due Charming Trading.... Please be advised that we want to continue to do business with Charming Trading ... I hope this will relieve the tension a little. I will not hurt our 20-year relationship.... ” Exhibit 27 is another handwritten letter from the Debtor to Ng, dated in March 1999. In that letter, the Debtor wrote, “I don’t want to be threatened by you or any of the *294suppliers you owe money to. I owe Charming Trading the money. I don’t know how much you personally owe out. But I am trying to develop a concept to pay you back through L/C’s & cash. I want to continue to do business with you but it can only be done on L/C’s & cash.” In the letter, the Debtor then expressed concerns about some merchandise he was not able to sell, but stated “I am not complaining about it, but we have to work together to get rid of these problems. You might have to go to your family to pay the people who threaten you. I will still pay you back all the money I owe you.” The Plaintiffs’ summary of invoices and payments by the Corporations, which was admitted into evidence without objection, Exh. 12, shows that after the Debtor’s letters to Ms. Ng, there were three additional shipments which totaled over $300,000, for which the Corporations did not pay at all. In June 1999, the Corporations were in arrears to the Plaintiffs in the amount of $921,000, and this was admitted by the Debtor. See Exhs. 12, 29; Tr. 9/17/10 at 81, 94-96; Tr. 9/21/10 at 61-68; Tr. 11/17/10 at 34-35; Tr. 2/4/11 at 57-60.
While it is not necessary to decide the issue at this point, it appears that the Debtor’s promises of repayment alone would not rise to the level of an enforceable personal guarantee. However, when considered in the context of the Plaintiffs’ efforts to pierce the corporate veil, the Debtor’s promise to pay, whether individually or by the Corporations as a whole, is persuasive evidence of the Debtor’s domination of the Corporation and weighs in favor of piercing. See DeWitt Truck Brokers, Inc. v. W. Ray Flemming Fruit Co., 540 F.2d 681, 686 n. 18 (4th Cir.1976) (“where the individual operator has used as persuasion upon the creditor that he stood personally behind the corporation and would see that its indebtedness was paid has been found in some cases to justify holding the individual defendant to his promise.”).
Based on the totality of the record these factors weigh heavily in favor of finding that the Debtor dominated and controlled the Corporations. However, as discussed earlier in this Decision, domination of the Corporations is not enough to pierce the veil. The Plaintiffs must also show that the Debtor’s domination was used to commit “a wrongful or unjust act toward the plaintiff[.]” Morris v. State Dep’t of Taxation & Fin., 82 N.Y.2d 135, 141-42, 603 N.Y.S.2d 807, 623 N.E.2d 1157 (1993).
Wrongful or unjust acts toward Plaintiffs
The Plaintiffs allege that the exercised his domination over the Corporations to harm, or worse, to defraud them. They argue that the Debtor siphoned the factor financing from the Corporations to pay his personal expenses leaving the Corporations unable to satisfy their obligations to the Plaintiffs. The Plaintiffs argue that the Debtor’s accountant could not account for hundreds of thousand of dollars received by the Corporations from the factors and other sources, including retailers who allegedly paid the Corporations directly. A direct result of the Corporations being unable to pay the Plaintiffs was the Plaintiffs default on their obligations to the Chinese manufacturers. The Plaintiffs argue that the Debtor falsely represented that they were being retained as an agent for the Corporations, and fraudulently induced them to issue invoices to the Corporations to make it appear that Charming Trading was the purchaser of goods and primarily liable to Chinese manufacturers. According to the Plaintiffs, it was only at the Debtor’s insis*295tence that Charming Trading purchased merchandise on its own credit and issued invoices to the Corporations. The Plaintiffs contend that the Debtor falsely represented to the Chinese manufacturers that the Corporations paid the Plaintiffs for goods that were shipped by the manufacturers, and it was the Plaintiffs who were liable. Ng allegedly borrowed significant sums of money from her family and mortgaged her home in order to pay the manufacturers but was unable to pay them in full and ultimately was sued and allegedly forced to flee her home in Hong Kong after she received threats to her personal safety. The Plaintiffs allege that the Debtor continually and falsely represented to them that they would be paid which induced them to continue to do business with the Debtor and the Corporations.
The Debtor maintains that even if the Plaintiffs are able to prove that the Debtor dominated the Corporations, they have not proven that in so doing the Debtor committed a fraud or wrong which resulted in an injury to them. According to the Debt- or, the Corporations have valid offsets to payment which is the cause of the Corporations’ failure to pay the Plaintiffs for goods shipped, and this is a simple breach of contract case. Despite couching this as a breach of contract case, the Debtor argues that the Plaintiffs should have at all times been acting as the Corporations’ agent to purchase goods from the Chinese manufacturers, with sole liability being on the Corporations. Tr. 9/21/10 at 111. The Debtor testified that Ng took it upon herself to purchase the goods directly from the Chinese manufacturers, rather than as the Corporations’ agent, so that she could make a larger commission. Tr. 9/21/10 at 111. The Debtor claims that Ng is a sophisticated businesswoman who has been employed in the garment industry for years handling millions of dollars worth of business. The Debtor argues that she was well aware of the Corporations’ capitalization and financing and well aware that she was doing business with the Corporations, not the Debtor individually. See Brunswick Corp. v. Waxman, 599 F.2d 34, 36 (2d Cir.1979) (finding that plaintiff knew or should have known that the corporation’s principal intended to avoid personal liability).
The record in this case is barren of any documentary evidence which would prove either parties’ version of how it came to be that Charming Trading issued invoices to the Corporations, despite its alleged role as agent of the Corporations. However, the Debtor contradicted his own testimony that it was Ng who decided to issue invoices to the Corporations. He testified that it was Ms preference that the Plaintiffs make the deal with the manufacturers and issue invoices to the Corporations, which, in theory, the Corporations would repay so that Charming Trading could pay the manufacturers. Tr. 9/20/10 at 174-75.
There is also evidence which tends to show that the Debtor and his Corporations did not interact with the Plaintiffs in a manner which is consistent with a principal/agent relationship. Although the Debtor claimed that the Corporations were primarily liable to the Chinese manufacturers, he also denied such liability and shifted the burden of repayment to the Plaintiffs. For example, in his handwritten note to Ms. Ng, dated in March 1999, the Debtor stated, “I don’t want to be threatened by you or any of the suppliers you owe money to. I owe Charming Trading the money. I don’t know how much you personally owe out. But I am trying to develop a concept to pay you back through L/C’s and cash. I want to continue to do business with you but it can only be done on L/C’s & cash.... You might have to go to your family to pay the people who threaten you. I will still pay you back *296all the money I owe you.” Exh. 27 (emphasis added). It is also inconsistent with a principal/agent relationship that when one of the Chinese manufacturers came to New York to seek payment of outstanding invoices from the Corporations, the Debtor told that manufacturer that he already paid Charming Trading for those goods and they should seek repayment from Ng. Tr. 11/17/10 at 19-26. In addition, although the Debtor testified that he did not know why the Plaintiffs, as the Corporations’ agent, paid for the goods shipped by the Chinese manufacturers, Tr. 9/21/10 at 26, at no time in the correspondence indicated in Exhibits 13, 14 and 27, did the Debtor, on behalf of the Corporations, admonish the Plaintiffs for taking on a role inconsistent with their agency relationship; rather, he encouraged it.
To put this in some context, at the time the Plaintiffs and the Debtor ceased doing business with each other, the Corporations had purchased approximately $2.3 million worth of merchandise from, or through, the Plaintiffs, in seventeen different shipments and only paid for approximately one-half of that merchandise. Tr. 9/21/10 at 67; Exh. 12. The Debtor admits that the Corporations received approximately $4.4 million from their factors during that time period, but instead of paying the Plaintiffs, he used those funds to pay other suppliers and overhead expenses. Tr. 9/21/10 at 77-80.
During late 1998 and early 1999, the Debtor, on behalf of the Corporations, repeatedly gave the Plaintiffs assurance that they would be paid what they were owed. See Exhs. 13, 14, 27. In a letter, dated December 9,1998, the Debtor, on behalf of the Corporations, promised Ng that “all our corporations” would be responsible to pay back the open invoices due to Charming Trading. In what may have been an inducement to continue doing business with the Corporations, the Debtor represented to Ng that “we have many other suppliers to support the repayment of Charming Trading open invoices.” Exh. 14. However, when questioned at trial as to the identity and nature of the business conducted with those other suppliers, the Debtor could not recall the names of those suppliers or the magnitude of the business conducted with them. Tr. 9/21/10 at 8-9; 36-37; 74-75. Exhibit E is the general ledger created by Mr. Portnoy in 2004/2005 based upon the Corporations’ check stubs. This document shows payments made by Just I for the “costs of goods sold” which would presumably have provided evidence of the Corporations’ other suppliers. The document shows only de minimis payments to suppliers other than Charming Trading in 1998, and belies the Debtor’s assurances to Ng in his December 9,1998 letter. Exh. E at 469.
As this Court previously stated, the Plaintiffs need not prove the elements of actual fraud in order to succeed in piercing the veil. The evidence must show that the Debtor committed a fraud or other wrong which resulted in the Plaintiffs’ unjust loss or injury. The Court finds that the Plaintiffs have sustained this burden. The totality of the circumstances surrounding this case show that the Debtor, as the sole actor on behalf of his Corporations, employed a scheme designed to deflect all financial responsibility for goods shipped from the Chinese manufacturers to the Corporations. This Court believes that this is the type of conduct that should not be insulated by utilizing the protection of a corporation and is what the veil-piercing theory developed under New York law was designed to protect against. The Debtor protests that the Plaintiffs purchased the goods on their own credit, at their own peril and not at his direction, but the Court finds it more likely that it was *297entirely the Debtor’s intention that Plaintiffs extend their own resources to purchase the goods. Although it may have been the Debtor’s earnest intention that the Corporations would repay the Plaintiffs, that intention was not supported by any financial reality. The Court finds that the Corporations, at the Debtor’s direction, entered into a series of transactions with the Plaintiffs which he knew, or should have known, the Corporations could not honor. See Kittay v. Flutie New York Corp. (In re Flutie New York Corp.), 310 B.R. 31, 61 (Bankr.S.D.N.Y.2004) (veil pierced where, among other factors, principal “knew or recklessly disregarded the deleterious effects of their conduct ...”).
Conclusion
For the foregoing reasons, the Court finds that the corporate veil should be pierced and the Debtor held liable for the Corporations’ obligations to the Plaintiffs. As such, the Plaintiffs’ opposition to the Claim Objection on that basis, is upheld. Further proceedings will be necessary to determine the amount of the Plaintiffs’ claim, and whether it should be discharged.
A further hearing will be held on March 19, 2012 at 9:30 a.m., to address ramifications of this Decision and the process to move this case forward. A separate order consistent with this Decision will issue forthwith.
. The Plaintiffs also have objected to the Debtor's discharge under section 727(a), but those claims are not specifically implicated by this interim ruling.
. Only these five corporations are mentioned here because they are the judgment debtors relevant in this case. The Court notes, however, that the Debtor has done business over the years through at least five other corporations: Fresh New Clothing, Co. Inc., Fresh New Clothing II, Inc., J.U.N.K. Jeanswear Corporation II, J.U.N.K. Jeanswear Corporation III, and Stewart Sourcing & Manufacturing Co., Inc. See Exhs. 73-83.
. At the time the adversary proceeding was filed this was a no-asset case; there was no bar date for the filing of claims, and thus no claim was filed. The Debtor did, however, schedule the Plaintiffs with a disputed claim of approximately $9.1 million, subject to set-off, both in the original schedules filed with the petition, and in amended schedules filed on November 15, 2010.
. Only one other proof of claim was filed in this case, by New York State Department of Taxation and Finance, in the amount of $3,518.87 for administrative (post-petition) tax liabilities. The fact that the Plaintiffs' claim was late-filed does not affect their status as a creditor. See 11 U.S.C. § 726(a)(3).
. In the amended joint pretrial memorandum, dated September 20, 2010, the parties stipulated that Plaintiffs’ Exhibits 1-86, and Debt- or's Exhibits A-P were admissible unless objected to on the grounds of relevance. No objections to relevance were raised or upheld during the trial and all of those exhibits were admitted.
. A discussion of whether the Debtor dealt with the Corporations at arms' lengthy would be directly related to Debtor's role as sole officer, employee and director of the Corporations.
. This factor and the last factor, i.e., whether the corporation in question had property that *292was used by other of the corporations as if it were its own, are similar and will be combined into one discussion.
. The State Court already determined that the Corporations are alter egos of each other. Although this Court has not yet decided the preclusive effect of the State Court Judgment in this proceeding, the Court finds that the facts presented in this proceeding would also be sufficient to establish that the Corporations are alter egos of each other.
. Although it is not part of this Memorandum Decision, the Plaintiffs have argued, under a separate theory, that the Debtor should be held liable on an alleged personal promise to pay the Corporations’ debts.
. Avirex is a brand of clothing that the Debt- or manufactured under a licensing agreement. Defrost is another brand of clothing that the Debtor hoped to obtain a license to sell, but never did. Tr. 9/21/10 at 33. The Debtor allegedly set up separate corporations under which to sell these brands, at the behest of the factor. Tr. 9/20/10 at 52, Tr. 9/21/10 at 34. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494656/ | ORDER (1) GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT AND (2) DENYING DEFENDANT’S CROSS-MOTION
J. CRAIG WHITLEY, Bankruptcy Judge.
THIS MATTER is before this Court on cross summary judgment motions filed by Plaintiff Belfor USA Group, Inc. (“Belfor”) and Defendant, Langdon M. Cooper, the Chapter 7 Bankruptcy Trustee for Howard Buddy Helms, Sr. and Sandra Nelson Helms (“Trustee”). The salient facts are not in dispute.
I. Statement of the Case and Procedural Background
Howard Buddy Helms, Sr. (“Howard”) and Sandra Nelson Helms (“Sandra”) (collectively, the “Helmses”) filed a voluntary Chapter 7 case on June 6, 2010. On October 4, 2010, Belfor brought this adversary proceeding seeking a declaration that certain insurance proceeds held by the Helmses at the petition date are not property of the bankruptcy estate but are instead owned by Belfor, pursuant to a pre-petition assignment. Langdon Cooper, the Chapter 7 Trustee (“Trustee”), answered and counterclaimed, arguing that Belfor’s assignment was legally defective, and these proceeds are in fact Section 541 estate property. Although named as additional defendants, the Helmses took no position in this dispute and were consensually dismissed from the action on February 14, 2011.
On February 10, 2011, Belfor filed a motion for summary judgment as to the Trustee’s First and Fourth Defenses, as well as his counterclaims (Fifth Defense). Belfor’s Mot. for Summ. J., Feb. 10, 2011, ECF No. 19. The two sides have since stipulated to the dismissal of the Trustee’s counterclaims with prejudice. Stipulation, Mar. 28, 2011, ECF No. 22. Belfor then amended its summary judgment motion to contest the Trustee’s remaining defenses. Belfor’s Am. Mot. for Summ. J., May 13, 2011, ECF No. 23. The Trustee countered by filing his own summary judgment motion on June 24, 2011. Trustee’s Mot. for Summ. J., June 24, 2011, ECF No. 25. After a hearing in August 2011 and a succession of briefs and counter-briefs, the Court took the matter under advisement.
II. Statement of Undisputed Facts
The Helmses owned a residence located at 15217 Bexley Place, Charlotte, North Carolina (“Residence”). The Residence was tenancy by the entireties property.
A house fire destroyed the Residence in October 2007. Afterward, the Helmses filed a claim with their homeowner’s insurance carrier (the “Insurance Policy”). The Helmses also retained Belfor, a licensed general contractor, to repair and essentially rebuild their home. The Helmses’ understanding with Belfor was memorialized in two written documents. First, Belfor and Howard Helms executed a Work Authorization on October 31, 2007 (“Work Authorization”) for Belfor to provide work, materials, and equipment to repair the Residence. The Work Authorization included an assignment provision purporting to transfer to Belfor all of the homeowners’ right, title, and interest in insurance proceeds — meaning, in this case, the Insurance Proceeds the Helmses were anticipating receiving from Auto-Owners Insurance. Sandra Helms did not sign the Work Authorization.
A second document further memorializing the parties’ agreement was a “Belfor *378Construction Contract” dated December 17, 2007 (“Construction Contract”). Here, Belfor agreed to furnish, inter alia, all labor, materials, tools, and equipment in order to repair the Residence. In exchange, the Helmses agreed to pay Belfor the sum of $217,981.72. Both Helmses signed this second document.
Upon execution of this second document, Belfor commenced work on the Residence. Reconstruction of the Residence was completed on August 4, 2008.
Meanwhile, in July 2008, the Helmses received $266,363.00 from their insurance carrier on account of their claim (the “Insurance Proceeds”). Despite receiving this sum, the Helmses paid Belfor only approximately $96,182.57 of the $217,981.72 owed it under the Agreement.
Belfor responded by filing a Claim of Lien on the Residence on November 26, 2008. On January 22, 2009, Belfor filed a complaint in North Carolina state court against the Helmses to perfect and enforce its lien against the residence and to establish its debt. Belfor’s Complaint is focused on establishing its debt and a lien against the Helmses’ residence. There is no mention of the insurance funds or any assignment of the same in the parties’ pleadings.
The Helmses resisted Belfor’s claims, leading to a trial in Wake County Superior Court. On April 28, 2010, the Superior Court entered a judgment in favor of Bel-for (the “State Judgment”) in the amount of $113,145.30 and granting Belfor a mechanic’s lien on the Residence. The State Judgment includes detailed findings of fact and conclusions of law supporting the debt and the imposition of the lien against the Residence.
The State Judge concluded that both the Work Assignment and the Construction Contract constituted the parties’ agreement, specifically designating the two agreements the “Contract.” 1 State Judgment, Finding of Fact No. 4 and Conclusion of Law No. 1, ECF No. 23-1.
The State Court further concluded that the Helmses had assigned the Insurance Proceeds to Belfor. Specifically, Finding of Fact No. 3 states in relevant part: “Defendant S. Helms [Ms. Helms] knew of and benefited from the Work Authorization signed by her husband [Mr. Helms].” State Judgment, Finding of Fact No. 3, ECF No. 23-1. The Work Authorization, of course, contained the assignment. Further, Finding of Fact No. 15 states that “Pursuant to the terms of the Contract, ... insurance policy proceeds in the amount owed to [Belfor] by [the Helmses] for work performed under the Contract were assigned and to be paid to [Belfor].” State Judgment, Finding of Fact No. 15, ECF No. 23-1.
The Helmses did not appeal the Superi- or Court’s decision. Nor did they pay Belfor on the judgment debt. Instead, the Helmses filed bankruptcy in this court one month after entry of the judgment. At the bankruptcy date, the Helmses still possessed a portion of the Insurance Proceeds. Their petition lists “[r]emaining Insurance Proceeds from casualty proceeds due to house fire” of $36,651.00. Voluntary Petition, Schedule B, Item 17, No. 10-31612, ECF No. 1. The Helmses have turned these funds over to the Trustee and have made no attempt to exempt them. Thus, the contest over the Insurance Proceeds is purely between Belfor and the Helmses’ other creditors, as represented by the Trustee.
III. Statement of Positions
In their several briefs, the parties have made any number of arguments, proeedur*379al and substantive, on whether the assignment should be honored. However, boiled down, Belfor contends that it owns the Insurance Proceeds because: (1) these monies were assigned to it by the Helmses before bankruptcy; (2) the validity of the assignment was previously established in a final state court ruling, was reaffirmed in this bankruptcy case, and is now unassailable under preclusion principles (collateral estoppel and res judicata); and (3) the assignment is not avoidable under Bankruptcy Code Section § 544 for several reasons, including (a) the Trustee’s failure to plead such a claim, (b) the Trustee’s failure to identify a “golden creditor” who could bring such an action at state law as required by § 544(b)(1), and (c) the contention that even if a “golden creditor” existed, it would be subject to Belfor’s equitable defenses.
The Trustee also claims to “own” the Insurance Proceeds, via the estate. He says the assignment was invalid under state law such that the Insurance Proceeds still were owned by the Helmses at the bankruptcy date. They are now property of the bankruptcy estate under Section 541. Because the assignment was void, Belfor’s interests are also subject to the Trustee’s creditor powers under Section 544(a)(1) and (2).
The Trustee’s theories are based upon Sandra Helms’ failure to sign the Work Authorization, which contained the assignment. Sandra possessed an ownership interest in the Residence and a distinct ownership interest in the Insurance Proceeds that stood in place of the Residence after the fire. Since Howard Helms could not have unilaterally assigned his wife’s interest in the Residence, the Trustee posits that he also could not unilaterally assign her interests in the Insurance Proceeds to Belfor.
The Trustee also disagrees with Belfor’s collateral estoppel and res judicata arguments. He contends the validity of the assignment was not at issue in either the state court action nor the bankruptcy Section 522(f) lien avoidance motion. In any event, these state law equitable doctrines do not invalidate the bankruptcy trustee’s avoidance powers pursuant to 11 U.S.C. § 544.
IV. Issues Presented
To resolve this dispute, three related questions must be answered:
1. Do the doctrines of collateral estop-pel and res judicata preclude the Trustee from challenging the validity of the prepet-ition assignment of the Insurance Proceeds to Belfor?
2. If not, was the purported assignment to Belfor effective under North Carolina law so as to make Belfor the owner of the Insurance Proceeds at the date of bankruptcy?
3. Is the prepetition assignment of the Insurance Proceeds to Belfor avoidable under Code Section § 544(a)?
Held:
The State Judgment and its holding that the Helmses assigned the Insurance Proceeds to Belfor is binding under collateral estoppel principles on the Helmses and their bankruptcy trustee as their successor in interest to their property under Section 541. Neither preclusion doctrine, however, impinges upon the Trustee’s Chapter 5 avoidance powers, as in this respect he stands in the shoes of creditors, not the debtors. Even so, the Trustee has failed to demonstrate that the assignment would be avoidable at state law by one of the Helmses’ creditors, and the transfer is not avoidable under Section 544. The Insurance Proceeds belong to Belfor.
*380DISCUSSION
I. Summary Judgment Generally.
Summary judgment is appropriate when “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a). “Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). “[A]t the summary judgment stage the judge’s function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial.” Id. at 249, 106 S.Ct. 2505. When hearing a motion for summary judgment, the inquiry made by the judge is whether “there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party.” Id. at 250, 106 S.Ct. 2505.
When a party has moved for summary judgment and shown that a genuine issue of material fact does not exist, “the burden shifts to the non-moving party to show that a genuine issue of material fact exists.” Felder v. Am. Gen. Fin., Inc. (In re Felder), 2000 WL 33710885, at *5 (Bankr.D.S.C.2000) (citation omitted). “The non-moving party cannot rest on his pleading or merely show that there is ‘some metaphysical doubt as to the material facts;’ rather, the non-moving party must come forward with specific facts showing that there is an issue for trial.” Id. (citations omitted).
II. Whether State Preclusion Doctrines Bar the Trustee’s Claims to the Insurance Proceeds Funds.
Belfor argues that both the North Carolina Superior Court and this bankruptcy court have held that the Insurance Proceeds were assigned to it by the Helmses before bankruptcy. Belfor further contends that the bankruptcy trustee stands in the shoes of the debtors, such that under the two preclusion doctrines, collateral estoppel and res judicata, the Trustee cannot now contest the validity of the assignment.
As a general rule, federal courts must afford “the same preclusive effect to a state court judgment as the forum that rendered the judgment would have given it.” Sartin v. Macik, 535 F.3d 284, 287 (4th Cir.2008) (citations omitted). The judgment in question was entered by a North Carolina state court, so we apply the North Carolina version of the preclusion doctrines. Id.
A. The Preclusion Doctrines.
Collateral estoppel, or issue preclusion, bars relitigation of an issue previously decided only if the party against whom the prior decision is asserted had “a ‘full and fair opportunity’ to litigate that issue in the earlier case.” Allen v. McCurry, 449 U.S. 90, 95, 101 S.Ct. 411, 66 L.Ed.2d 308 (1980) (citations omitted). Collateral estoppel requires a showing by the proponent that “the issue in question was identical to an issue actually litigated and necessary to the judgment, that the prior action resulted in a final judgment on the merits, and that the present parties are the same as, or in privity with, the parties to the earlier action.” Sartin, 535 F.3d at 287-88 (citing Thomas M. McInnis & Assocs., Inc. v. Hall, 318 N.C. 421, 349 S.E.2d 552, 557 (1986)).
Res judicata, i.e., claim preclusion, “bars the relitigation of any claims that were or could have been raised in a prior proceeding between the same parties.” Sartin, 535 F.3d at 287 (citing *381Thomas M. McInnis & Assocs., Inc., 349 S.E.2d at 556-57). “The essential elements of res judicata are: (1) a final judgment on the merits in a prior suit; (2) an identity of the cause of action in the prior suit and the present suit; and (3) an identity of parties or their privies in both suits.” First Mount Vernon Indus. Loan Ass’n v. Prodev XXII, LLC, 2011 WL 32539, at *5 (N.C.Ct.App.2011) (quoting Bryant v. Weyerhaeuser Co., 130 N.C.App. 135, 502 S.E.2d 58, 61, disc, review denied, 349 N.C. 228, 515 S.E.2d 700 (1998)).
B. There is no Preclusive Effect to the Section 522(f) Order.
Early in this Chapter 7 case, the Helms-es sought to avoid Belfor’s lien against their residence under Section 522(f) as impairing their exemptions. Mot. to Avoid J. Lien, No. 10-31612, ECF No. 10. The Order denying their motion contained a legal conclusion that “[pjursuant to the terms of the Contract, the insurance policy proceeds in the amount owed to Belfor were assigned and to be paid directly to Belfor.” Order Den. Debtors’ Mot. to Avoid J. Lien, No. 10-31612, ECF No. 42. Belfor contends that this conclusion bars the Trustee from asserting a claim to the Insurance Proceeds.
The lien avoidance order is not preclusive. The issue raised by the Helmses’ lien avoidance motion involved Belfor’s lien against the Residence and whether that lien constituted a “judicial” or instead a “statutory” lien within the meaning of the statute. At the conclusion of the hearing, this Court agreed with Belfor that its lien was statutory and hence not avoidable. In a bench ruling, this Court briefly stated the reasons supporting its decision and then asked Belfor’s counsel to submit an order consistent with those remarks.
Unfortunately, the order that was tendered by counsel contained a “flyer” — an extraneous conclusion that the insurance proceeds had been assigned to Belfor before bankruptcy. The importance of that conclusion was not recognized by this Court and unfortunately, it remained in the order when entered.
That extraneous conclusion does not have a preclusive effect. The assignment of the insurance proceeds question was not presented in the lien avoidance motion. It was not argued at hearing. It was not part of the bench ruling. The fact that the conclusion was included in the order submitted by counsel was in all likelihood due to a mistake by counsel. Otherwise, it was a fraud on the court.2 Either way, the conclusion is subject to reconsideration.
Further, the preclusion doctrines are not met. Collateral estoppel does not apply because the issue was not actually litigated, nor was it necessary to the lien dispute on the residence. And neither doctrine applies in that the Trustee was not a party to the lien avoidance dispute. This fight was entirely between Belfor and the Helmses, as the Debtors sought to avoid a lien to secure their exemptions.
In some circumstances, typically when asserting a debtor’s prepetition property rights, the Chapter 7 trustee is the debt- or’s legal privy. However, as to most motions that are litigated in a Chapter 7 case, debtors and their trustees are independent, and often adverse, parties. Typically, a Chapter 7 Trustee has no economic *382interest in a lien avoidance motion. If successful, the debtor obtains the equity in the subject property; if unsuccessful, the lien creditor. The estate is not usually affected by the outcome of a Section 522(f) motion, and the Trustee is not in privity with a debtor.3
Given this, if the Trustee’s assault on the alleged assignment is precluded, it must be by virtue of the State Judgment.
C. The State Judgment and the Assignment.
The State Judgment established Belfor’s debt, awarded it costs and attorneys’ fees, and established a mechanic’s lien (N.C.Gen.Stat. §§ 44A-17-44A-35) on the Helmses’ residence. The State Judgment also includes a legal conclusion that the Helmses assigned the insurance proceeds to Belfor before bankruptcy. As before, Belfor contends that the conclusion is pre-clusive.
The Trustee does not deny that the elements of collateral estoppel exist in the State Judgment. Instead, he seeks to minimize the impact of that ruling. For example, even as the Trustee admits that the State Court decided that the Helmses had assigned the Insurance Proceeds to Belfor, he contends that it did not determine whether the assignment was “valid,” or “effective,” as against Ms. Helms. Trustee’s Br., ECF No. 26; Trustee’s Supplemental Br., ECF No. 28. Further, the Trustee argues that the State Judgment did not, and could not, determine whether the Assignment was avoidable under Bankruptcy Code Section 544. Trustee’s Br., ECF No. 26.
1. Sandra Helms’ Interests in the Insurance Proceeds.
The Trustee’s arguments rest on his assertion that Sandra Helms had a separate property interest in the Insurance Proceeds that could not be assigned to Belfor without her signature.
The first part of this argument is well taken. Under North Carolina law, if a married couple owns real property as tenants by the entireties, both spouses have an insurable interest in the property and any fire insurance covering the entire-ties property. A wife, living separate and apart from her husband, is entitled to collect insurance proceeds under a policy taken out, and paid for, by her husband on their entireties property. Carter v. Cont’l Ins. Co. of N.Y., 242 N.C. 578, 89 S.E.2d 122 (1955). In Carter, the Court found that a husband’s proprietary interest is an inseparable part of the moiety such that his insurable interest covered, and the insurance loss benefits inured to the benefit of, the entire estate; since the wife also had an interest in that entireties estate, she had an interest in the insurance proceeds. Id. at 124 (internal citations omitted); see also Lovell v. Rowan Mut. Fire Ins. Co., 302 N.C. 150, 274 S.E.2d 170 (1981) (wife of an insured who intentionally burned entireties property is entitled to recover under insurance policy issued to the husband, notwithstanding his act of arson).
Since Sandra Helms had an insurable interest in the Insurance Proceeds, the Trustee contends that her interests could not be unilaterally assigned by her husband to Belfor. Thus, the Trustee maintains that the Assignment was legally inef*383fective to convey title to Belfor, both as to Sandra and as to her creditors.
2. Contrasting the Trustee’s Section 54-1 and 544 Powers.
The Trustee’s arguments highlight the two powers that a trustee may exercise in a bankruptcy case. First, under Section 541, the Trustee succeeds to control of a debtor’s nonexempt property and may liquidate it for the benefit of creditors. See 11 U.S.C. §§ 521(a)(4) (turnover of property of the estate); 541 (property of the estate); 704(a)(1) (duties of trustee). Second, the Trustee may avoid certain transfers of a debtor’s property under Chapter 5 of the Bankruptcy Code, Sections 544-549, and recover that property, or its value, under Section 550. 11 U.S.C §§ 544-550.
When a Trustee liquidates a debtor’s property, including asserting a debtor’s litigation claims, he is acting as the debtor’s legal successor-in-interest. See, e.g., First Ala. Bank of Montgomery, N.A. v. Parsons Steel, Inc., 825 F.2d 1475 (11th Cir.1987); Buckley v. TransAmerica Inv. Corp. (In re Southern Kitchens, Inc.), 216 B.R. 819, 881-32 (Bankr.D.Minn.1998). In these instances, the trustee stands in the debtors’ shoes and is subject to defenses which would be applicable to the debtors themselves. See First Ala. Bank of Montgomery, N.A., 825 F.2d 1475; Drake v. Franklin Equip. Co. (In re Franklin Equip. Co.), 418 B.R. 176, 210 (Bankr.E.D.Va.2009).
Conversely, when the Trustee seeks to avoid transfers of a debtor’s property under Chapter 5, the Trustee is acting on behalf of creditors and is their representative. See In re WorldCom, Inc., 401 B.R. 687, 650 (Bankr.S.D.N.Y.2009) (citations omitted) (“[t]he trustee does not bring an avoidance action for the benefit of the debtor, but for the benefit of the estate’s creditors”). On these occasions, the Trustee is not bound by the debtor’s actions; nor is he the debtor’s privy.
The distinction is important in the present case because the Trustee asserts each power as to the Insurance Proceeds. The Trustee first claims to “own” the Insurance Proceeds under Section 541, as Sandra Helms’ successor-in-interest.4 He argues that the purported assignment failed to convey Sandra Helms’ half interest in the Insurance Proceeds because she did not sign it. However, even if valid as to Sandra Helms, the Trustee maintains that transfer was ineffective as against her creditors and is subject to the Trustee’s “strong arm” powers under Section 544.
We consider the Trustee’s two theories separately.
III. Collateral Estoppel Bars the Trustee, as the Helmses’ Legal Successor-in-Interest, from Claiming the Insurance Proceeds under Section 541-
Standing in the Debtors’ shoes, it is difficult for the Trustee to argue that the State Judgment is not binding on him. As noted above, when asserting Sandra Helms’ property rights in these monies, the Trustee is her privy. See, e.g., First Ala. Bank of Montgomery, N.A., 825 F.2d 1475; In re Southern Kitchens, Inc., 216 *384B.R. at 831-32. “Privity,” for purposes of collateral estoppel and res judicata, “denotes a mutual or successive relationship to the same rights of property.” State ex rel. Tucker v. Frinzi, 344 N.C. 411, 474 S.E.2d 127, 130 (1996) (quoting Settle v. Beasley, 309 N.C. 616, 308 S.E.2d 288, 290 (1983)). In this context, if the doctrines of collateral estoppel and res judicata would prevent the debtor from asserting a claim, the trustee is also bound. Keller v. Keller (In re Keller), 185 B.R. 796, 800 (9th Cir. BAP 1995) (Bankruptcy Trustee bound by judgment from state family law court issued prior to the petition date under res judicata); see also Randa Coal Co. v. Va. Iron Coal & Coke Co. (In re Randa Coal Co.), 128 B.R. 421 (W.D.Va.1991).5
The State Court found that “[Ms.] Helms knew of and benefited from the Work Authorization signed by her husband [Mr. Helms].” State Judgment, Finding of Fact No. 3, ECF No. 23-1. That Court also found that while the Helmses received $266,363.00 from their insurer to repair the Residence, State Judgment, Finding of Fact No. 15, ECF No. 23-1, they only paid Belfor $96,182.57 and “otherwise retained or spent the money provided to them by their insurer[,]” State Judgment, Finding of Fact No. 16, ECF No. 23-1. Based upon these facts, the state judge concluded that both the Work Assignment and the Construction Contract constituted the parties’ agreement, specifically designating the two agreements, the “Contract.” State Judgment, Finding of Fact No. 4 and Conclusion of Law No. 1, ECF No. 23-1. The State Court further concluded that “[p]ursuant to the terms of the Contract, without consideration of change orders and setoffs, insurance policy proceeds in the amount owed to [Belfor] by [the Helmses] for work performed under the Contract were assigned and to be paid to Plaintiff.” State Judgment, Finding of Fact No. 15, ECF No. 23-1. Finally, the State Court made a Conclusion of Law declaring that Contract to be enforceable against each of the Defendants. State Judgment, Conclusion of Law No. 1, ECF No. 23-1. In short, the State Judgment declared the Insurance Proceeds to be Belfor’s property under their agreement.
Given these specific rulings, and the fact that the Trustee is subject to collateral estoppel to the same extent the Helmses would be, it would appear that the Trustee’s argument that the assignment was invalid as to Sandra Helms is precluded.
Seeking to avoid this result, the Trustee would limit the breadth of the ruling. Specifically, he suggests that the State Judgment “does not provide ... that the Work Authorization unilaterally signed by Mr. Helms was a valid assignment such that the Work Authorization effectively assigned the Insurance Proceeds to Bel-for.”
This Court disagrees. That is exactly what the State Court held. It would be obtuse to believe that, having concluded that the Insurance Proceeds were assigned to Belfor by the Helmses, the State Judge might have been reserving judgment as to whether the assignment was effective as between these parties.
In substance, the State Court determined that Sandra Helms ratified the Work Authorization by conduct, including the assignment, and then both Helmses breached the Contract.6 By holding the *385Work Authorization to be part of the parties’ agreement and further holding that the Helmses had conveyed both Defendants’ interest in the Insurance Proceeds to Belfor, the State Court was clearly stating that the assignment was valid and effective as against both Helmses.
Since collateral estoppel would bar the Helmses from asserting in any second litigation with Belfor that the Insurance Assignment was ineffective, the Trustee is also precluded from making that assertion — when standing in the debtors’ shoes. Given this, and since the Trustee’s “ineffectiveness” argument is reasserted in his Section 544 argument, we will for the moment hold discussion of the merits of his theory.
IV. The Assignment is not Avoidable Under Section 5M..
The Trustee’s fallback argument is that the assignment was also ineffective as against Sandra Helms’ creditors and therefore is avoidable under Section 544(a)(1) & (2).7
Section 544(a)(1) & (2) provides, in relevant part:
(a) The trustee shall have, as of the commencement of this case, and without regard to any knowledge of the trustee or of any creditor, the rights and powers of, or may avoid any transfer of property of the debtor or any obligation incurred by the debtor that is voidable by—
(1) a creditor that extends to the debtor at the time of the commencement of the case, and that obtains, at such time and with respect to such credit, a judicial lien on all property on which a creditor on a simple contract could have obtained such a judicial lien, whether or not such a creditor exists; [or]
(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,....
11 U.S.C. § 544(a)(1) & (2).
Once again, the Trustee argues that Sandra Helms had an insurable interest in the insurance proceeds that could not be unilaterally assigned to Belfor by her husband. The Work Authorization failed to transfer her property interests in the Insurance Proceeds to Belfor, meaning that the transfer was void not just as to Sandra, but as to her creditors.
Belfor has argued a variety of defenses to this second theory, including an assertion that the Trustee has not separately pled a Section 544(a) cause of action and may not now seek to avoid the transfer under that provision.
A. Failure to Plead a Section 544(a) Action is Not Fatal to the Trustee’s Claims.
Belfor argues that there is no Section 544(a) avoidance claim asserted in this action. The Trustee first brought a Counterclaim under 11 U.S.C. § 544(a) (attacking Belfor’s mechanic’s lien against the Helmses’ residence), but stipulated to its dismissal with prejudice. Stipulation, Mar. 28, 2011, ECF No. 22.
According to Belfor, the Trustee’s attack on the Assignment was based upon alleged ownership under Section 541 and avoidance under § 544(b). After Belfor argued the lack of an identified “golden creditor” *386as required by § 544(b), the Trustee asserted in his Supplemental Brief that he was acting under Section § 544(a). Belfor contends that the Trustee is barred from reasserting his dismissed § 544(a) claim in a reply brief. Of course, the Trustee disagrees.
This action involves competing theories as to ownership of the Insurance Proceeds and the purposes of the action. Belfor asserts that these monies are presently its property based upon the prepetition assignment. Thus, Belfor believes the Trustee is now seeking to avoid a prepetition transfer of property and recover the same. The Trustee has a diametrically opposed view: he believes the assignment was void ab initio such that half of these monies were still Sandra Helms’ property at the petition date. To his mind, Belfor is making a claim to monies owned by the debtor at the petition date that are now estate property. The Trustee views himself as defending against Belfor’s claims on the basis that his Section 544 powers are paramount.
On the unique facts presented, this Court gives the nod to the Trustee on the procedural question. The need to plead question hinges on whether one assumes a prepetition transfer. The Trustee does not, so he did not specifically plead Section 544. As he points out, the case law does not require that a Section 544 affirmative defense be specifically pled under Rule 7008, nor as a counterclaim. Placer Sav. & Loan Ass’n. v. Walsh (In re Marino), 49 B.R. 600, 604 (N.D.Cal.1985), rev’d on other grounds, 813 F.2d 1562 (9th Cir.1987).
Further, there is no question but that both parties fully appreciated the issues to be decided in this case from the outset. The First Defense in Trustee’s Answer states in relevant part: “... there is no valid and enforceable assignment to or for the benefit of the Plaintiff of the $36,651 the Trustee holds as an asset of the estate under Section 541 of the Code.... ” Then, in his Third Defense, the Trustee denies Belfor’s assertion (from its Amended Complaint) that the Insurance Proceeds were validly assigned to it and should not be property of the Debtors’ estate.
Having defended against Belfor’s declaratory judgment claim on the assertions that the assignment was not properly made and the property remains estate property, in now asserting Section 544(a)(1) and (2), the Trustee is simply stating the legal reasons why he believes his claim to the property to be superior to Belfor’s.
Belfor’s pleading argument fails under the Rules, or is at best a technical defense. Belfor has had adequate notice and has long been aware,of the Trustee’s claims to these monies.
B. The Trustee has Failed to Demonstrate a Superior Claim to the Proceeds under Section 544.
We turn now to the merits of the Trustee’s “ineffectiveness” argument. Fortunately, we do not need to decide the legally obscure question whether a spouse who is a sole named insured on an insurance policy can, under North Carolina law, unilaterally assign the benefits of the same to a third party after a casualty loss has occurred as to tenancy by the entireties property.
1. The Trustee’s Creditor Avoidance Theory Rests on the Invalidity of the Transfer vis-a-vis Sandra Helms, not her Creditors.
While the Trustee recasts his “ineffective” argument as a Section 544 creditor matter, it is essentially the same argument he made under his Section 541 theory. In short, he believes the assignment to be *387void because Sandra did not sign the Work Authorization. This theory is not really a creditor rights argument, and the Trustee makes no assertion why a creditor would be able to avoid the assignment. Rather, this is an argument why the transfer would not be effective as to Sandra Helms, a co-owner of the Insurance Proceeds. As explained above, the Trustee is precluded from making that assertion.
2. The Trustee’s Theory Rests on an Invalid Premise.
The second problem with the Trustee’s theory is that it depends on an invalid premise: the suggestion that Sandra Helms did not consent to the assignment. The State Court expressly concluded otherwise. After hearing the evidence, that Court found Sandra Helms, while not a signatory to the Work Authorization, to be a willing participant in the assignment. The finding that “Defendant S. Helms knew of and benefited from the Work Authorization contract signed by her husband” bears out this conclusion. It is clear that the State Judge considered Sandra Helms to have consented to, or ratified, her husband’s execution of the Work Authorization, including the assignment. This determination is demonstrated further by Conclusion of Law No. 1, in which the State Judge concludes that “The Contract, including the Work Authorization, is enforceable against each of the Defendants.” State Judgment, Conclusion of Law No. 1, ECF No. 23-1.
The State Court’s conclusion is supported by the circumstances: Sandra owned an equal interest in the Residence. Like her husband, she wanted that home rebuilt, and she and her husband contracted with Belfor to do the job. While only Howard Helms signed the work authorization, both Helmses executed the subsequent agreement, the Construction Contract and Payment Schedule. It is clear that the parties intended that Belfor be paid through the Insurance Proceeds. No alternative source of funding as been suggested by any party. The Helmses’ home was in fact reconstructed by Belfor, and the Helmses enjoyed its benefits for several years. This was not a case of one spouse unilaterally conveying away the other’s rights.
The assignment was valid and effective as to the debtors. Therefore, if the Trustee is to prevail under Section 544(a), he must demonstrate that the assignment was avoidable by one of Sandra Helms’s creditors.
3. A Valid Prepetition Assignment Takes Precedence over the Trustee’s Section 5H Powers.
When a person assigns to a creditor money that the debtor is entitled to receive from a third party, that assignment is perfected and complete when the assignment is executed, not when the money is disbursed to the creditor. See Goldstein v. Madison Nat’l Bank of Washington, D.C., 807 F.2d 1070, 1074 (D.C.Cir.1986); Huffman v. Hopkins-Lewis Co. (In re Harbour), 801 F.2d 394 (4th Cir.1986) (unpublished table decision); First Trust Nat’l Ass’n v. Am. Nat’l Bank and Trust Co. of Chicago (In re Adventist Living Ctrs., Inc.), 174 B.R. 505, 512 (Bankr.N.D.Ill.1994). Thereafter, if the assignor later receives proceeds of assigned rights, the assignor holds them in constructive trust for the assignee. Tavormina v. Aquatic Co., N.V. (In re Armando Gerstel, Inc.), 65 B.R. 602, 605-06 (S.D.Fla.1986).
In contrast, the Trustee’s Section 544(a) powers as a hypothetical judicial lien creditor under Section 544(a)(1) and as the holder of an unsatisfied execution creditor under Section 544(a)(2) both arise as of the date of bankruptcy. Consequently, *388it has been held that when property is assigned outside the preference period, proceeds that debtor received during the preference period never became property of debtor’s estate, but were held in trust for the assignees. In re Armando Gerstel, Inc., 65 B.R. at 605.
In our case, Belfor’s assignment predates the preference period by several years. Therefore, assuming the assignment to be effective against creditors, the Helmses had no interest in the insurance proceeds when they received them, and the Trustee currently holds no interest in the same.
Even while acknowledging the assignment, the Trustee maintains that this conveyance was ineffective against creditors. However, he cites no North Carolina statutory or case authority to support his assertion, and it appears his position is entirely reflexive. For while many conveyances of property have to be made in writing and often recorded in a public registry in order to be effective against the bankruptcy trustee, this does not appear to be true for assignments of insurance proceeds.
I. An Assignment of Insurance Proceeds Need Not be Made in Writing to be Effective.
Unlike a transfer of the tenancy by the entireties real estate (which would require a recorded deed signed by both Helmses), no particular form of conveyance is required to assign insurance proceeds. An assignor’s intention to assign a right can be made either orally or in writing, unless a writing is required by a statute or by contract. See Restatement (Second) of Contracts § 324 (1981).
Section 341 of the Restatement, entitled Creditors Of An Assignor, reiterates the premise that “[a]n effective assignment extinguishes the assignor’s right” and places the proceeds in constructive trust for the assignee. Comment, Restatement (Second) of Contracts § 341 (citing Restatement of Restitution § 165). It also clarifies that the assignment is usually effective against third parties: A “creditor of the assignor who claims the assigned right by garnishment, levy of execution or like process is not a bona fide purchaser, even though he has no notice of the assignment. Unless protected by statute or by estoppel or like doctrine, he is subject to the assign-ee’s right.” Comment, Restatement (Second) of Contracts § 341.
There are some circumstances where a lack of formality may cause the assignment to “be defeated by creditors of the assignor....” Id. at § 324. As to what these circumstances are, the Comment again references Section 341 of the Restatement.
Subsection b of Section 341 describes certain defective assignments that are subject to the claims of an assignor’s creditors. First, it notes that “[a]n assignor’s trustee in bankruptcy can in general reach all of the assignor’s legal or equitable interest in any of his property, including powers that he might have exercised for his own benefit and property transferred by him in fraud of creditors.” Id. at § 341 (citing 11 U.S.C. §§ 541(a) & (b) and 548).
Subsection b continues:
In addition, a person against whom a transfer is voidable can reach the property transferred. In such cases, therefore, the assignee’s right is not superior to that of the lien obtained by garnishment or like process. A revocable gratuitous assignment, for example, does not limit the power of the assignor’s creditors to levy on the assigned claim.
Comment, Restatement (Second) of Contracts § 341 (citing Restatement (Second) of Contracts § 332).
*389None of these exceptions are applicable in the present case. The first exception (the Trustee recovering assignor’s interest in the property under Section 541) is barred by collateral estoppel. Section 548, the bankruptcy fraudulent conveyance statute, is not impugned — undisputedly, Belfor gave reasonable equivalent value in exchange for the assignment by constructing the Helmses’ new home.
That leaves us where we began: seeking a person against whom the transfer is voidable. The example provided in the comment is inapposite in that this was not a revocable gratuitous assignment. Id.
Looking further into the few cases cited in the Restatement comparing the rights of an assignor’s creditors to those of his assignee, only one presents factual circumstances similar to the present case, Ketchikan Shipyard, Inc. v. Anchorage Nautical Tours, Inc. (In re Anchorage Nautical Tours, Inc.), 102 B.R. 741, 744 (9th Cir. BAP 1989). Its holding, however, supports Belfor’s position, not the Trustee’s.
In Anchorage Nautical Tours, the Ninth Circuit Bankruptcy Appellate Panel ruled that a written assignment of insurance proceeds is not required to make the transfer enforceable against the bankruptcy trustee. Id. at 744-45. In that case, a shipyard made repairs on a vessel pursuant to an agreement with the ship owner-debtor and an insurance company, which was to indemnify all costs of a repair. Id. at 742. The debtor orally agreed to assign the insurance proceeds to the yard, but the yard was never paid. Id. After the debtor went into bankruptcy, the insurance company requested a court order determining who was entitled to payment. Id. at 742-43. The bankruptcy judge held that the insurance proceeds belonged to the debt- or’s estate. Id. Reversing the lower court and remanding the matter for the imposition of a constructive trust on the insurance funds (in favor of the yard), the B.A.P. held that the debtor had effectively assigned its insurance claim for repairs to the yard. Id. at 744-45. That court recited the general rule found in the Restatement: no formal written agreement was necessary to establish a transfer, and the transferor-debtor merely held the payments in constructive trust for the yard. Id. at 744. The transferee-yard’s right to the monies was superior to all others’ interests, including the Trustee’s. Id. at 744-45.
While that case was decided under Alaska law, the Trustee cites no reason why the outcome would be any different in North Carolina. In fact, he cites no North Carolina authority, case, or statute supporting his view. Therefore, this Court endorses the view of Anchorage Nautical Tours that an oral assignment of insurance proceeds is effective in bankruptcy. The assignment of the Insurance Proceeds to Belfor is enforceable both as to the Helms-es and their creditors.
V. Potentiality of Equitable Relief.
A final reason weighs in favor of awarding these funds to Belfor — it is the equitable result.
In a recent case presenting similar facts, this Court held certain fire insurance proceeds derived from a prepetition fire loss of the debtor’s residence to be Section 541 estate property. Ward v. Unitrin Direct Prop. & Cas. Co. (In re Stafford), 357 B.R. 730 (Bankr.W.D.N.C.2006). On appeal, the U.S. District Court reversed that decision, holding the monies to be subject to an equitable lien in favor of a general contractor that rebuilt the debtor’s residence. In re Stafford, No. 5:06CV145-V (W.D.N.C. Sept. 15, 2011). The District Court reasoned that where a debtor engages a contractor before bankruptcy to *390reconstruct a residence destroyed by fire with the general understanding that the contractor will be paid from the fire insurance proceeds on that residence, the debt- or, the estate, and other creditors would be unjustly enriched by receiving both the benefits of that arrangement (the value of the new residence) while denying the contractor payment from the intended source. Id.
Specifically in Stafford, the District Court found that there was an intent for the insurance monies to be held in trust for the benefit of the debtors and general contractor so the debtors’ home could be rebuilt, and that, pursuant to an insurance account disbursement agreement, the contractor had been designated as the co-payee of the debtors. Id. Because the contractor had given valuable consideration in exchange for his asserted interest in the insurance proceeds, the Court determined the contractor was “not similarly situated to other general unsecured creditors asserting a claim against the [debtors’ estate” and ultimately found an “imposition of an equitable trust is warranted in order to prevent unjust enrichment.” Id.
Neither party to our dispute has cited to Stafford, and there are differences between the two eases. The facts are not on “all fours,” although they are close. And the trustee in Stafford did not assert a Section 544 claim to the insurance proceeds. If applied expansively, the Stafford case might impinge upon the Bankruptcy Code’s ratable distribution scheme. It does, however, at a minimum reflect the District Court’s perspective on the equities of these trustee-contractor disputes over insurance loss proceeds. Even though the two cases are distinguishable, this Court is obliged to respect those views.
In conclusion, as established in the pre-petition State Judgment, the Insurance Proceeds received by the Debtors were assigned to Belfor and were held in constructive trust for Belfor. That assignment is not voidable, either by Sandra Helms or her creditors. Therefore, the remaining proceeds currently possessed by the Trustee belong to Belfor and must be turned over, including any interest accruals thereon.
Summary judgment is GRANTED in favor of Belfor. The Trustee’s counter-motion is DENIED.
SO ORDERED.
. For consistency, the overall agreement will be referred to as the ''Contract” in this order.
. The Trustee accuses opposing counsel of bad faith in adding this conclusion to the order. It is unclear whether this was an inadvertent error, as opposed to an intentional act. As the Trustee points out, Belfor’s counsel was aware at the time that the insurance assignment issue was to be decided in this litigation and not in the lien avoidance matter.
. A Trustee might have an interest in the outcome of a debtor’s lien avoidance motion, if he believed both the lien and the debtor’s exemption to be invalid. However, even in this circumstance, the Trustee’s interests are opposed to, and certainly not aligned with, those of the Debtors.
. The parties’ positions have evolved over the course of this litigation. It is unclear at this date whether the Trustee claims only Sandra’s half interest in the proceeds or both Helms’ interests. Howard, of course, signed the written assignment, and since North Carolina does not recognize tenancy by the en-tireties as to personal property, Bowling v. Bowling, 243 N.C. 515, 91 S.E.2d 176, 180 (1956), it would appear that the conveyance would be valid as to Howard’s half interest. Thus, we will refer only to Sandra’s half interest going forward.
. However, see discussion below, regarding avoidance actions.
. This conclusion was necessary to the State Court’s Judgment, not only as to establishing the liability, but also the award of interest and attorneys’ fees to Belfor, based upon a contract provision contained in the Work Authorization. State Judgment, Finding of Fact No. 14, ECF No. 23-1.
. Belfor argues in its briefs that the Trustee is proceeding under Section 544(b). However, the Trustee’s latest brief clarifies that his theory is based upon Section 544(a)(1) & (2), so we will confine our discussion to these sub-parts. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494657/ | *392MEMORANDUM RULING
ROBERT SUMMERHAYS, Bankruptcy Judge.
In the present adversary proceeding, Thomas R. Willson, the duly-appointed Chapter 7 Trustee (the “Trustee”) of Central Louisiana Grain Cooperative, Inc. (the “Debtor”), asserts claims against ten (10) former members of the Debtor’s board of directors. The Trustee’s original complaint for damages (the “Complaint”) alleges that these defendants breached their fiduciary duties to the Debtor, failed to exercise adequate oversight and control, and failed to maintain adequate records. (Complaint at ¶¶ 16-28.) In addition to the former directors, the Trustee asserts a direct claim against Admiral Insurance Company (“Admiral”). The Trustee alleges that Admiral issued a Nonprofit Management Liability Insurance Policy (the “Admiral D & 0 Policy”) that covers the losses alleged in the Complaint. The Trustee names Admiral as a defendant pursuant to the Louisiana Direct Action Statute. Admiral subsequently filed a Motion for Summary Judgment seeking dismissal of the claims against it on the grounds of the “insured versus insured” exclusion in the Admiral D & 0 Policy. After considering the parties’ arguments, the summary judgment record, and the relevant authorities, the court DENIES the Motion for Summary Judgment for the reasons set forth below.
JURISDICTION
This case has been referred to this court by the Standing Order of Reference entered in this district which is set forth as Rule 88.4.1 of the Local Rules of the United States District Court for the Western District of Louisiana. No party in interest has requested a withdrawal of the reference. The court finds that this is a core proceeding pursuant to 28 U.S.C. § 157(b)(2). These Reasons for Decision constitute the court’s findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.1
BACKGROUND
The Debtor filed for relief under Chapter 7 of the Bankruptcy Code on April 10, 2008, and the Trustee was subsequently appointed on May 7, 2008. The Debtor was a Louisiana agricultural cooperative association formed under La. R.S. 3:71 et seq. On April 10, 2010, the Trustee commenced the present adversary proceeding against fourteen (14) defendants. Ten (10) of the defendants — Jess Vanderlick, Vernon Mathews, John Dean, Louis Gatlin, Lloyd Puckett, Ben Littlepage, Charles Matt, John Deykeyser, Richard Hargis, and Gordon Smith — were members of the Debtor’s Board of Directors. Another defendant, Charles Vanderlick, Jr., was the General Manager of the Debtor. Defendant Mike Gillespie was the Debtor’s accountant. Finally, the Trustee named the Debtor’s two D & O insurance providers pursuant to the Louisiana Direct Action Statute: Admiral and Monitor Insurance Co. (“Monitor”). Monitor was subsequently dismissed as a defendant.
*393The focus of Admiral’s Motion for Summary Judgment is whether the Admiral D & 0 Policy covers the claims asserted in the Complaint. The policy provides that it will “pay on behalf of the Insureds all Loss arising from any Claim first made against the Insureds during the Policy Period and reported to the Insurer in writing during the Policy Period or within ninety days thereafter, for any Wrongful Act.” (Ex. A to Trustee’s Opposition Memorandum [Dkt. No. 100] at ¶ I.) The policy defines “Insured Person” as any “past, present or future duly elected or appointed directors, trustees, officers, employees (including part-time, seasonal and temporary individuals), volunteers, or committee or staff members of the Insured Entity....” (Id. at ¶ 111(D).) The policy defines the Insured Entity as the Debtor and any of its subsidiaries. The Admiral D & 0 Policy also contains certain exclusions to this coverage. Exclusion F of the policy provides as follows:
In addition to the Exclusions listed in section IV of the Common Policy Terms and Conditions Section, the Insurer shall not be liable to make any payment for Loss in connection with a Claim made against any Insured:
F. by, on behalf of, or in the right of the Insured Entity in any capacity, provided, however, this exclusion does not apply to any Claim that is a derivative action brought or maintained on behalf of the Insured Entity, but only if such Claim is instigated and continued totally independent of, and totally with the solicitation of, or assistance of, or participation of, or intervention of any Insured.
(Id. at ¶ TV(F).) (Emphasis added). Admiral subsequently filed the present Motion for Summary Judgment arguing that, as a matter of law, Exclusion F of the policy precludes coverage for the claims asserted by the Trustee. Specifically, Admiral argues that the claims brought by the Trustee against the insured director defendants are claims brought “by, on behalf of, or in the right of the Insured Entity in any capacity.”
DISCUSSION
A. Summary Judgment Standard
Summary judgment is proper if the pleadings, discovery products on file, and affidavits show that there are no genuine issues of material fact and that the movant is entitled to judgment as a matter of law. See Fed. R. Civ. P 56. The purpose of summary judgment is to pierce the pleadings and to assess the proof to determine whether there is a genuine need for trial. See Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986). Summary judgment procedure is designed to isolate and dispose of factually unsupported claims or defenses. Celotex Corp. v. Catrett, 477 U.S. 317, 323-24, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Where, as here, the movant does not bear the burden of persuasion, the movant may satisfy its summary judgment burden by pointing to an absence of evidence supporting an essential element of the non-moving party’s claim. Celotex Corp., 477 U.S. at 324-326, 106 S.Ct. 2548 (absence of support for an essential element of the plaintiffs claim entitles the defendant to summary judgment unless in response the plaintiff non-movant sets forth facts that permit a reasonable trier of fact to find for the plaintiff on that essential element of his claim). Assuming that the movant has met this burden, the non-movant plaintiff must come forward with “substantial evidence” supporting the essential elements challenged in the motion for summary judg*394ment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). In other words, the evidence must be sufficient to withstand a motion for directed verdict and to support the verdict of a reasonable jury. Id. Under this standard, the non-movant cannot rely on unsupported assertions or arguments, but must submit sufficiently probative evidence supporting the essential elements of its claims challenged in the motion for summary judgment.
B. The Applicable Standards For Interpreting Insurance Contracts.
Admiral’s motion requires the court to construe the language of Exclusion F of the Admiral D & O Policy. When dealing with matters of contract construction, federal courts generally look to state law. In Louisiana, insurance policies are construed using the general rules of contract interpretation set forth in the Louisiana Civil Code. See Innovative Hospitality Systems, LLC v. Abraham, 61 So.3d 740, 743 (La.App. 3d Cir.2011); Muller v. Colony Insurance Co., 57 So.3d 341, 346 (La.App. 1st Cir.2010) (“An insurance contract or policy is a conventional obligation that constitutes the law between the parties to the contract, the insured and the insurer.”) If the language of the policy is clear and unambiguous, the policy must be enforced as written. Muller, 57 So.3d at 346. However, “a provision which seeks to narrow the insurer’s obligation is strictly construed against the insurer, and, if the language of the exclusion is subject to two or more reasonable interpretations, the interpretation which favors coverage must be applied.” Innovative Hospitality Systems, 61 So.3d at 743.
C. Judicial Treatment of The “Insured Versus Insured” Exclusion.
Section F of the Admiral D & O Insurance Policy is what is commonly called the “insured versus insured” exclusion. Public companies typically provide D & O insurance coverage to their officers and directors to protect against the risk of liability arising from actions taken in their official capacities on behalf of the corporation. See, e.g., Bart Schwartz & Amy Goodman, Corporate Governance: Law and Practice § 5.04[2] (Mathew Bender 2005). These policies generally cover derivative and direct claims by shareholders as well as claims by a corporation’s creditors, employees, suppliers, and other third parties. Id. One of the typical exclusions to such policies is the insured versus insured exclusion. Like Exclusion F in the Admiral D & O Policy, these provisions generally exclude coverage for claims by one insured (typically the corporation who procured the policy) against another insured (typically the corporate director or officer covered by the policy). The purpose of the exclusion is to avoid collusive claims by insured corporations “trying to recoup corporate losses by attributing them to the wrongdoing of directors and officers who, if insured, have nothing to lose by taking the blame.” Narath v. Executive Risk Indemnity, Inc., 2002 WL 924231 at *5 (D.Mass. March 14, 2002); In re Molten Metal Technology, Inc., 271 B.R. 711, 728 (Bankr.D.Mass.2002).
While the application of this exclusion may be straightforward when claims are brought by the insured corporation, its application is less clear in the bankruptcy context when claims are brought by a debtor-in-possession, plan committee, or trustee. In many bankruptcy cases, a trustee or liquidating trust will bring claims against the debtor’s former officers and directors seeking to recover for alleged breaches of fiduciary duty or mismanagement prior to the bankruptcy filing. The question for courts in these cases is whether the trustee’s claims are
*395brought by or on behalf of the insured company and thus are subject to the insured versus insured exclusion. Courts addressing this question in the context of claims brought by a debtor-in-possession or a plan committee are split. Many courts have held that there is a sufficient identity between the pre-petition debtor and the post-petition debtor-in-possession or plan committee/trust that such claims fall within the exclusion. See, e.g., Reliance Ins. Co. of Illinois v. Weis, 148 B.R. 575 (E.D.Mo.1992) (holding that action by plan committee against the debtor’s former officers and directors was subject to the insured versus insured exclusion); Stratton v. National Union Fire Ins. Co., 2004 WL 1950337 at *5 (D.Mass. Sept. 3, 2004) (claims brought by successor entity created under the plan were subject to the exclusion); R.J. Reynolds-Patrick County Memorial Hospital v. Federal Ins. Co., 315 B.R. 674, 679 (Bankr.W.D.Va.2003) (claims by liquidating trust and debtor-in-possession subject to the exclusion); but see Cox Communications, Inc. v. National Union Fire Ins. Co., 708 F.Supp.2d 1322, 1330 (N.D.Ga.2010) (claims by bondholders’ committee not subject to the exclusion). Some cases involving debtors-in-possession rely on case law holding that the debtor-in-possession is essentially the same entity as the pre-petition debtor. See R.J. Reynolds-Patrick County Memorial Hospital, 315 B.R. at 680 (citing N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513,104 S.Ct. 1188, 79 L.Ed.2d 482 (1984)). Other courts generally hold that a debtor-in-possession or plan committee/trust merely steps into the shoes of the pre-petition debtor for purposes of the insured versus insured exclusion. See Reliance Ins. Co. of Illinois, 148 B.R. at 582; R.J. Reynolds-Patrick County Memorial Hospital, 315 B.R. at 678. These decisions hold that, as the successor to the pre-petition debtor, a debtor-in-possession or plan committee/trust should be treated as the insured debtor for purposes of the insured versus insured exclusion. See Stratton, 2004 WL 1950337 at *5.
In contrast, many courts have declined to apply the exclusion in cases where claims are brought by a duly appointed Chapter 11 or Chapter 7 trustee. See, e.g., In re County Seat Stores, Inc., 280 B.R. 319, 327 (Bankr.S.D.N.Y.2002) (claims brought by Chapter 11 trustee not subject to insured versus insured exclusion); Alstrin v. St. Paul Mercury Ins. Co., 179 F.Supp.2d 376 (Del.2002) (same); In re Pintlar Corp., 205 B.R. 945 (Bankr.Idaho 1997) (same); In re Molten Metal Technology, 271 B.R. 711 (Bankr.D.Mass.2002) (same); In re Buckeye Countrymark, Inc., 251 B.R. 835 (Bankr.S.D.Ohio 2000) (same); In re Laminate Kingdom, LLC d/b/a Floors Today, 2008 WL 704396 at *3 (Bankr.S.D.Fla. March 13, 2008) (claims by bankruptcy trustee against a former manager of the debtor were not subject to the insured versus insured exclusion). These courts rely on several factors in holding that the exclusion does not apply to claims brought by a trustee. First, these courts generally conclude that the Chapter 11 or Chapter 7 trustee is separate and distinct from the insured debtor. See In re County Seat Stores, Inc., 280 B.R. at 325 (“A bankruptcy trustee is a legal entity separate and distinct from the debtor.”) These courts also rely on the fact that the trustee owes his or her duties not to the debtor, but to the bankruptcy estate and “the entire community of interests” of the debtor. Id. (quoting Pepper v. Litton, 308 U.S. 295, 60 S.Ct. 238, 84 L.Ed. 281 (1939)); Narath, 2002 WL 924231 at *2 (claims by Chapter 11 trustee not subject to exclusion because, unlike claims by the pre-petition debtor, claims by the trustee were for “the purpose of retrieving and liquidating assets for the benefit of creditors and potentially, *396shareholders” and that the trustee was adverse to the defendants); Molten Metal Technology, 271 B.R. at 729 (the trustee and debtor have “different powers and rights and ... being separate and distinct entities ... [have] different interests.”). Some courts also reason that a bankruptcy trustee is sufficiently adverse to the officer and director defendants that claims brought by the trustee do not raise the specter of collusion that otherwise might arise if the claims are brought by the insured corporation. See, e.g., Narath, 2002 WL 924231 at *2 (reasoning that the underlying purpose for the insured versus insured exclusion did not apply to claims brought by a Chapter 11 trustee because “the parties are adverse, and the purpose of the exclusion — to prevent collusion between insured parties — is defeated.”) See also County Seat Stores, Inc., 280 B.R. at 329 (noting that a trustee “as a truly adverse party, does not, or should not, raise concerns of collusion because the trustee does not represent the interest of any party that could be a participant of a conspiracy to collude.”).2
D. Does The Insured Versus Insured Exclusion Bar Coverage With Respect to The Trustee’s Claims?
Turning to the present case, the scope of the insured versus insured exclusion in the Admiral D & 0 Policy is governed by the language of that exclusion. Exclusion F of that policy precludes coverage for claims “by, on behalf of, or in the right of the Insured Entity in any capacity.” The policy defines “Insured Entity” as “Central Louisiana Grain Cooperative, Inc.” and its subsidiaries. Exclusion F applies to the claims in the present case only if the Trustee can be deemed the “Insured Entity.” The court agrees with the reasoning of the courts in County Seat Stores, Inc., Molten Metal Technology, and Laminate Kingdom that a duly appointed bankruptcy trustee is not the insured debtor for purposes of the insured versus insured exclusion. Specifically, once Central Louisiana Grain Cooperative, Inc. filed for relief under Chapter 7 of the Bankruptcy Code, all of its claims against its former officers and directors flowed *397into the bankruptcy estate. This estate and the Chapter 7 trustee appointed to administer the estate are separate and distinct entities from the pre-petition debtor. See Molten Metal Technology, 271 B.R. at 726 (“upon the debtor’s filing of its bankruptcy petition ... the claims became the property of a new entity, the bankruptcy estate.”) (emphasis added); see also In re Int. Gold Bullion Exchange, Inc., 60 B.R. 261, 263 (Bankr.S.D.Fla.1986) (“... a trustee, like a debtor-in-possession, is conceptually separate for purposes of bankruptcy law ... ”) The Trustee’s duties and role in this case differs from that of the insured debtor in that he is bound by the duties set forth in 11 U.S.C. Section 704(a) “to collect and reduce to money the property of the estate for the benefit of the debtor’s creditors.” Laminate Kingdom, 2008 WL 704396 at *4. Id.; Narath, 2002 WL 924231 at *2. In discharging these duties, the Trustee does not act on behalf of or for the benefit of the defunct debtor. Laminate Kingdom, 2008 WL 704396 at *4. Accordingly, the claims brought by the Trustee are not claims brought “by” the Insured Entity because the Trustee is a distinct legal entity with different duties and functions, and the language of the exclusion does not sweep the Trustee into the definition of “Insured Entity.” Nor are they claims brought “on behalf’ of the Insured Entity because, under section 704(a), the Trustee administers the estate (which includes the claims asserted in this case) “for the benefit of the debtor’s creditors,” not the defunct debtor. Id.
Even in R.J. Reynolds-Patrick County Memorial Hospital and similar decisions holding that the insured versus insured exclusion applies to debtors-in-possession and plan committees/trusts, the courts distinguished those cases from cases where, as here, the claims are brought by a duly appointed Chapter 11 or 7 trustee. 315 B.R. at 679-82. In R.J. Reynolds-Patrick County Memorial Hospital, the court observed that the exclusion would likely not apply to claims brought by a bankruptcy trustee because, while a “pre-petition debt- or is the same entity as a debtor-in-possession,” a “debtor-in-possession is not the same entity as the Chapter 11 trustee.” The court also noted that a plan committee or liquidating trust is different from a court-appointed trustee in that the claims asserted by a plan committee/trust result from the “voluntary assignment, through the Plan” of the claims, while the appointment of a trustee “is almost always effected in contravention of the wishes of a debtor.” Id. In other words, claims brought by a Chapter 11 or 7 trustee do not typically raise any danger of collusion. Accordingly, “[bjecause a chapter 11 debt- or-in-possession is different than a chapter 11 trustee that is appointed by the court, claims by a debtor-in-possession, or its assignee, against a director or officer might possibly be precluded by an [insured versus insured exclusion] while the same action against the same director or officer brought by a chapter 11 trustee in the same case might not be excluded by [the] clause.” Id.; see also Stratton, 2004 WL 1950337 at *5 (distinguishing cases where claims are brought by a trustee because “[a]ny proceeds in these claims were to be paid directly to creditors, making the trustee a genuinely adverse party.”) In contrast, one of the primary cases cited by Admiral, National Union Fire Ins. Co. v. Olympia Holding Corp., 1996 WL 33415761 at *7 (N.D.Ga.1996), is not so readily distinguishable because the plaintiff in that case was a Chapter 7 trustee. The court, however, does not find the Olympia Holding case persuasive because that case fails to assess or even acknowledge the case law recognizing the legal distinction between a bankruptcy trustee and the defunct Chapter 7 debtor. *398Nor does the Olympia Holding court acknowledge the trustee’s duties under the Bankruptcy Code. Instead, the Olympia Holding court merely concludes that “for purposes of this litigation, there is no legal distinction between [the insured company] and ... [the] Trustee for the bankruptcy estate.” Id. Accordingly, the court rejects Olympia Holding as grounds to grant Admiral’s Motion for Summary Judgment.
Admiral further argues that the Molten Metal Technology line of cases is inapplicable to the present case because, in contrast to the exclusion at issue in those cases, the Admiral D & 0 Policy also excludes claims brought “in the right of the Insured Entity.” The court disagrees. First, the policy in Laminate Kingdom included this “in the right of’ language, and the court nevertheless ruled that the exclusion was inapplicable because the trustee was asserting claims on behalf of the debtor’s creditors, not the debtor. More importantly, Admiral’s argument fails because the “Insured Entity” in this case — Central Louisiana Grain Cooperative — had no rights to or ownership interest in any of the claims asserted by the Trustee. Rather, all the Debtor’s rights with respect to these cIaims(along with all other estate property under 11 U.S.C. § 541) vested in the bankruptcy estate upon the filing of the petition. Cox Communications, Inc., 708 F.Supp.2d at 1330 (the exclusion does not apply to bondholders’ committee, because the committee “simply enforce[s] a right belonging to” the bankruptcy estate); In re General Growth Properties, Inc., 426 B.R. 71, 76 (Bankr.S.D.N.Y.2010) (“As claims of the bankruptcy estate, only the trustee can bring them and [plaintiff] no longer owns them nor can [plaintiff] assert them.”); Molten Metal, 271 B.R. at 729 (trustee was not prosecuting claims on behalf of the debtor because “[u]pon the Debtor’s bankruptcy filing, the claims at issue became assets of the bankruptcy estate, ... which is a separate entity from the Debt- or.”) Accordingly, the Trustee is not asserting these claims “in the right of the Insured Entity,” but in the right of the bankruptcy estate. To the extent that Admiral’s argument is that this “in the right of’ language extends the exclusion to claims brought by successors, the applicable authorities and the plain language of the policy’s definitions and exclusion do not support Admiral’s argument. First, the Molten Metal and Laminate Kingdom line of cases hold that a bankruptcy trustee is not merely a successor to the insured debtor. See, e.g. County Seat Stores, 280 B.R. at 326 (observing that the trustee does not strictly “stand in the shoes” of the debtor). Moreover, the policy does not define “Insured Entity” to include successors, nor does Admiral point to any authority construing this “in the right of’ language to apply to successors. As Laminate Kingdom noted, if Admiral had intended to include successors or bankruptcy trustees in the exclusion, it could have included language clearly expressing its intent. Laminate Kingdom, 2008 WL 704396 at *5 (“If Carolina Casualty wanted to include the bankruptcy trustee, it could have expressly provided so by plainly excluding claims brought by the ‘Insured Entity’s trustee in bankruptcy.’ ”) In sum, the court concludes that Admiral has not met its burden of establishing, as a matter of law, that the insured versus insured exclusion in Exclusion F of the Admiral D & 0 policy bars coverage for claims brought by the Trustee in this case. This result is consistent with the express language of the policy as well as the cases construing similar provisions in the bankruptcy context. It is also consistent with the underlying purpose of the insured versus insured exclusion to avoid collusive claims.
*399E. The Derivative Action Exception.
The ten director defendants also oppose Admiral’s Motion for Summary Judgment on the grounds that the “derivative action” exception to the insured versus insured exclusion in Paragraph F of the policy applies to this case. Given the court’s conclusion that the exclusion does not apply on other grounds, the court need not further address this argument. The court, however, notes that the derivative action exception likely would not apply to the claims brought by the Trustee because these claims are direct claims, not derivative claims brought by a creditor or shareholder of the Debtor. See Torch Liquidating Trust v. Stockstill, 561 F.3d 377 (5th Cir.2009) (breach of fiduciary duty claims brought by liquidating trustee were direct claims not derivative claims).
CONCLUSION
For the reasons set forth herein, the court DENIES Admiral’s Motion for Summary Judgment. Admiral shall submit an order that reflects the court’s ruling herein within 20 days.
IT IS SO ORDERED.
. After the hearing on this matter, the court held a telephone conference with the parties to discuss whether the Supreme Court's ruling in Stern v. Marshall, - U.S. --, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) precludes the court from entering final orders or judgments in this adversary proceeding. Subsequently, the parties consented to the court entering final orders or judgments in this proceeding. (See Joint Stipulation [Dkt. No. 128] and Statement on Behalf of Admiral [Dkt. No. 127].) In light of 28 U.S.C. § 157(c), the court concludes that this stipulation is sufficient to allow the court to enter final orders under Stem.
. Courts have also grappled with the scope of the insured versus insured exclusion outside of the bankruptcy context. For example, courts have addressed the scope of the exclusion in cases where the FDIC or FSLIC has brought claims against the former management of a failed financial institution. As in the bankruptcy context, these cases address whether the insured versus insured exclusion applies to claims brought by regulators based on damages suffered by a failed financial institution as a result of actions by its former management. As in the bankruptcy context, court decisions have diverged over the extent to which claims by the FDIC or FSLIC fall within this exclusion. Compare Mt. Hawley Ins. Co. v. Federal Savings & Loan Ins. Corp., 695 F.Supp. 469, 483-84 (C.D.Cal.1987) (claims brought by FSLIC against former officers and directors of a failed savings and loan were not covered under the insured versus insured exclusion to a D & O policy because the FSLIC merely steps into the shoes of the failed bank and “becomes to all intents and purposes the bank ... ”), with FDIC v. National Union Fire Ins. Co., 630 F.Supp. 1149, 1156 (W.D.La.1986) (noting that the FDIC “does not simply stand in the shoes of its predecessor bank”). The cases holding that the exclusion applies to such claims typically involve actions where the FDIC or FSLIC is acting in its corporate capacity and is not acting for the benefit of a failed institution's creditors and depositors. See, e.g., Mt. Hawley Ins. Co., 695 F.Supp. at 482 (noting that the FSLIC was acting solely in its corporate capacity: "When the FSLIC later sues the officers and directors in that situation, it does so on its own behalf in its corporate capacity.”) These cases are distinguishable from the cases addressing the exclusion in the bankruptcy context when the claims at issue are asserted by a trustee charged with duties to the bankruptcy estate and "the entire community of interests” of the debtor. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494658/ | MEMORANDUM DECISION
THOMAS S. UTSCHIG, Bankruptcy Judge.
On December 22, 2011, the Court conducted a hearing on (i) the defendants’ motion for summary judgment, and (ii) the plaintiffs’ motion for partial summary judgment. The plaintiffs were represented by Attorneys Tanya M. Bruder and Donald R. Marjala, and the defendants were represented by Attorney Erik H. Monson. This matter is a core proceeding *466under 28 U.S.C. § 157(b)(2)(I), and the Court has jurisdiction under 28 U.S.C. § 1334. The following shall constitute the Court’s findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052.
The plaintiffs wish to preclude discharge of a $1.1 million judgment entered against Mr. Pawlak in state court. By order dated June 3, 2011, this Court previously dismissed a portion of the plaintiffs’ second amended complaint.1 The pending motions involve the remaining causes of action, which arise under 11 U.S.C. §§ 523(a)(2)(A) and 523(a)(4). In their motion, the plaintiffs contend that the state court judgment should be given pre-clusive effect as to the amount of the debt. The defendants argue that the critical issues were not actually litigated in the state court and the plaintiffs have not demonstrated that they suffered any actual damages.
As a preliminary matter, the plaintiffs have agreed to the dismissal of their claims against Mrs. Pawlak. All that is left is to determine whether Mr. Pawlak obtained something from the plaintiffs through fraud or false pretenses, or whether he engaged in fraud or defalcation while acting in a fiduciary capacity. The essential facts are these. The plaintiffs are an organic dairy and its individual members. Organic Choice Cooperative was originally founded in 2002 by the other plaintiffs.2 Mr. Pawlak was hired to serve as Organic Choice’s general manager and was responsible for acquiring milk from organic dairy farmers for resale by the cooperative. His employment agreement had an original term of 12 months.3 Shortly after his employment, Mr. Pawlak negotiated an agreement with Horizon Organic Dairy for the sale of the cooperative’s milk.4 Soon after Horizon executed a long-term agreement at the end of 2002, the cooperative was reorganized and converted into a limited liability company. Blue Moon Capital, LLC, an entity owned by Mr. Pawlak, became a member of the successor company, Organic Choice LLC.5 Mr. Pawlak’s agreement with the cooperative was assigned to the LLC. This made him both an owner and an employee of Organic Choice.
*467In the spring of 2003, Mr. Pawlak contacted James Greenberg, a milk producer who was in the process of becoming certified to sell organic milk. Mr. Greenberg indicated that he would be interested in selling his milk through Organic Choice.6 Mr. Pawlak informed the other owners of his negotiations and told them that Mr. Greenberg’s milk would not be certified until October of 2003.7 During the time he was negotiating with Mr. Greenberg, the other members of Organic Choice grew dissatisfied with Mr. Pawlak and decided to terminate his relationship with the company.8 After he learned that his employment agreement would not be renewed, Mr. Pawlak formed a competing company, Organic Farm Marketing, LLC.9 He also entered into a marketing agreement with Mr. Greenberg.
Mr. Pawlak also filed two lawsuits after his termination. In the first suit, he alleged that the plaintiffs had breached the employment contract by failing to give him 60 days’ notice of his termination. That case was soon settled. The second suit alleged that the other members of the LLC had breached their fiduciary duties by prohibiting him from participating in the company and excluding him from various meetings.10 After the second suit was filed, the other members went even further. They formed Organic Family, the entity which is a named plaintiff in this case. They sold the assets of Organic Choice to Organic Family in November of 2004 and sent Mr. Pawlak a check for $50,000.00, ostensibly representing his portion of the sales price. Upon the advice of counsel, he deposited the check even though he continued to object to the sale.11 Meanwhile, the other members filed counterclaims in the second state court lawsuit claiming that it was actually Mr. Pawlak who was guilty of breaching fiduciary duties — namely, the ones he owed to Organic Choice as its general manager. Unfortunately for Mr. Pawlak, *468the counterclaims were not answered in a timely fashion. The state court entered a default judgment against Mr. Pawlak even as his own claims regarding the sale were dismissed on the grounds that his deposit of the check constituted an accord and satisfaction.12
The state court conducted a daylong trial as to damages on the counterclaims and entered an award of damages of approximately $1.1 million. The calculation was based on Mr. Greenberg’s testimony. He stated that before he signed a marketing agreement with Organic Farm Marketing (Mr. Pawlak’s new entity), he executed a marketing agreement with Organic Choice itself.13 Mr. Pawlak supposedly concealed this agreement because he knew his relationship with Organic Choice was about to end.14 While Mr. Greenberg did ultimately receive his organic certification, he never sold his milk to either Organic Farm Marketing or Organic Choice. Instead, he negotiated directly with Horizon itself.15
As a result, Mr. Pawlak did not actually receive an economic benefit from concealing the original contract or pursing his own arrangement with Mr. Greenberg. However, it appears that the state court damage award is based upon the likely revenue from the original contract. Mr. Pawlak contends that to the extent such a contract existed, it was “illusory” in that any performance by Mr. Greenberg was tied not to the contract but to his personal choice about whether to finalize the organic certification process. This argument strikes at the question of liability (which was the result of a default judgment) rather than the value of any lost revenues (the subject of the actual trial). The question is whether Mr. Pawlak may revisit that issue now.
Summary judgment is appropriate where there are no disputed issues of material fact and the moving party is entitled to summary judgment as a matter of law. See Fed. R. Bankr.P. 7056, incorporating Fed.R.Civ.P. 56(c). Summary judgment is to be denied only if there is a “genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986). A material fact is one related to a disputed matter that might affect the outcome of the action. Id. When deciding whether there is a genuine issue of material fact, all facts are construed in the light most favorable to the non-moving party, and all reasonable inferences are drawn in favor of that party. Heft v. Moore, 351 F.3d 278, 282 (7th Cir.2003); see also Schuster v. Lucent Techs., Inc., 327 F.3d 569 (7th Cir.2003). The Court’s role is not to resolve factual issues, but to grant summary judgment if there can be “but one reasonable conclusion.” Liberty Lobby, 477 U.S. at 250, 106 S.Ct. 2505.
This is an action challenging the debtor’s right to discharge a debt. Principles of bankruptcy jurisprudence dictate that exceptions to discharge are to be construed strictly against a creditor and liberally in favor of the debtor. See In re Chambers, 348 F.3d 650, 654 (7th Cir.2003); In re Scarlata, 979 F.2d 521, 524 (7th Cir.1992). A plaintiff must prove all *469elements of the proffered exception to discharge by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 287-88, 111 S.Ct. 654, 659-60, 112 L.Ed.2d 755 (1991). The plaintiffs claim the debt is nondischargeable under either 11 U.S.C. § 523(a)(2)(A) or 523(a)(4). The first section excepts debts to the extent obtained by “false pretenses, a false representation, or actual fraud.” The second excepts debts “for fraud or defalcation in a fiduciary capacity, embezzlement, or larceny.”
In order to except a debt from discharge under § 523(a)(2)(A), a creditor is typically required to establish the following elements: (i) the debtor made a false representation of fact, (ii) the debtor either knew the representation was false or made the representation with reckless disregard for its truth, (iii) the representation was made with an intent to deceive, and (iv) the plaintiff justifiably relied upon the false representation. See In re Kimzey, 761 F.2d 421, 423-24 (7th Cir.1985), abrogated on other grounds by Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991); Vozella v. Basel-Johnson (In re Basel-Johnson), 366 B.R. 831 (Bankr. N.D.Ill.2007). In McClellan v. Cantrell, 217 F.3d 890, 893 (7th Cir.2000), the court noted that “actual fraud” in the context of the statute is broader than, and need not take the form of, a specific misrepresentation if there is evidence of a fraudulent scheme by which the debtor sought to take advantage of another person. As the court stated:
No learned inquiry into the history of fraud is necessary to establish that it is not limited to misrepresentations and misleading omissions. “Fraud is 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.”
Id. (citing Stapleton v. Holt, 1952 OK 408, 207 Okla. 443, 250 P.2d 451, 453-54 (1952)). The point of the statute is to preclude dishonest debtors from injuring someone by their fraudulent conduct and then using the bankruptcy system to evade liability.
The plaintiffs contend that the state court judgment is entitled to preclu-sive effect. As a matter of full faith and credit, a federal court must apply the forum state’s law of issue preclusion in determining the preclusive effect of a state court judgment. Bell v. Mathe (In re Mathe), 2011 WL 4006636, at *2 (Bankr.E.D.Wis. Sept. 9, 2011). In Wisconsin, this determination is ultimately based upon principles of “fundamental fairness.” See Paige KB. v. Steven G.B., 226 Wis.2d 210, 225, 594 N.W.2d 370 (Wis.1999). One question is whether the individual circumstances of the prior case reflect an “inadequate opportunity or incentive to obtain a full and fair adjudication in the initial action.” Mathe, 2011 WL 4006636, at *2 (citing Michelle T. v. Crozier, 173 Wis.2d 681, 689, 495 N.W.2d 327 (Wis.1993)). In addition, the preclusive effect of a default judgment is limited to those matters actually litigated (or decided) in the prior matter. Menard, Inc. v. Liteway Lighting Prods., 2005 WI 98, 282 Wis.2d 582, 614, 698 N.W.2d 738 (2005).
Here, it is admitted that there was no trial as to liability. The judgment was entered because Mr. Pawlak’s former attorney missed a deadline to respond to the *470counterclaims.16 In addition, the May 22, 2007, judgment which was entered after the trial on damages referenced two claims. The first cause of action was for a violation of Wis. Stat. § 183.0402(1), under which the plaintiffs alleged that Mr. Pawlak had not dealt fairly with the other members of Organic Choice. The court concluded that Mr. Pawlak had violated the statute by engaging in transactions from which he “derived an improper personal benefit” and that he engaged in “willful misconduct” which was detrimental to Organic Choice.17 The court also awarded damages on the second cause of action for breach of fiduciary duty, finding that Mr. Pawlak breached his fiduciary duties (as both the manager of Organic Choice and the controlling member of Blue Moon, his ownership entity) by taking actions which were “contrary to the business health and viability” of Organic Choice.18
In terms of preclusive effect, it seems clear that the state court judgment conclusively establishes the amount of the plaintiffs’ claim. However, any judgment obtained in state court must still satisfy the statutory requirements of § 523(a) before it will be excepted from discharge. The judgment is preclusive only as to the issues it actually determined, and even then only to the extent dictated by principles of “fundamental fairness.” Paige KB., 226 Wis.2d at 225, 594 N.W.2d 370. The judgment does not speak directly to the elements of fraud under § 523(a)(2)(A). Instead, the judgment indicates that Mr. Pawlak violated Wis. Stat. § 183.0402(1), which provides as follows:
(1) No member or manager shall act or fail to act in a manner that constitutes any of the following:
(a) A willful failure to deal fairly with the limited liability company or its members in connection with a matter in which the member or manager has a material conflict of interest.
(b) A violation of criminal law, unless the member or manager had reasonable cause to believe that the person’s conduct was lawful or no reasonable cause to believe that the conduct was unlawful.
(c) A transaction from which the member or manager derived an improper personal profit.
(d) Willful misconduct.
There is no indication that a violation of this statute required proof of an intent to deceive, a misrepresentation or other “trick,” or any of the other elements of § 523(a)(2).19 As such, the Court must make an independent review to determine whether the plaintiffs’ claims satisfy the code.
Mr. Pawlak argues that the plaintiffs’ claims under § 523(a)(2)(A) must be dismissed because they cannot demonstrate *471that he obtained anything of value through a false representation or actual fraud. He submits that either he must have obtained an actual benefit or the creditor must have sustained an actual loss as a direct result of his fraudulent conduct. For purposes of summary judgment, Mr. Pawlak assumes that the plaintiffs can prove that he secured a marketing agreement with Mr. Greenberg and concealed it from the plaintiffs as the conflict between them escalated. Since the only harm alleged by the plaintiffs related to the Greenberg contract, Mr. Pawlak contends that even if their allegations are accepted as true, there was no actual damage. The reason for this is that he believes the Greenberg contract was based upon an illusory promise and was therefore unenforceable. He also contends that they cannot demonstrate that their reliance was justifiable.
As to the question of reliance, it is clear that Mr. Pawlak informed the other members of Organic Choice about his discussions with Mr. Greenberg and that he gave them a timetable for Mr. Greenberg’s organic certification. His e-mail to the other members was sent on July 18, 2003. According to the plaintiffs, in the e-mail he told them that he had a “paperwork meeting” set for the following Thursday at Mr. Greenberg’s farm, and that “we should get him signed sooner vs. later.”20 Within a month of this e-mail, Mr. Pawlak was at odds with the other managers over his salary and had been informed about the likely termination of his employment. The other managers acted swiftly to remove Mr. Pawlak from the operations of Organic Choice and yet apparently did not followup with Mr. Greenberg about the “paperwork meeting” or the signing of any contracts. Even presuming that Mr. Pawlak concealed the existence of a signed agreement, it is unclear how the plaintiffs could justifiably rely upon his alleged omissions. Not only had they been informed about Mr. Greenberg, but they knew that a “paperwork meeting” was supposed to have taken place. There are no allegations that they made inquiries about the Greenberg contract or that they pursued the matter until much later; there is also no indication that Mr. Pawlak lied to them. Instead, they contend that he “concealed” the agreement from them.
Presuming this is true (an obligatory presumption at this stage of the proceedings), this may mean that Mr. Pawlak did not deal fairly with the company. Likewise, his execution of his own agreement with Mr. Greenberg may constitute a transaction from which he “derived an improper personal benefit,” and he may have engaged in “willful misconduct” which was detrimental to the company. Such conclusions justify the findings made by the state court under Wis. Stat. § 183.0402(1), but § 523(a)(2)(A) requires something more. It requires evidence of a scheme or trick which deceives the plaintiffs; it requires proof that they were fooled, and that Mr. Pawlak gained an advantage over them by false suggestions or suppression of the truth. McClellan, 217 F.3d at 893. And they must be able to demonstrate that once drawn in by his scheme, they relied upon it to their detriment.
Justifiable reliance is a minimal, subjective standard that encompasses matter of the qualities and characteris-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.” Field v. Mans, 516 U.S. 59, 71, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995). While justifiable reliance does not obligate a creditor to investi*472gate everything a debtor says, the creditor may not “blindly” rely upon a misrepresentation which could have been proven false through a “cursory examination or investigation.” Id. If the surrounding circumstances raise red flags, or if the creditor’s own capacity and knowledge would justify further investigation, a duty to investigate may arise. Id. at 72. For example, in Andresen & Arronte, PLLC v. Hill (In re Hill), 425 B.R. 766, 777 (Bankr. W.D.N.C.2010), the court rejected a law firm’s argument that it justifiably relied upon the debtor’s promises of payment because it was a sophisticated party who proceeded with its representation of the debtor despite “obvious warning flags.” Here, the plaintiffs acted swiftly to terminate Organic Choice’s relationship with Mr. Pawlak and took over operation of the company. Even a cursory investigation in August of 2003 into pending organic suppliers (for example, by way of a simple phone call to Mr. Greenberg) would have revealed the existence of the contract.
More crucial is the question of harm itself. Because of the default, the state court presumed that Mr. Pawlak was guilty of unfair dealing and willful misconduct. It then found that a performing agreement with Mr. Greenberg would have been worth more than $1 million to Organic Choice. For purposes of summary judgment, this Court must also assume that Mr. Pawlak executed a contract with Mr. Greenberg on behalf of Organic Choice and then hid the agreement during his dispute with the other members of the company. It must also accept the state court’s calculations as to the value of a performing agreement. In order to find the debt nondischargeable under § 523(a)(2)(A), however, the Court must consider whether the plaintiffs were actually harmed by the loss of the Greenberg contract. It must forget for the moment that if Mr. Greenberg had performed, Organic Choice would have realized more than $1 million in revenue and ask instead whether Mr. Pawlak’s actions robbed the company of the ability to bind Mr. Green-berg to the contract.
An agreement is illusory where performance is “conditional on some fact or event that is wholly under the promisor’s control and his bringing it about is left wholly to his own will and discretion.” Metro. Ventures, LLC v. GEA Assocs., 2006 WI 71, 291 Wis.2d 393, 717 N.W.2d 58 (2006) (quoting Nodolf v. Nelson, 103 Wis.2d 656, 660, 309 N.W.2d 397 (Wis.Ct.App.1981)). When Mr. Green-berg allegedly entered into the August 2003 marketing agreement with Organic Choice, he had not yet obtained his organic certification. Nothing required him to do so. The plaintiffs contend that this fact is simply a condition precedent to enforcement, not an illusory promise. Mr. Paw-lak believes that Mr. Greenberg’s discretionary power to determine whether to obtain certification renders the contract illusory, and thus unenforceable. The distinction between an illusion and a valid condition is often a narrow one. However, as a fundamental principle of contract law, “[A] contract must be definite and certain as to its basic terms and requirements to be enforceable.” Herder Hallmark Consultants, Inc. v. Regnier Consulting Group, Inc., 2004 WI App 134, ¶ 8, 275 Wis.2d 349, 354, 685 N.W.2d 564.
In Nodolf, the Wisconsin Supreme Court considered the distinction between a valid condition precedent and an illusory contract in the context of a real estate contract with a financing clause. A contractual provision which makes performance contingent (or subject) to a specific event, such as one party’s receipt of sufficient financing to close the transaction, creates a condition precedent. 103 *473Wis.2d at 658, 309 N.W.2d 397. Essentially, the condition delays enforceability until the condition has been met. Id. A contract is illusory, however, when one party holds complete authority to determine whether a contract is now binding. In Nodolf, the “subject to financing clause” contained no financing terms whatsoever, and the court observed:
If the buyer could breathe enforceability into the contract by claiming that the financing condition has been met, the buyer would have an unfettered right to decide whether the condition has been fulfilled. This is true because only the buyer and no court can determine the terms of the financing. That right would render buyer’s promise to purchase illusory.
Id. at 659, 309 N.W.2d 397.
Given that Mr. Greenberg could unilaterally decide whether to continue the pursuit of certification, there was no binding obligation on him. He could “breathe enforceability” into the contract by obtaining certification, but he could also abandon the process for any reason if he chose. Organic Ghoice could not have compelled compliance with the contract. As the court stated in Nodolf, “Unilateral action by one party ... is usually insufficient to remove uncertainty.” Id. Whatever the value of a binding agreement might have been, the Greenberg contract was illusory and unenforceable. In order to succeed under § 523(a)(2)(A), the plaintiffs must demonstrate that they suffered actual damages as a direct and proximate result of the debtor’s false representation or fraud. In re Rick, 2011 WL 1321361, at *4 (Bankr.D.N.D. Apr. 6, 2011). They have not done so. It appears that even if Mr. Pawlak did conceal the agreement from Organic Choice and the other members, he obtained nothing by doing so. Further, they suffered no actual loss because the contract was unenforceable.
Next, the Court must also make an independent determination as to whether Mr. Pawlak was acting in a “fiduciary capacity” for purposes of § 523(a)(4). Under that section, a debtor may not discharge debts for “fraud or defalcation in a fiduciary capacity.” The section contemplates that the plaintiff must demonstrate the existence of a trust or fiduciary relationship between the parties. Historically, this required evidence of an express, technical, or statutory trust with an explicit declaration of trust, a clearly defined trust res, and an intent to create a trust. Basel-Johnson, 366 B.R. at 847. In recent years, courts have also found a fiduciary relationship in instances in which there was “a difference in knowledge or power between fiduciary and principal” that “gives the former a position of ascendancy over the latter.” In re Marchiando, 13 F.3d 1111, 1116 (7th Cir.1994); see also In re Woldman, 92 F.3d 546, 547 (7th Cir.1996) (the exception to discharge “reaches only those fiduciary obligations in which there is substantial inequality in power or knowledge”).
The existence of a “fiduciary relationship” within the meaning of § 523(a)(4) is a matter of federal law. In re Frain, 230 F.3d 1014, 1017 (7th Cir.2000). As the Seventh Circuit has stressed repeatedly, not all persons treated as fiduciaries under state law are considered to act in a “fiduciary capacity” within the meaning of the bankruptcy code. See Follett Higher Educ. Group, Inc. v. Berman (In re Berman), 629 F.3d 761, 767 (7th Cir.2011); Woldman, 92 F.3d at 547. Instead, a fiduciary relationship only exists for purposes of nondis-chargeability if it “imposes real duties in advance of the breach.” Marchiando, 13 F.3d at 1116. More specifically, such a relationship exists in situations in which *474“one party 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.” Id. Fiduciary obligations between equals, such as general partners in a partnership or joint venturers, do not qualify. Woldman, 92 F.3d at 547.
When considering where Mr. Pawlak’s obligations to Organic Choice fall on the broad spectrum of fiduciary relationships, the Seventh Circuit’s decision in Frain is instructive. In that case, the debtor was the major shareholder and was responsible for the day-to-day business operations of the company. The court noted that although this gave him a “natural” advantage over the other two shareholders, it did not render them incapable of knowing the state of the corporation’s finances. A superior knowledge of the daily operations was not sufficient in itself to place him in a “position of ascendancy.” 230 F.3d at 1017. Instead, what the court determined to be crucial was that “the concentration of power was substantially one-sided.” Id. Frain had 50% of the shares, daily control, and a shareholder agreement which provided that all “major decisions,” including his possible termination for cause, required the consent of the holders of 75% of the voting shares. As the Seventh Circuit noted, the other shareholders were essentially powerless to limit Frain’s control of the company, and a chief operating officer with 50% of the shares “who cannot be removed for cause without his consent possesses a position of considerable ascendancy over the other shareholders.” Id. at 1018.
For purposes of summary judgment it is necessary to construe the facts in the light most favorable to the plaintiffs. In this case, Mr. Pawlak had two roles with Organic Choice. As the sole principal of Blue Moon, he was essentially a member of the limited liability company. As the general manager of Organic Choice, he had control over the daily operations of the company. However, as the facts illustrate, neither of these roles created the type of “ascendancy” enjoyed by the defendant in Frain. Mr. Pawlak’s Blue Moon entity was one of six members and held no power to block the voting control of the others. His employment contract as the general manager may have given him a “natural advantage” over the others as to the financial condition of Organic Choice, but there is no indication that the same knowledge was somehow unavailable to the other members or that they were incapable of monitoring his performance. Mr. Pawlak’s salary was set by the employment agreement at 7% of gross sales. Unlike the situation in Frain, Mr. Pawlak was unable to unilaterally modify the terms of this agreement or set a different salary structure. In fact, when a dispute over salary arose, the other members terminated his employment and essentially removed him from the company.
The balance of power between Mr. Pawlak and the other members of Organic Choice was not tilted significantly in his favor. He did not have the freedom to run the company as he saw fit, and the evidence is that he reported events (such as his contact with Mr. Greenberg) to the other members. Even presuming that he concealed an executed contract from the other members, the Court must consider the relationship as it stood prior to the alleged wrong. Frain, 230 F.3d at 1017. A fiduciary relation only qualifies under § 523(a)(4) if it “imposes real duties in advance of the breach.” Marchiando, 13 F.3d at 1116. When considering where a relation falls on the fiduciary spectrum, the focus must be on the substantial imbalance in knowledge or power throughout *475the relationship, rather than at the moment of the alleged wrong. Woldman, 92 F.3d at 547.
Under state law, there is no doubt that Mr. Pawlak owed fiduciary duties to Organic Choice, both as a member and as the company’s general manager. But in the context of the bankruptcy code, he lacked the sort of “ultimate power” or unequal control required for him to have a “position of ascendancy” under the relevant case law. Mr. Pawlak’s role with Organic Choice gave him certain advantages but no particular authority over the plaintiffs. In Frain, the court noted the lack of checks and balances between the parties, and observed that the debtor had “more knowledge, and substantially more power,” than the other shareholders. 230 F.3d at 1018. In the present case, the plaintiffs had the authority to review Mr. Pawlak’s performance and terminate his employment after the initial 12-month period for any reason. There is no evidence which supports the notion that Mr. Pawlak could unilaterally control the operations of Organic Choice or that the plaintiffs lacked the power to check him if they wished. In fact, the undisputed evidence is to the contrary— they terminated his employment and restructured the company without him. This relationship is closer to that of a joint venture between equals than it is to that of a general partner with significant power over limited partners or a corporate officer and shareholder with ultimate authority over corporate operations.
Accordingly, the defendant’s motion for summary judgment is granted. The claims under §§ 523(a)(2)(A) and (a)(4) are dismissed.
An order and judgment shall be entered consistent with this decision.
. The plaintiffs had alleged that the debtor's activities in connection with a malpractice settlement with his former attorney constituted some sort of fraud. The Court concluded that the plaintiffs' allegations did not state a cause of action under either 11 U.S.C. § 727(a)(4)(C) or § 523(a)(2)(A).
. Defendant’s Proposed Findings of Fact ¶ 1; Plaintiffs' Response to Defendant’s Proposed Findings of Fact ¶ 1. Organic Choice Cooperative was subsequently dissolved after the formation of Organic Choice, LLC. The assets of Organic Choice, LLC, were then transferred to Organic Family, LLC, in 2004.
. The original employment contract was signed in August of 2002. Defendant’s Proposed Findings of Fact ¶¶ 4-6; Plaintiffs’ Response ¶¶ 4-6.
. Under the agreement, Horizon agreed to purchase one ’’load” of approximately 50,000 pounds of milk per day from Organic Choice through the remainder of 2002. Defendant’s Proposed Findings of Fact ¶11; Plaintiffs’ Response ¶ 11. A long-term purchase agreement was executed between Organic Choice and Horizon in December of 2002. Defendant's Proposed Findings of Fact ¶¶ 12-13; Plaintiffs’ Response ¶¶ 12-13.
.There is a factual dispute as to why the cooperative was reorganized. Mr. Pawlak contends that it was converted into a limited liability company in order to accommodate the Horizon contract (which may have required a significant increase in milk production). Defendant’s Proposed Findings of Fact ¶ 16. The plaintiffs claim that the formation of a limited liability company was done solely in response to Mr. Pawlak’s request that he be brought into the business as an owner. Plaintiffs’ Response ¶ 16. This dispute is not material to the outcome.
. As with other issues, the parties dispute the details of the Greenberg negotiations. Mr. Pawlak contends that Organic Choice would not have signed a marketing agreement with Mr. Greenberg because his farm had not yet been certified organic. Defendant's Proposed Findings of Fact ¶¶ 48-50. The plaintiffs argue that “industry practice’’ is to sign producers before certification is complete to secure their production, and that Organic Choice signed a number of producers prior to completion of certification. Plaintiffs’ Response ¶ 50. Again, however, these facts are not material to the outcome.
. Defendant’s Proposed Findings of Fact ¶¶ 45-47; Plaintiffs' Response ¶¶ 45-47. Although the plaintiffs dispute Mr. Pawlak’s characterization of his interaction with Mr. Greenberg, they acknowledge that he sent them an e-mail about Mr. Greenberg in July 2003 and that he told them Mr. Greenberg’s milk could not be certified as organic until the following October.
. The parties debate precisely why the relationship deteriorated — namely, whether the other members decided Mr. Pawlak was making too much money, or whether he was asking for too much more. Defendant's Proposed Findings of Fact ¶ 53; Plaintiffs' Response ¶ 53. For purposes of this decision, it is sufficient to simply recognize that it ended badly.
. Mr. Pawlak’s new entity was formed on August 5, 2003. Defendant's Proposed Findings of Fact ¶ 62.
. Here again, there is a difference of opinion as to how the process unfolded. What is clear is that Mr. Pawlak was no longer welcome within Organic Choice, and the other members sought to remove him from membership, ultimately creating their own new entity without him.
. In fact, his attorney filed an amended complaint in the second lawsuit seeking to invalidate the sale or obtain an accounting and fair distribution of Blue Moon's interest in Organic Choice. Defendant’s Proposed Findings of Fact ¶ 111.
. Defendant's Proposed Findings of Fact ¶ 122.
. Defendant’s Proposed Findings of Fact ¶ 127; Plaintiffs’ Response ¶ 127.
. Defendant’s Proposed Findings of Fact ¶ 129; Plaintiffs’ Response ¶ 129.
.Mr. Pawlak believes this was because Horizon offered a volume premium. Defendant's Proposed Findings of Fact ¶ 136. The plaintiffs dispute this characterization. Plaintiffs’ Proposed Findings of Fact ¶¶ 136-137. Regardless, neither company received any milk from Mr. Greenberg.
. As the state court noted in its June 23, 2006, Decision on Motions, "By virtue of not responding, plaintiffs have been deemed to have admitted the allegations of the counterclaim." Slip op. at 5 (attached to the plaintiffs’ original complaint as Exhibit B).
. May 22, 2007, Judgment at 1.
. Id.
. At the same time, the Court is cognizant of the Seventh Circuit’s admonishment in McClellan that "actual fraud” under the code is broader than misrepresentation, and that "[b]reaches of fiduciary obligation are commonly punished as frauds even when there is no misrepresentation or misleading omission.” 217 F.3d at 893 (citation omitted). Depending upon the facts, a violation of Wis. Stat. § 183.0402(1) might conceivably constitute actual fraud. This simply illustrates the fact that the Court must consider whether the plaintiffs’ claims under § 523(a)(2)(A) are sufficient to withstand Mr. Pawlak's motion for summary judgment.
. Plaintiffs’ Response ¶ 45. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494659/ | ORDER ON DEBTORS’ MOTION TO RETAIN TAX REFUND
JAMES R. SACCA, Bankruptcy Judge.
Before the Court is the Debtors’ Motion to Retain Tax Refund [Doc. No. 15] (the “Motion”), the Response thereto filed by the Chapter 7 Trustee, Janet Watts (the “Trustee”) [Doe. No. 22], Debtors’ Response [Doc. No. 29] and the Trustee’s Amended Response [Doc. No. 31]. In the Motion, Debtors seek authority to retain their joint federal and state income tax refunds in the amount of $10,388 (collectively referred to hereafter as the “refund”). Debtors assert that they are each entitled to half of the refund and, because they have each claimed an exemption in their portion, they should be able to retain the entire refund. The Trustee asserts that no portion of the refund is property of Mrs. Hraga’s bankruptcy estate and, therefore, all but that portion of the refund which may be exempted by Mr. Hraga should be delivered to the Trustee for administration as an asset of the bankruptcy estate.1 Accordingly, the Court must determine the ownership of the joint tax refund at the time Mr. and Mrs. Hraga filed their Chapter 7 petition.
Background and Procedural History
Mohammed and Renee Hraga filed a joint voluntary petition under Chapter 7 of the Bankruptcy Code on February 17, 2011. The Trustee was thereafter appointed as the Chapter 7 Trustee. In the Motion and on Schedule B, as amended [Doc. No. 26], the Debtors disclosed federal and state income tax refunds of $10,388 for tax year 2010, which they asserted were a joint asset. On Schedule C, as amended [Doc. No. 36], the Debtors each *529claimed $5,067.99 of the refund as exempt pursuant to O.C.G.A. § 44-13-100(a)(6). The Trustee objected to the Motion on the basis that (a) the refund is the sole property of Mr. Hraga, who was the sole wage earner in the family and from whose wages came the withholdings which generated the refund and (b) Mr. Hraga does not have sufficient exemptions to exempt the entire amount of the refund.
The parties agree that only Mr. Hraga earned income in 2010. Mr. Hraga had total income of $83,131 in 2010, all of which was attributable to his employment. The Hraga’s only “payment” toward their tax liability, other than the withholdings from Mr. Hraga’s wages, was one refundable credit2 on their 2010 federal tax return, which was the Making Work Pay credit of $800. During the 2010 tax year, the Debtors’ federal joint income tax liability was $2,709, and the state liability was $2,395. Federal tax withholdings from Mr. Hra-ga’s wages totaled $10,944 and the state withholdings totaled $4,548. Consequently, $10,388 of the funds withheld from Mr. Hraga’s wages were refunded. Following a hearing on April 12, 2011, the Court took the matter under advisement. Debtors’ 2010 federal and state tax returns were filed with the Court after the hearing at the Court’s direction to complete the record. The Debtors have admitted that they have spent $7,408.63 of the refund,3 leaving a balance of $2,979.37, and the Court directed the Debtors at the hearing not to spend any more of the refund.
Conclusions of Law
The question before the Court is whether or to what extent a non-income earning spouse who paid no withholding taxes is entitled to a portion of a joint income tax refund in a bankruptcy case. To answer this question, the Court must determine the relative property interests of the Debtors in the refund. In re Evans, No. 10-10077-WHD, 2010 WL 6612501, at *1 (Bankr.N.D.Ga.2010).
A bankruptcy court must apply the applicable state law to determine whether a debtor held a property interest at the time the bankruptcy petition was filed. Butner v. United States, 440 U.S. 48, 54-55, 99 S.Ct. 914, 917-19, 59 L.Ed.2d 136 (1979). There does not appear to be any Georgia law that answers the question of how to allocate a joint income tax refund between married taxpayers other than when they are seeking a dissolution of their marriage. How a tax refund would be allocated in a state court divorce proceeding, however, is not the appropriate inquiry in a bankruptcy proceeding. In re Carlson, 394 B.R. 491, 494-95 (8th Cir. BAP 2008); Evans, 2010 WL 6612501, at *2. While the objective of the law in a marital dissolution may be the equitable distribution of assets between spouses, the objective of bankruptcy law is the equitable distribution of each of a debtor’s assets to each of that debtor’s creditors. In re Crowson, 431 B.R. 484, 489 (10th Cir. BAP 2010); Carlson, 394 B.R. at 495; Evans, 2010 WL 6612501, at *2. The appropriate inquiry, therefore, is whether Mrs. Hraga *530had a right to a portion of the refund at the time of the bankruptcy filing and whether that right, if any, became part of her bankruptcy estate, and not whether she might be entitled to seek an equitable distribution of the refund in some speculative, future divorce proceeding. Crowson, 431 B.R. at 489; Carlson, 394 B.R. at 495; Evans, 2010 WL 6612501, at *2.
Because spouses in Georgia neither hold property as community property nor as tenants by the entirety, see O.C.G.A. § 19-3-9 (Lexis 2011), Georgia law is not like the applicable state law in most of the jurisdictions where bankruptcy courts are located that have held that spouses have equal interests in a tax refund. See In re Marciano, 372 B.R. 211 (Bankr.S.D.N.Y.2007) (applying New York law); In re Barrow, 306 B.R. 28 (Bankr.W.D.N.Y.2004) (applying New York Law); In re Aldrich, 250 B.R. 907 (Bankr.W.D.Tenn.2000) (applying Tennessee law); see also In re Innis, 331 B.R. 784 (Bankr.C.D.Ill.2005) (finding marriage is a shared partnership under Illinois law); but see In re Lock, 329 B.R. 856 (Bankr.S.D.Ill.2005) (spouses do not hold equal interests in property under Illinois law). Georgia law has no presumption of equal ownership of property between spouses. O.C.G.A. § 19-3-9 (“The separate property of each spouse shall remain the separate property of that spouse, except as provided in Chapters 5 and 6 of this title and except as otherwise provided by law.”); Evans, 2010 WL 6612501, at *3 (citing O.C.G.A. § 19-3-9). Accordingly, in Georgia, funds earned by one spouse from employment during a marriage remain the separate property of that spouse unless the spouse transfers an interest in those funds to the other spouse or a court distributes the funds equitably in a divorce proceeding. Evans, 2010 WL 6612501, at *3 (citing O.C.G.A. § 19-3-9).
The majority of bankruptcy courts that have addressed the allocation of a joint tax refund between spouses hold that the refund should be apportioned based upon the respective tax withholdings of the spouses because the applicable state law in their jurisdictions does not presume equal ownership of property by spouses. See, e.g., Carlson, 394 B.R. at 494 (applying Minnesota law); In re Edwards, 400 B.R. 345 (D.Conn.2008) (applying Connecticut law); In re W.D.H. Howell, LLC, 294 B.R. 613 (Bankr.D.N.J.2003) (applying New Jersey law); In re Lock, 329 B.R. 856 (Bankr.S.D.Ill.2005) (applying Illinois law); In re Smith, 310 B.R. 320 (Bankr.N.D.Ohio 2004) (applying Ohio law). The applicable law in Georgia is consistent with the applicable law in those jurisdictions that hold this majority position.
Consistent with the analysis of the majority of bankruptcy courts, the Eleventh Circuit Court of Appeals has held that “[w]here spouses claim a refund under a joint return, the refund is divided between the spouses, with each receiving a percentage of the refund equivalent to his or her proportion of the withheld tax payments,” Gordon v. United States, 757 F.2d 1157, 1160 (11th Cir.1985). A “tax refund essentially represents the government’s repayment to the taxpayer of an overpayment made by that taxpayer,” and, consequently, “such a refund is the property of the spouse who earned the income and overpaid the tax.” Evans, 2010 WL 6612501, at *3 (quoting Carlson, 394 B.R. at 494) (internal quotation marks omitted). “Put more simply, you take out what you put in.” Edwards, 400 B.R. at 346. “Put another way, the maker of the overpayment is entitled to the credit or refund ...” Kemp v. United States, 131 F.R.D. 212, 213 (N.D.Ga.1990) (quoting Gens v. United States, 230 Ct.Cl. 42, 673 F.2d 366, 368 (1982)) (internal quotation marks omit*531ted) (refund apportionable to extent of contribution to overpayment of tax). The mere filing of a joint income tax return does not result in a transfer of property from one spouse to another. United States v. MacPhail, No. 04-3472, 2005 WL 2206681, at *3 (6th Cir.2005) (the filing of a joint return does not convert the income of one spouse to the income of another, and accordingly, an overpayment of tax should be disbursed to the person who made the overpayment).
Although the majority position may lead to the correct result in most cases, this Court agrees with Evans that “an irrebuttable presumption that the joint tax refund is owned in proportion to the amount of tax withholdings is not appropriate.” Evans, 2010 WL 6612501, at *3. The concern expressed in Evans regarding an irrebuttable presumption has resulted in the recent emergence of another line of bankruptcy cases which apply a formula from the IRS manual and .revenue rulings to determine to what extent a portion of the refund may be attributable to a spouse based on payments in the form of credits or overpayments generated by a spouse apart from tax withholdings. E.g., In re Palmer, No. 10-6009-7, 2011 WL 890690, at *7 (Bankr.D.Mont.2011); Evans, 2010 WL 6612501, at *3-*5; Crowson, 431 B.R. at 490-98.4 An example of a situation where such an irrebuttable presumption would not be appropriate would be where one spouse contributed all of the withhold-ings, but the other spouses was entitled to the first time home buyer tax credit, which tax credit, rather than the withholdings alone, generated or contributed to the refund. In the case before this Court, using the formulas in Evans, Crowson and Palmer, all of the $800 credit taken by the Hragas for Making Work Pay would be attributed to Mr. Hraga because Mrs. Hraga could not claim any such credit if she filed a separate return on account of the fact that she had no income.
Because Mr. Hraga is the only one of these joint debtors who earned income in 2010 and it was the withholdings from his income and the Making Work Pay credit attributable solely to his income that resulted in the overpayment which generated the refund, this Court finds that the refund in its entirety was the sole property of Mr. Hraga at the time of the bankruptcy filing. Palmer, 2011 WL 890690; Evans, 2010 WL 6612501; Crowson, 431 B.R. 484; see In re Edwards, 363 B.R. 55 (Bankr.D.Conn.2007) aff'd 400 B.R. 345 (D.Conn.2008); WDH Howell, LLC, 294 B.R. 613; Lock, 329 B.R. 856; In re Kleinfeldt, 287 B.R. 291 (10th Cir.BAP2002). Accordingly, it is hereby
ORDERED, that the Debtors’ Motion is granted in part to the extent Mr. Hraga can exempt the refund, and it is denied to the extent he cannot. The Debtors are directed to turn over to the Trustee the sum of $5,068, which amount may be increased based on the Trustee’s objection to the Debtors’ exemptions.5 The Debtors *532shall turn over to the Trustee $2,979.37 on or before June 13, 2011 and the parties shall cooperate with one another to submit a consent order to the Court on or before June 13, 2011 containing the terms for repayment of the remaining $2,088.63 under this Order. It is
FURTHER ORDERED, if a consent order containing the terms of the repayment of the balance of the $2,088.63 is not submitted on or before June 13, 2011, then the Court shall hold a hearing on the matter on June 14, 2011, at 10 a.m. in Courtroom 1404, United States Courthouse, 75 Spring St., Atlanta, Georgia 30303 to consider repayment terms for the balance of the refund that must be turned over to the Trustee.
. The Trustee has objected to the Debtors’ exemptions, including to the refunds at issue [Doc. No. 32]. Because Mr. Hraga’s exemption in the refund cannot exceed $5,600 less the $532 exemption he claimed in a joint checking account, the Trustee is seeking to administer no less than $5,068 of the refund.
. The "Payment” section of the federal tax return, which contains the refundable credits to which the Court is referring, is found on lines 61 through 72 of Form 1040 for 2010. Credits on the 2010 Georgia Form 500 return can be found on Schedule 2, lines 1 through 12. Debtors did not claim any such credits on their 2010 Georgia tax return.
. An itemization of on what the Debtors have spent the refund was filed with the Court after the hearing, as well. At the time the Motion was filed on March 18, 2011, the Debtors allege they had spent $2,721.18 of the refund. By the time of the hearing on April 12, 2011, the Debtors spent another $4,687.45 of the refund without getting the court approval they sought in the Motion.
. The 10th Circuit Bankruptcy Appellate Panel in Crowson did not overrule the prior decision of the 10th Circuit Bankruptcy Appellate Panel in Kleinfeldt, but rather limited the ruling in Kleinfeldt to its facts, that being a case with one income earning spouse where the refund is comprised solely of a refund of that spouse’s withheld wages and where no refundable credits or other overpayments had to be allocated between the spouses. Crowson, 431 B.R. at 487.
. The hearing on the Trustee's Objection to the Debtors' Exemptions is scheduled for June 14, 2011 at 10:00 a.m. If the Court determines that additional amounts must be turned over to the Trustee as a result of this hearing, the court will determine a deadline at that time by which those additional funds must be turned over. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494660/ | Memorandum Decision
ROBERT E. GROSSMAN, Bankruptcy Judge.
In the substantively consolidated cases of Agape World, Inc., et al. (“Agape”),1 Kenneth P. Silverman, the Chapter 7 trustee (“Trustee”), commenced this adversary proceeding against Meister Seelig & Fein, LLP (the “Defendant”), a law firm that represented Agape during a time when Agape conducted a massive Ponzi scheme that bilked the public of more than $400 million. The Agape scheme was based on false representations that investors’ funds would be used to make short-term fully collateralized loans to creditworthy borrowers on terms producing significantly higher rates of return to the investors than what was then available. The Trustee seeks to i) avoid payments made to the Defendant by Agape for legal fees incurred by Agape in connection with the Defendant’s representation of Agape on a variety of matters and to ii) recover damages for the Defendant’s alleged negligence or malpractice in its representation of Agape. The Trustee also seeks damages from the Defendant under the legal theory of contribution for amounts that Agape’s estate is required to disburse in satisfaction of filed claims which will exceed what the Trustee argues is Agape’s fair share of such payments. The Trustee argues that while Nicholas Cosmo, the principal of Agape, was the admitted mastermind of the Ponzi scheme, the Defendant’s wrongful acts magnified any losses the investors incurred at the hands of Agape. The Defendant filed a motion to dismiss the adversary proceeding in its entirety (the “Motion”), pursuant to Fed. R.Civ.P. 12(b)(6), 8 and 9(b), and on the basis that the Trustee lacks standing to bring several of the causes of action. The Defendant also seeks to dismiss the Complaint based on the Trustee’s alleged violation of an agreement, pursuant to which the parties stipulated that the Trustee would forbear from filing a complaint, in exchange for an agreement that the applicable statute of limitations would be tolled.
With respect to the avoidance claims, the Court finds that the Trustee has adequately pleaded claims for relief other than the claim for attorneys’ fees incurred in connection with bringing the avoidance claims. For that reason, this portion of the Motion is denied. With respect to the claims based on the Defendant’s alleged negligence, malpractice, or wrongful acts, the Court finds that to the extent the investors and not Agape were harmed by the Defendant’s alleged wrongful acts, the Trustee lacks standing to bring such claims and therefore these claims must be dismissed. The Court also finds that to the extent Agape itself is deemed to have been injured as a result of wrongful conduct in which Agape participated, the application of the Wagoner rule bars the Trustee from asserting such claims.2 To the extent that the Trustee alleges in the Complaint that Agape did not participate *563in or condone the Defendant’s alleged failure to properly advise Agape regarding the registration requirements under the federal securities laws, and therefore the Wagoner rule does not apply, the Trustee fails to state a claim against the Defendant under the standards enunciated by the Supreme Court in Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The Wagoner rule does not deprive a bankruptcy trustee of standing to sue an entity whose misconduct, in which the bankrupt corporation did not participate, injured the estate. However, the misconduct as alleged must give rise to a plausible cause of action. It is not plausible to believe that Agape was injured by the legal advice the Defendant gave to Agape, because the Ponzi scheme included the failure to register the investments as securities at the outset. Without a plausible nexus between the alleged wrongdoing and injury to Agape, this claim must be dismissed as well.
The Court now turns to the contribution claims. These claims also must be dismissed. While some recent decisions argue a contrary position, the Court believes that a Chapter 7 trustee may have the right to assert a contribution claim under applicable New York law. However, the Trustee’s right to assert a cause of action against the Defendant under the theory of contribution does not relieve the Trustee of the obligation to adequately plead each element of the underlying claim giving rise to the right of contribution. Although courts applying New York law recognize that contribution claims are not barred by the doctrine of in pari delicto, the Wagoner rule dictates a different result. The Wagoner rule, which largely applies to the negligence claims underlying the contribution claim, elevates in pari delicto beyond a mere defense to a claim, and acts to bar the Trustee from bringing such claims. Under the facts of this case, in which the Trustee is barred by the Wagoner rule from bringing the underlying claims, the contribution claim cannot be maintained. To the extent any portion of the negligence claim is not barred by the Wagoner rule, it is nevertheless dismissed for failure to state a claim under the standard set forth in Ashcroft v. Iqbal, 556 U.S. 662, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The Court declines to determine whether the Trustee breached the tolling agreement, and denies this portion of the Motion.
Facts
Nicholas Cosmo (“Cosmo”) was the president of Agape and operated Agape as a massive Ponzi scheme from 2003 to 2009.3 Cosmo predicated the scheme on representing Agape World, Inc. (“Agape World”) as a bridge lender providing short-term commercial loans for borrowers otherwise unable to obtain financing from traditional sources. Through Agape World, Cosmo represented to prospective investors that these loans would generate above-market rates of return. Based on these promises, Agape World raised in excess of $350 million from more than 5,500 investors. However, it appears that only approximately $18 million was actually employed to fund the aforementioned loans. To evidence their investments, investors were issued client contracts, which included assurances that their investments were secured by first position asset liens equaling 100% of the investments. Agape virtually guaranteed rates of return of up to 80% over extremely short periods. Cos-mo also presented Agape Merchant Advance, LLC (“Agape Merchant”) as being *564in the business of making loans to merchants against credit cards and other receivables. Agape Merchant raised approximately $50 million from investors, but the books and records of Agape Merchant reflect that only $5 million was invested as represented. Cosmo used the vast majority of the funds raised by Agape World and Agape Merchant to both support his own lifestyle, which included massive losses resulting from investing in futures trading and commodities trading, and to pay exorbitant commissions and bonuses to brokers, which were a necessary expense in keeping any Ponzi scheme functioning. Initial investors received returns of approximately 12% on their investments, but the “returns” were derived not from any actual loans but rather from money provided by new investors.
In part as a result of the economic turmoil of 2008, Agape found it increasingly difficult to attract a steady stream of new investors, and, as is the fate of all such schemes, it all fell apart. Cosmo was indicted on criminal charges in 2009, and on October 29, 2010, he pleaded guilty to federal charges of mail and wire fraud. As part of his allocution at sentencing, Cosmo admitted that from 2003 to some point in 2009, he operated Agape as a Ponzi scheme and that his use of Agape’s funds to engage in the unauthorized trading in commodities and futures was a part of that scheme. (Complaint (“Compl.”), ¶ 36) (citing to Transcript of October 29, 2010 Plea Hearing in United States v. Nicholas Cosmo, Case No. CR-09-255, United States District Court for the Eastern District of New York).
On February 5, 2009 (the “Petition Date”), an involuntary Chapter 7 petition was filed against Agape World. On February 12, 2009, an order was entered appointing the Trustee as interim trustee. On March 4, 2009, an order for relief under Chapter 7 was entered in the Agape World case. On April 14, 2009, an order was entered substantively consolidating the Agape cases. On January 19, 2011 the Defendant and the Trustee entered into a Tolling and Forbearance Agreement (“Tolling Agreement”), stipulating and agreeing that the Trustee would forbear from filing a complaint, and in exchange, the Defendant agreed that the statute of limitations applicable to the claims which are the subject of this adversary proceeding would be tolled. The dates set forth in the Tolling Agreement were extended by agreements dated April 18, 2011 and May 17, 2011. On June 22, 2011, within the deadline set forth in the Tolling Agreement, as extended, the Trustee commenced the instant adversary proceeding against the Defendant.
The Complaint contains the following allegations:
1. The Defendant was retained in February 2007 to represent Agape. From February 2007 to January 2009, the Defendant represented Agape in at least thirty-eight separate matters, including representing Agape as the mortgage lender in thirty loan transactions, the formation of Agape Merchant, representing Agape in the direct purchase of certain real estate properties, providing legal advice regarding certain equity investments, reviewing Agape’s form of investor contract and advising Agape as to whether it was subject to the requirements of the securities laws, representing Agape in its efforts to receive financing from third parties, and providing legal advice regarding Agape’s business practices. Over the course of its retention by Agape, the Defendant billed and collected approximately $400,000 in fees and costs from Agape (the “Billing Transfers”).
2. The Defendant was fully aware that Agape raised its money from individual investors, and that some of these funds *565were used to provide loans and acquire real estate. In the summer of 2007, Cos-mo was warned by a lender that Agape was selling “securities” that required registration under the Securities Act of 1933 (the “Securities Act”). Cosmo responded that he had sought advice from the Defendant, and the Defendant advised him that Agape did not have to register the investments as securities. After the meeting, Cosmo inquired again from the Defendant whether Agape needed to register the investments, and was again assured that Agape did not need to register. (Compl., ¶ 49). On June 27, 2007, Cosmo provided the Defendant with a copy of the two-page investment agreement Agape required its investors to sign, in order for the Defendant to determine whether the form of the contract was “legal and appropriate.” (Compl., ¶ 42). The investment contract contained the representation that “Agape World, Inc. does not purchase, sell, or mortgage any real estate or any other similar vehicles including stocks and equities.” (Compl., ¶ 48). The Defendant verbally advised Cosmo that Agape did not need to register the investments with the Securities and Exchange Commission (“SEC”), and reiterated this advice on April 1, 2008. (Compl., ¶ 49). At some point in October 2008, the following disclaimers, initially drafted by the Defendant, were added to the emails sent by Agape:
This literature is provided for informational purposes only, and does not constitute an offer or solicitation to buy or sell any security discussed herein or in any jurisdiction where such would be prohibited.
The Trustee alleges in the Complaint that Agape was in fact offering to sell and selling securities, which were subject to the registration requirements of the federal securities laws unless they qualified for an exemption. Section 2(a)(1) of the Securities Act defines “security” to include any “investment contract.” The investor contract used by Agape constituted a security because “(a) Agape solicited money from investors (b) who had an expectation of profits arising from (c) a common enterprise (d) through the efforts of third parties.” (Compl., ¶ 52). Furthermore, the investor contract did not fall within any of the exempted categories of securities identified in the Securities Act. In November 2008, contrary to its initial advice, the Defendant advised Cosmo that the offerings did constitute securities that needed to be registered with the SEC. Even if the securities were exempt from registration with the SEC, they would be subject to the anti-fraud provisions of the Securities and Exchange Act (the “Exchange Act”).
3. According to the allegations contained in the Complaint, had the Defendant advised Cosmo that he needed to register under the Securities Act, and had Cosmo followed the advice, the scheme would have ended as early as 2007 because Agape lacked certified financial statements, which were required in order to register the offering as securities. Had the Defendant advised Cosmo that Agape needed to register under the Securities Act, and if Cosmo failed to heed the Defendant’s advice, the Trustee asserts that the Defendant would have had an affirmative obligation under DR 7-102 of the New York Code of Professional Responsibility (22 NYCRR 1200.33) to disclose Cosmo’s actual and intended crimes to the investors. (Compl., ¶¶ 55-58).
4. In June 2007, the Defendant assisted in Cosmo’s purchase of a house located in Levittown, New York, which house was later transferred to an Agape SPE, and during the course of the purchase, the Defendant discovered Cosmo’s prior conviction for mail fraud in 1999. The Defen*566dant also discovered that Cosmo had an outstanding judgment against him in the amount of $212,788.98 based on the prior mail fraud conviction. The Defendant took no steps to protect Agape from potential liability or issues arising from having a convicted felon in Cosmo’s position at Agape, and never discovered that Agape’s broker’s license was revoked in 2000 as a result of the conviction. The Defendant was aware that Cosmo falsely claimed that the judgment had been paid, and on October 3, 2007, Cosmo delivered a bank check to the Defendant in the amount of $212,788.98 drawn on Agape’s corporate account payable to the order of the Department of Justice. The Defendant took no action to report the withdrawal despite the fact that Agape’s funds were being used by Cosmo for his own personal benefit. (Compl., ¶¶ 59-65).
5. Cosmo opened trading accounts in the name of Agape World — using Agape funds — at a series of futures commission merchants (“FCMs”) and the Defendant was aware, or should have been aware, that Cosmo’s use of Agape funds to open trading accounts was unauthorized. The Defendant knew or should have known that the Agape funds could only be used to make short term bridge loans and yet did nothing to reveal Cosmo’s actions. (Compl., ¶¶ 66-70).
6. On November 13, 2007, Cosmo emailed the Defendant and asked for an opinion letter from the Defendant stating that Cosmo was the 100% owner of Agape World, the funds of Agape World were his, and Cosmo was permitted to use the funds of Agape World to conduct futures trading. The Defendant never prepared such an opinion letter, but continued to permit the Defendant’s name to be used in emails that created the appearance that the Defendant agreed with Cosmo’s false statements. (Compl., ¶¶ 71-75).
7. Cosmo’s conduct violated sections 4b(a)(2)(i) and (iii) of the Commodity Exchange Act, which make it unlawful for any person, in or in connection with any order, to make any contract for the sale of any commodity, to cheat or defraud another person or willfully deceive or attempt to deceive any person with regard to any act of agency performed or with respect to any order for another person. But for the Defendant’s assistance in concealing the fact that Agape’s funds did not belong to Cosmo, Cosmo would not have been able to engage in unauthorized and undisclosed futures trading. (Compl., ¶¶ 76-77).
8. The Defendant knew or should have known that Agape’s investor contract and website included false representations regarding the nature of Agape’s investments, and had the Defendant advised Agape to correct these misstatements or had the Defendant reported Cosmo’s crimes, Cos-mo’s scheme would have ended sooner. (Compl., ¶¶ 78-84).
9. In October 2008, the Defendant received inquiries from Agape’s investors regarding the scope of the Defendant’s representation of Agape and complaints regarding Agape’s practices. Agape had sent letters to its investors dated October 8, 2008, representing that Agape was “backed by one of New York’s top real estate law firms, Meister, Seelig & Fein, LLP.” (Compl., ¶ 87). After receiving a copy of this letter, the Defendant researched the applicable securities laws and concluded by at least mid-November 2008 that Agape was selling securities, and the securities were unregistered and non-exempt. The Defendant requested that Agape make a correction to the letters being sent to investors solely to reflect that the Defendant “represented” Agape in lending transactions. (Compl., ¶¶ 91-96).
*56710. On January 22, 2009, the Defendant withdrew from its representation of Agape. Between October 8, 2008 and January SO, 2009, total transfers of approximately $46 million were made from Agape accounts. Of that amount, approximately $12.8 million was transferred to Agape brokers and other insiders and approximately $2 million was transferred to FCMs. According to the Complaint, the Defendant’s actions “enabled, concealed and prolonged Cosmo’s fraudulent schemes.” (Compl., ¶ 107). Agape received no benefit from Cosmo’s actions. Agape’s innocent investors and officers could have prevented or mitigated their losses had the Defendant notified them of Cosmo’s scheme. The Defendant should have reported Cosmo’s crimes to the Commodities Futures Trading Commission (“CFTC”) or to local criminal authorities.
11. In addition to the Billing Transfers received by the Defendant from Agape, the Defendant withdrew $5,000 on October 11, 2007 and $23,574.87 on March 19, 2008 from its IOLA as legal fees in connection with the 137 Cardinal Road transaction, which constituted legal fees to the Defendant. (The October 11, 2007 transfer and the March 19, 2008 transfer, together, are the “Cardinal Road Transfers”). (Compl., ¶ 111).
In Counts One through Six of the Complaint, the Trustee seeks to avoid and recover the Billing Transfers and the Cardinal Road Transfers pursuant to Bankruptcy Code §§ 548(a)(a)(A), 548(a)(1)(B), and New York Debtor and Creditor Law §§ 273, 274, 275 and 276. In Count Seven, the Trustee seeks an award of legal fees to the extent the Trustee is successful in its claim under § 276 of the DCL (Counts One through Seven are collectively referred to as the “Fraudulent Transfer Claims”). In Count Nine, the Trustee seeks damages in an unspecified amount based on the Defendant’s alleged legal malpractice and/or negligent representation of Agape. In Count Ten, the Trustee seeks damages in an unspecified amount and the equitable remedy of forfeiture in the form of disgorgement of all professional fees the Defendant received from Agape, based on the Defendant’s alleged breach of its fiduciary duties owed to Agape. In Count Eleven, the Trustee seeks damages in an unspecified amount based on the Defendant’s alleged aiding and abetting Cos-mo’s breach of the fiduciary duty he owed to Agape. In Count Eight, the Trustee seeks to recover from the Defendant damages in an unspecified amount based on the Trustee’s right to seek contribution under Section 1401, et seq., of the New York Civil Practice Law and Rules (“CPLR”). C.P.L.R. § 1401, et seq. (McKinney 1997). The Trustee asserts that under the New York contribution statute, the Trustee is entitled to recover from the Defendant any amounts the Trustee pays in excess of its fair share for wrongs involving the Defendant as a joint or concurrent tortfeasor as described in Counts Nine and Eleven.
On July 19, 2011, the Defendant filed a motion seeking to withdraw the adversary proceeding from the Bankruptcy Court to the District Court for the Eastern District of New York, which is currently pending before Judge Joseph Bianco. On July 19, 2011, the Defendant filed a motion seeking to stay this adversary proceeding pending resolution of the motion to withdraw the reference. At a hearing held on July 25, 2011 before Judge Dorothy Eisenberg, the Court denied the Defendant’s motion seeking a stay, and directed the Defendant to file an answer or otherwise move on or before August 8, 2011. On August 8, 2011, the Defendant filed the Motion. By order entered on September 12, 2011, this adversary proceeding was reassigned from *568Judge Eisenberg to Judge Grossman. On September 13, 2011, the Trustee filed opposition to the Motion, reply papers were filed, and a hearing was held on October 19, 2011. On November 14, 2011, the Defendant and the Trustee each filed supplemental memoranda of law. Thereafter, the matter was marked submitted.
Discussion
1) Standard for Motion to Dismiss
A motion to dismiss for failure to state a cause of action under Federal Rule of Civil Procedure 12(b)(6) (“Rule 12(b)(6)”), made applicable to this adversary proceeding by Fed. R. Bankr.P. 7012, requires a determination as to whether the complaint properly states a claim under Fed.R.Civ.P. 8 (“Rule 8”). See Fed. R. Bankr.P. 7008. Under Rule 8, a complaint must contain a “short and plain statement of the claim showing the pleader is entitled to relief.” Ashcroft v. Iqbal, 566 U.S. 662, 668, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). Recently, the Supreme Court has twice taken up the requirements of Rule 8. See Ashcroft v. Iqbal, 556 U.S. at 662, 129 S.Ct. 1937; see also Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). In both cases, the Supreme Court emphasized two principles which form the basis for determining a Rule 12(b)(6) motion.
First, the tenet that a court must “accept all factual allegations as true” is limited to factual allegations, and does not apply to legal conclusions listed in the plaintiffs complaint. Ashcroft v. Iqbal, 556 U.S. at 668, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009). The Court explained that legal conclusions are not entitled to the assumption of truth: “[w]hile legal conclusions can provide the complaint’s framework, they must be supported by factual allegations. When there are well-pleaded factual allegations, a court should assume their veracity and then determine whether they plausibly give rise to an entitlement to relief.” Id., 556 U.S. at 676, 129 S.Ct. 1937.
Second, “only a complaint that states a plausible claim for relief survives a motion to dismiss.” Id. The Supreme Court has explained that “[t]he plausibility standard is not akin to a probability requirement, but asks for more than a sheer possibility.” Id.
This two-pronged approach now forms the standard to be applied when courts are determining a motion to dismiss for failure to state a cause of action. Id. Courts must focus only on the allegations in the complaint which are entitled to the assumption of truth, “discounting legal conclusions clothed in the factual garb.” Gowan v. Novator Credit Mgmt. (In re Dreier LLP), 452 B.R. 467, 475 (Bankr.S.D.N.Y.2011). Based on these well-pleaded factual allegations, courts must determine if the complaint states a plausible claim for relief. See Id. Determining whether a complaint states a plausible claim is “context specific, requiring the court to draw on its experience and common sense.” Ashcroft v. Iqbal, 556 U.S. at 668, 129 S.Ct. 1937. However, the “pleadings must create the possibility of a right to relief that is more than speculative.” Spool v. World Child Int'l Adoption Agency, 520 F.3d 178, 184 (2d Cir.2008). A complaint has facial plausibility when “the pleaded factual content allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal 556 U.S. at 668, 129 S.Ct. 1937.
Additionally, courts must “draw inferences ... in the light most favorable to the [nonmovant], and construe the complaint liberally.” Gowan v. Novator Credit Mgmt., 452 B.R. at 476 (quoting Gregory v. Daly, 243 F.3d 687, 691 (2d Cir.2001) *569(other citations omitted)). Finally, “courts must consider the complaint in its entirety.” Tellabs, Inc. v. Makor Issues & Rights, Ltd. 551 U.S. 308, 310, 127 S.Ct. 2499, 168 L.Ed.2d 179 (2007). The court may take judicial notice of the public record in related cases involving one of the parties. Mangiafico v. Blumenthal, 471 F.3d 391, 398 (2d Cir.2006). A court may even consider a document that has not been incorporated by reference “ “where the complaint relies heavily upon its terms and effect, which renders the document integral to the complaint.’ ” Buena Vista Home Entm’t, Inc. v. Wachovia Bank, N.A. (In re Musicland Holding Corp.), 374 B.R. 113, 119 (Bankr.S.D.N.Y.2007) (citing Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir.2002) (other citations omitted)).
Fed.R.Civ.P. 9(b), which is applicable in this ease pursuant to Bankruptcy Rule 7009, governs claims for intentional fraudulent transfers. Silverman v. Actrade Capital, Inc. (In re Actrade Fin. Techs. Ltd.), 337 B.R. 791, 801 (Bankr.S.D.N.Y.2005). The first, sixth and seventh claims arise under Bankruptcy Code § 548(a)(1)(A) and DCL §§ 276 and 276-a, and each claim requires a finding of intent by the transferor to defraud. Picard v. Madoff, et al. (In re Bernard L. Madoff Inv. Sec. LLC), 458 B.R. 87, 105 (Bankr. S.D.N.Y.2011) (“Picard v. Madoff ”) (citing Gowan v. The Patriot Group, LLC (In re Dreier LLP), 452 B.R. 391, 424 (Bankr.S.D.N.Y.2011)). As actual intent fraudulent transfers, these claims must meet the heightened specificity requirements under Fed.R.Civ.P. 9(b). Sharp Int’l Corp. v. State Street Bank & Trust Co. (In re Sharp Int’l Corp.), 403 F.3d 43, 56 (2d Cir.2005). However, where a bankruptcy trustee is the party asserting the actual fraudulent transfer claim, the Second Circuit has adopted “ ‘a more liberal view ... since a trustee is an outsider to the transaction who must plead fraud from secondhand knowledge.’ ” Picard v. Cohmad Sec. Corp. et al. (In re Bernard L. Madoff Inv. Sec. LLC), 454 B.R. 317, 329 (Bankr.S.D.N.Y.2011) (“Picard v. Cohmad”) (citing Nisselson v. Softbank AM Corp. (In re MarketXT Holdings Corp.), 361 B.R. 369, 395 (Bankr.S.D.N.Y.2007) (other citations omitted)).
2. Actual Fraudulent Transfer Claims
In Counts One and Six of the Complaint, the Trustee seeks to recover the Billing Transfers and the Cardinal Road Transfers as actual fraudulent transfers under Bankruptcy Code §§ 544, 548(a)(1)(A), 550 and DCL § 276.4 The Trustee also seeks to recover his attorneys’ fees pursuant to DCL § 276-a.5 Both the Trustee and the Defendant agree *570that in the context of an admitted Ponzi scheme such as this, transfers made by a Ponzi entity are presumed to have been made with actual intent to hinder, delay or defraud creditors under the relevant Bankruptcy Code provisions and applicable New York Debtor and Creditor law. Picard v. Cohmad, 454 B.R. at 330; McHale v. Boulder Capital LLC (In re The 1031 Tax Grp. LLC, et al.), 439 B.R. 47, 72 (Bankr.S.D.N.Y.2010). The “Ponzi scheme presumption” works to establish fraudulent intent on the part of the transferor as a matter of law. Picard v. Madoff, 458 B.R. at 104. The Ponzi scheme presumption applies only to the transferor’s intent, and there is no requirement under these Bankruptcy Code sections or under DCL § 276 that the Trustee prove that the transferee acted with fraudulent intent as well. Picard v. Cohmad, 454 B.R. at 331 (“[I]t is the transferor’s intent alone, and not the intent of the transferee, that is relevant under NYDCL § 276.”).6 The sole exception to the Ponzi scheme presumption is where the transfers at issue are so unrelated to the Ponzi scheme that the transfers do not serve to further the Ponzi scheme. Picard v. Madoff, 458 B.R. at 105 (citing In re Manhattan Inv. Fund Ltd., 397 B.R. 1, 11 (S.D.N.Y.2007)).
The Defendant makes two arguments in favor of dismissing these claims. First, the Defendant asserts that the Complaint contains no plausible allegations that the Defendant had actual knowledge of the underlying fraudulent scheme or that the Defendant rendered substantial assistance to the underlying scheme. However, case law is clear that the intent of the transferee is irrelevant to establishing a prima facie claim under these intentional fraudulent conveyance actions, under either the Bankruptcy Code or DCL § 276. Picard v. Madoff, 458 B.R. at 105 (other citations omitted). Second, the Defendant argues that the defense set forth in Bankruptcy Code § 548(c), which is available for transferees who received transfers for value and in good faith, precludes the Trustee from asserting a claim under Bankruptcy Code § 548(a)(1)(A). In addition, the Defendant asserts that the parallel statute under the DCL, which provides that a conveyance can be recovered from any person “except a purchaser for fair consideration without having knowledge of the fraud at the time of the [transfer] ...” insulates the Defendant from any claim by the Trustee under DCL § 276 and 276-a.
While the Defendant’s argument regarding good faith and fair consideration is a permissible defense to these actual fraudulent transfer claims, and may be raised at the summary judgment stage and/or at trial, it is only sufficient to dismiss these claims at this stage if it appears from the face of the Complaint that the Defendant took the funds in good faith and for fair consideration. Picard v. Madoff, 458 B.R. at 105, n. 10 (citing Pani v. Empire Blue Cross Blue Shield, 152 F.3d 67, 74-75 (2d Cir.1998)). The Trustee sufficiently alleges the Defendant had knowledge of Agape’s wrongdoing and also alleges that Agape received less than fair consideration in exchange for the Billing Transfers and the Cardinal Road Transfers. Therefore, the Defendant’s affirmative defense does not warrant dismissal of the actual fraudulent transfer claims.
*571Count Seven, which is dependent upon a finding of liability under DCL § 276, also requires a finding that the Defendants received the transfers with fraudulent intent. Because the Trustee does not allege in the Complaint that the Defendant acted with intent to defraud, this claim shall be dismissed pursuant to Rule 9(b), and the Trustee may not recover attorneys’ fees in this action.
3. Constructive Fraudulent Transfer Claims
The Trustee has sufficiently pleaded Counts Two, Three, Four and Five of the Complaint pursuant to §§ 548(a)(1)(B), 544, 550(a) and 551 of the Bankruptcy Code and §§ 273, 274, 275, 278 and/or 279 of the DCL to avoid and recover the Billing Transfers and the Cardinal Road Transfers from the Defendant as constructive fraudulent transfers. The heightened pleading standards applicable to actual fraudulent transfer claims under Fed.R.Civ.P. 9(b) are inapplicable to these counts. Picard v. Cohmad, 454 B.R. at 332 (citing Bank of Commc’ns v. Ocean Dev. Am., Inc., No. 07-CIV-4628, 2010 WL 768881, at *6 (S.D.N.Y. Mar. 8, 2010) (other citations omitted)). Thus, the Trustee need only set forth a short statement of the claim showing that the Trustee is entitled to relief, which gives the defendant “ ‘sufficient notice to prepare an answer, frame discovery and defend against the charges.’ ” Id. (quoting Nisselson v. Drew Indus., Inc. (In re White Metal Rolling & Stamping Corp.), 222 B.R. 417, 429 (Bankr.S.D.N.Y.1998)).
In Count Two, the Trustee must allege that Agape did not receive “reasonably equivalent value” for the Billing Transfers and the Cardinal Road Transfers. 11 U.S.C. § 548(a)(1)(B). In Counts Three through Five, the Trustee must allege that the Defendant did not receive “fair consideration.” DCL § 272. The Trustee has adequately pleaded lack of ‘fair consideration’ so long as the Trustee alleges lack of ‘fair equivalent’ value or a lack of good faith by the transferee. Picard v. Cohmad, 454 B.R. at 333. Courts have concluded that ‘reasonably equivalent value’ under § 548(a)(1)(B) and ‘fair consideration’ under DCL are fundamentally the same. Id. (citing Balaber-Strauss v. Sixty-Five Brokers (In re Churchill Mortg. Inv. Corp.), 256 B.R. 664, 677 (Bankr.S.D.N.Y.2000)), aff'd, Balaber-Strauss v. Lawrence, 264 B.R. 303 (S.D.N.Y.2001) (“Churchill ”).
The Defendant argues that as the recipient of its legal services, Agape received sufficient consideration as a matter of law. Therefore, Counts Two through Five must be dismissed for failure to state a claim. The Court does not find the Defendant’s argument dispositive at this stage of the adversary proceeding. In order to determine whether Agape received ‘reasonably equivalent value’ or ‘fair consideration’ in exchange for the Billing Transfers and the Cardinal Road Transfers, the Court must examine the entire circumstances surrounding each of the transfers. Picard v. Cohmad, 454 B.R. at 334 (other citations omitted). As Judge Lifland held in Picard v. Cohmad:
In this case, where the reasonably equivalent value analysis requires more than a simple math calculation, it is inappropriate [to undertake this analysis] at the motion to dismiss stage. See Global Crossing Estate Rep. v. Winnick, No. 04-CIV-2558, 2006 WL 2212776, at *9 (S.D.N.Y. Aug. 03, 2006) (“[T]he question whether ‘fair consideration was received is a factual one, and thus even where on the surface it would appear that such is the case (for example, the [defendants] point out that during the period, [the debtor] managed to raise *572billions of dollars in capital, precisely what it had asked the [defendants] to accomplish, it would be premature to dismiss these claims.’ ”)); In re Actrade Fin. Techs. Ltd., 337 B.R. at 804 (“[T]he question of ‘reasonably equivalent value’ ... is fact intensive, and usually cannot be determined on the pleadings.”).
Id.
So it is with the case before the Court. While a law firm is entitled to be paid for services rendered, the Trustee has adequately pleaded that the Defendant provided less than fair consideration in exchange for the Billing Transfers and the Cardinal Road Transfers because the Defendant acted negligently in its representation of Agape. This is in direct contrast to the findings of fact in Churchill, as case upon which the Defendant relies to support its argument. In Churchill, the Chapter 7 trustee did not allege in his complaint that brokers to a Ponzi schemer provided less than fair consideration for the commissions they received while performing their duties. In addition, the trustee in Churchill conceded that the brokers earned what they were paid without committing any wrongdoing, not even negligence, and faithfully carried out their duties. Churchill, 256 B.R. at 684. For purposes of analyzing the instant motion the Court is pursuaded that Trustee has properly and adequately pleaded lack of reasonably equivalent transfers with respect to Counts Two through Five.
4. Counts Eight Through Eleven
In Counts Nine through Eleven of the Complaint, the Trustee seeks to recover damages from the Defendant predicated on the Defendant’s alleged malpractice, breach of fiduciary duty to Agape, and the Defendant’s aiding and abetting Cosmo’s breach of his fiduciary duty to Agape. In each of these counts, the Trustee alleges that Agape has been damaged in amounts to be determined at trial. In addition, under the breach of fiduciary duty claim set forth in Count Ten, the Trustee seeks the equitable remedy of forfeiture of all legal fees paid by Agape to the Defendant. In Count Eight of the Complaint the Trustee seeks to recover from the Defendant, as a tortfeasor, amounts the Trustee may overpay in the future to Agape investors in this bankruptcy case based on the estate’s proportionate share, under the theory of contribution set forth in section 1401 of the New York CPLR.
The Defendant asserts as a threshold issue that Counts Nine through Eleven must be dismissed because the Trustee lacks standing to bring each of these causes of action. The Defendant argues that as a matter of law the Trustee may not recover under these counts as any injuries were incurred by Agape’s investors, not by Agape. Because a Trustee only has standing to seek damages based on injuries to Agape, these causes of action must be dismissed. The Defendant also asserts that to the extent the Trustee seeks to recover for injuries to Agape, these claims are barred by the Wagoner rule. Under the Wagoner rule, a bankruptcy trustee lacks standing to seek recovery on behalf of a debtor company against third parties for injuries incurred by the misconduct of the debtor’s controlling managers. Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114,118 (2d Cir.1991); In re The Bennett Funding Group, Inc., 336 F.3d 94, 99-100 (2d Cir.2003). Because Cosmo, as the sole principal of Agape, was the orchestrator of the Ponzi scheme, the Trustee is not entitled to recover against the Defendant as participants in the scheme for any injuries it may have sustained. The Defendant is correct that standing is a threshold issue, and if the Trustee lacks standing to bring these claims, the Bankruptcy Court has no *573subject matter jurisdiction to adjudicate these claims. McHale v. Citibank, N.A. (In re the 1031 Tax Group, LLC), 420 B.R. 178, 191-92 (Bankr.S.D.N.Y.2009) (other citations omitted). In order to rule on this issue, the Court must examine the Trustee’s standing to bring these causes of action, using the following as a guideline.
a) Standing
Standing is a jurisdictional issue under Article III of the Constitution. Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d at 119; Valley Forge Christian College v. Americans United for Separation of Church and State, Inc., 454 U.S. 464, 471-476, 102 S.Ct. 752, 70 L.Ed.2d 700 (1982). “To have standing, ‘a plaintiff must [1] allege personal injury [2] fairly traceable to the defendant’s allegedly unlawful conduct and [3] likely to be redressed by the requested relief.’ ” Hirsch v. Arthur Andersen & Co., 72 F.3d 1085, 1091 (2d Cir.1995) quoting Allen v. Wright, 468 U.S. 737, 751, 104 S.Ct. 3315, 82 L.Ed.2d 556 (1984).
The doctrine of standing “incorporates both constitutional and prudential limitations on federal court jurisdiction.” Wight v. BankAmerica Corp., 219 F.3d 79, 89 (2d Cir.2000). Under Article III of the Constitution there must be a case or controversy to invoke a federal court’s jurisdiction, which requires, among other things, that the party invoking the power of the court has a personal stake in the outcome of the case or controversy. Id. As such, the legal rights asserted by the plaintiff must be his or her own. Warth v. Seldin 422 U.S. 490, 499, 95 S.Ct. 2197, 45 L.Ed.2d 343 (1975); Wight v. BankAmerica Corp., 219 F.3d at 91; Breeden v. Kirkpatrick & Lockhart, LLP, 268 B.R. 704, 709, (Bankr.S.D.N.Y.2001); Caplin v. Marine Midland Grace Trust Co. of New York, 406 U.S. 416, 428, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972). The prudential limitations of standing “are ‘judicially self-imposed limits on the exercise of federal jurisdiction,’ ... and exist to preserve ‘the proper — and properly limited — role of courts in a democratic society.’ ” McHale v. Citibank, N.A., 420 B.R. at 192 (quoting Selevan v. N.Y. Thruway Auth., 584 F.3d 82, 91 (2d Cir.2009) and Bennett v. Spear, 520 U.S. 154, 162, 117 S.Ct. 1154, 137 L.Ed.2d 281 (1997) (other citations omitted)). Included among the prudential limits to standing is the Wagoner rule, which provides that a trustee standing in the shoes of the bankrupt corporation lacks standing to assert claims against third parties for assisting in defrauding the corporation where the alleged fraud is conducted by management. Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d at 120. The Wagoner rule applies in the Second Circuit, and courts in this Circuit have consistently adhered to the Wagoner rule, despite the fact that many other Circuit courts do not follow this approach, and treat this as an affirmative defense under the in pari delicto doctrine. McHale v. Citibank, N.A., 420 B.R. at 197 (other citations omitted).
In order to determine whether the Trustee is asserting his legal rights, the Court must examine what rights are conferred upon a bankruptcy trustee. “Under the Bankruptcy Code the trustee stands in the shoes of the bankrupt.” Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d at 118. As such, the trustee has access to all legal and equitable interests the debtor had, including the right to bring any suit that the debtor could have instituted had it not filed for bankruptcy. Caplin v. Marine Midland Grace Trust Co. of New York, 406 U.S. 416, 428, 92 S.Ct. 1678, 32 L.Ed.2d 195 (1972); Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d at 120. While section 544(b) of the *574Bankruptcy Code authorizes the trustee to avoid transfers that a creditor of the debt- or with an allowed claim could avoid under applicable law, section 544 is limited to avoidance actions, and “does not permit the trustee to assert the personal, direct claims of creditors for the benefit of the estate or for a particular class of creditors.” Goldin v. Primavera, et al. (In re Granite Partners, L.P.), 194 B.R. 318, 324 (Bankr.S.D.N.Y.1996) (citing Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d at 118; Caplin v. Marine Midland Grace Trust Co. of New York, 406 U.S. at 434, 92 S.Ct. 1678; and E.F. Hutton & Co. v. Hadley, 901 F.2d 979, 985 (11th Cir.1990)). Thus, it is necessary to establish which rights belonged to Agape at the time of filing in order to determine which rights the Trustee now has standing to assert.
Applicable state law determines if a right to sue belongs to a debtor, or to the creditors of that debtor. Mediators, Inc. v. Manney (In re Mediators, Inc.) 105 F.3d 822, 827 (2d Cir.1997); Hirsch v. Arthur Andersen & Co., 72 F.3d at 1093; Breeden v. Kirkpatrick & Lockhart, LLP, 268 B.R. at 710. In this case, we look to New York State law to determine whether the Trustee has the right to bring the remaining causes of action set forth in the Complaint.
i) Counts Nine Through Eleven
As alleged in Count Nine, the Defendant committed legal malpractice when it advised Agape that it was not required to register the investor contracts under the Securities Act, when it failed to advise Agape to correct misrepresentations Agape made to the public regarding Agape’s business activities and the sale of unregistered securities, and when it assisted Cosmo in the unauthorized withdrawal of funds from Agape’s account for trading in the commodities and futures markets. According to the allegations set forth in Count Ten, the Defendant breached its fiduciary duty of care, loyalty, candor and communication when it failed to report Agape’s unauthorized commodities and futures trading to Agape’s investors and officers, the FCMs, and/or the Commodities Futures Trading Commission (“CFTC”). In Count Eleven, the Trustee alleges that the Defendant aided and abetted Cosmo’s breach of his fiduciary duties to Agape when the Defendant “facilitated” Cosmo’s sale of unregistered securities through Agape, and when Cosmo used Agape’s funds in an unauthorized and illegal manner, exposing Agape to investor liability.
Counts Nine, Ten and Eleven can be broken down into the following categories. First, the Trustee alleges that the Defendant aided and abetted or otherwise assisted Cosmo in his scheme to loot Agape for his personal benefit. Second, the Trustee alleges that the Defendant committed malpractice when it advised the Debtor that it was not required to register the sale of the investments with the SEC, thus exposing Agape to liability from the defrauded investors. Third, the Trustee alleges that the Defendant aided and abetted Cosmo’s scheme to sell unregistered securities through Agape.
As for claims that the Defendant aided and abetted or otherwise assisted Cosmo in his scheme to loot Agape for his personal benefit, the application of the Wagoner rule acts to bar the Trustee from bringing these claims. Cosmo’s scheme to divert the assets from Agape is imputed to Agape under the theory of agency. This imputation acts to prevent the Trustee from suing to recover for a wrong in which the Trustee is deemed to have participated. Wight, 219 F.3d at 87.
*575The Trustee argues that because Cosmo acted solely in his own self-interest when he looted the assets of Agape, the theft cannot be deemed to be for any legitimate corporate purposes, and his actions were adverse to Agape’s. Therefore, the Trustee claims that these causes of action fall within the adverse-interest exception to the Wagoner rule. Under the adverse-interest exception, the presumption that the acts and knowledge of an agent acting within the scope of employment are imputed to the principal is rebutted. Mediators, 105 F.3d at 827 (citing Center v. Hampton Affiliates, 66 N.Y.2d 782, 784, 497 N.Y.S.2d 898, 488 N.E.2d 828 (1985)). The exception is only applicable where an agent by his or her actions has “totally abandoned” the principal’s interests. Id. (citing Center v. Hampton Affiliates, 66 N.Y.2d at 784-85, 497 NY.S.2d 898, 488 N.E.2d 828). While Cosmo’s looting of Agape may fit within this exception, this exception does not apply where the principal is a corporation, and the agent is its sole shareholder. Mediators, 105 F.3d at 827. This exception to the exception is known as the “sole actor” rule. Id. (citing Harold Gill Renschlein & William A. Gregory, The Law of Agency and Partnership § 64 at 121 (2d ed. 1990)). Under the “sole actor” rule, where the principal and agent are one and the same, which is the case here, the agent’s knowledge is imputed to the principal notwithstanding the agent’s self-dealing. One rationale for the sole actor rule is that an agent’s knowledge should be imputed to the principal where the agent is the mere alter ego of the principal “because the party that should have been informed was the agent itself albeit in its capacity as principal.” McHale v. Citibank, N.A., 420 B.R. at 202 (internal citations omitted).
The Trustee claims that the sole actor rule does not apply in this case because the Defendant had an obligation to warn Agape’s innocent investors of Cos-mo’s actions, and this failure to warn precludes any imputation of Cosmo’s knowledge to Agape. In the alternative, the Trustee asserts that the Defendant’s own misconduct in violating the applicable New York Disciplinary Rules requires the Defendant to forfeit any legal fees received that are tainted by the Defendant’s breach of its fiduciary duty to Agape. The Court is not aware of any decisions, nor does the Trustee cite to any, which expand the exception to the Wagoner rule to include sole actors like Cosmo based on the fact that innocent investors were harmed. The sole actor exception applies regardless of whether the Defendant could have reached out to investors to advise them that Cosmo was looting Agape. So long as Cosmo was the only person at Agape to whom the Defendant could have reported the looting, and Cosmo was doing the looting, the sole actor exception applies.
Any claim that Agape was injured as a result of the Defendant’s violation of its ethical obligations must be dismissed under the Wagoner rule as well. As stated above, the Wagoner rule works to deprive a bankruptcy trustee of standing to sue on behalf of a corporation that suffered a direct injury from a third party’s actions if the corporation’s sole stockholder and decision maker participated in the wrongdoing. Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d at 119. In the case of Cosmo’s looting, the Trustee does not dispute that Cosmo engineered the entire scheme, and the Defendant’s alleged actions facilitated Cosmo’s plan. Because the Trustee is deemed to be a party to the scheme, the Wagoner rule bars the Trustee from maintaining a suit to recover for any injuries suffered by Agape. See Mediators, 105 F.3d at 824 (Second Circuit affirmed dismissal of claims brought by a creditors’ committee against a bank and a *576law firm charged with aiding and abetting a scheme by the debtor’s principals to appropriate corporate assets for themselves for little or no consideration. The Circuit Court held that the claims belonged to the creditors because the third parties cooperated in the misconduct initiated by the principals.). As a result, the Trustee’s allegation that Agape suffered a direct injury (either in the form of stolen profits or in the payment of legal fees) does not cure the Trustee’s lack of standing under the Wagoner rule. It is Cos-mo’s role as the mastermind of the looting that deprives the Trustee of standing to bring these claims.
With respect to the whether the Trustee can maintain his claim against the Defendant for its failure to advise Agape to correct misrepresentations Agape made to the public regarding i) the true nature of Agape’s business activities and ii) Agape’s sale of unregistered securities in violation of the Securities Act, the Court finds in favor of the Defendant. These claims sound in negligence, and, if proven, resulted in harm to the investors, not Agape. Because the investors, and not Agape, were actually harmed, the Trustee lacks standing to bring these claims. As the Second Circuit held in Hirsch, “claims predicated upon the distribution of misleading [information] to investors [in an investment] are the property of those investors, and may be asserted only by them and to the exclusion of [the trustee in bankruptcy].” Hirsch, 72 F.3d at 1094.
To the extent the Trustee alleges that these actions harmed Agape’s estate as distinct from the creditors of the estate, the allegations in the Complaint do not support this finding. If anything, the Defendant’s alleged negligence served to extend the scheme, for the benefit of Agape and its principal. These incidental benefits to Cosmo do not place these claims outside the reach of the Wagoner rule by way of the adverse interest exception because this exception does not apply to conduct that benefits the corporation. As the New York Court of Appeals recently ruled in Kirschner v. KPMG LLP, 15 N.Y.3d 446, 912 N.Y.S.2d 508, 938 N.E.2d 941 (2010), “ ‘the Trustee [in bankruptcy] must allege, not that the ... insiders intended to, or to some extent did, benefit from their scheme, but that the corporation was harmed by the scheme, rather than being one of its beneficiaries.’ ” 15 N.Y.3d at 461, 912 N.Y.S.2d 508, 938 N.E.2d 941 (citing Kirschner v. Grant Thornton LLP, 2009 WL 1286326, at *7, 2009 U.S. Dist. LEXIS 32581, at *27 (2009)). Even if the adverse interest exception applies, the sole actor rule applies as well, rendering the adverse interest exception unavailable.
Finally, the Trustee alleges that the Defendant’s failure to advise Cosmo that the investments were securities, which required compliance with the SEC registration requirements, caused direct harm to Agape. This claim, if true, does not give rise to any cause of action by the Trustee other than negligence. While investors deceived by an attorney’s representations may have claims against such attorneys under applicable Securities Act provisions, the client’s only cause of action against the attorney is one for malpractice or negligence, and not for aiding and abetting or conspiracy to violate applicable securities laws.7 Dinsmore v. Squadron, Ellenoff, Plesent, Sheinfeld & Sorkin, 135 F.3d 837, 841 (2d Cir.1998) (A law firm may not be found liable in a private action for conspiring or aiding and abetting a violation of § 10(b) or Rule 10b-5 of the Securities *577Act.) (citing Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164, 114 S.Ct. 1439, 128 L.Ed.2d 119 (1994) (other citations omitted)). The Trustee does not point to any direct injury Agape incurred, other than the liability to investors that flowed from the Ponzi scheme. Because the investors, not Agape, incurred damages, the Trustee does not have standing to sue the Defendant under these theories. The harm flowing from the Defendant’s improper advice was not suffered by Agape, but by Agape’s investors. As such, these allegations may give rise to claims by the creditors of Agape, but not by the Trustee.
To the extent that the Trustee alleges that the improper advice by the Defendant harmed Agape directly, the Wagoner rule would apply to bar such claims as well, because Cosmo is a party to, or participant in, the wrongful conduct. Breeden v. Kirkpatrick & Lockhart, LLP, 268 B.R. at 709. The Complaint, however, can be read to allege that the Defendant failed to properly advise Agape of the relevant securities laws, and Agape did not participate in or endorse this misconduct. However, this claim cannot withstand the pleading requirements of Rule 8. A malpractice action under New York law requires that the injured party plead that the defendant took action, which was below the reasonable standard of care, and that the action was the proximate and actual cause of the injury. In this case, the allegations contained in the Complaint belie any argument that the Defendant’s actions were the actual and proximate cause of the injury sustained. In his allocution, “Cosmo admitted that he operated Agape as a Ponzi scheme” (Complaint, ¶ 36) and the Ponzi scheme was in existence and functioning as such from 2003, but it is undisputed that the Defendant was not retained as counsel to Agape until 2007. The scheme never included registering the investments as securities. The allegation that the Defendant’s legal advice proximately caused damages to Agape does not meet the plausibility standard the Supreme Court set forth in Iqbal.
Based on the allegations set forth in the Complaint, it is not plausible to conclude that the Defendant’s legal advice affected Cosmo’s decision not to register the investments as securities as of 2007, when the Ponzi scheme was in full swing. It does not appear from the Complaint that Cosmo ever had any intention of complying with the applicable Securities Act requirements, as to do so would threaten his entire scheme. Where the principal and the agent are the same person and were actively engaged in a scheme to defraud investors since 2003, it is not plausible to conclude that the Defendant’s breach of duty to the agent four years after the fraud began caused any direct injury to Agape. Therefore, Counts Nine though Eleven shall be dismissed.
ii. Count Eight
In Count Eight of the Complaint, the Trustee seeks contribution from the Defendant under the New York contribution statute. As set forth in the Complaint the underlying claims giving rise to contribution are malpractice and/or aiding and abetting Cosmo’s breach of his fiduciary duties owed to Agape. Section 1401 of the CPLR governs claims for contribution under New York law and provides, in pertinent part, as follows:
[T]wo or more persons who are subject to liability for damages for the same personal injury, injury to property or wrongful death, may claim contribution among them whether or not an action has been brought or a judgment has been rendered against the person from whom contribution is sought.
*578CPLR § 1401 (McKinney 1997). The amount of contribution to which a person may be entitled is “the excess paid by him over and above his equitable share of the judgment recovered by the injured party; but no person shall be required to contribute an amount greater than his equitable share ... to be determined in accordance with the relative culpability of each person liable for contribution.” CPLR § 1402 (McKinney 1997). New York courts have held that “the policy of the law, as declared by the Legislature in CPLR 1401, is to allow contribution unless it is clear that the legislative policy which led to the passage of the statute would be frustrated by the granting of contribution in favor of the person who violated the statute.” Zona v. Oatka Rest. & Lounge, Inc., 68 N.Y.2d 824, 825-26, 507 N.Y.S.2d 615, 499 N.E.2d 869, 869 (1986) (internal citations omitted).
Under the New York contribution statute, a person subject to liability in tort for damages may assert a contribution claim against another tortfeasor in a separate action. CPLR § 1403 (McKinney 1997). The right of contribution exists among parties which are 1) subject to liability for damages, 2) under the same of different theories of law, 3) for the same injury. See Nassau Roofing & Sheet Metal, Co., Inc. v. Facilities Dev. Corp., 71 N.Y.2d 599, 603, 528 N.Y.S.2d 516, 523 N.E.2d 803 (1988); see also Perkins Eastman Architects, P.C. v. Thor Eng’rs, P.A., 769 F.Supp.2d 322, 327 (S.D.N.Y.2011) (The critical requirement for a contribution claim under New York law is that the breach of duty by the contributing party had a part in causing or exacerbating the injury for which contribution is sought.). Under contribution, a party subject to liability in tort may sue to hold a joint, concurrent, successive, independent, alternative, and/or intentional tortfeasor liable for any amounts the party paid in excess of its fair share. Nassau Roofing & Sheet Metal Co., Inc. v. Facilities Dev. Corp., 71 N.Y.2d at 603, 528 N.Y.S.2d 516, 523 N.E.2d at 805.
“[A] defendant may seek contribution from a third party even if the injured plaintiff has no direct right of recovery against that party, either because of a procedural bar or because of a substantive legal rule.” Roquet v. Braun, 90 N.Y.2d 177, 182, 659 N.Y.S.2d 237, 681 N.E.2d 404 (1997) (citations omitted). Contribution may also be asserted where the third party tortfeasor has no duty to the injured party. Id. In addition, if there was a breach of duty running from the third party tortfeasor to the defendant, a contribution claim may lie, provided the breach of that duty by the third party tortfeasor caused or augmented the injury for which contribution is being sought. Id. (citations omitted). However, the party seeking contribution must make out all of the essential elements of a cause of action against the proposed contributor. Jordan v. Madison Leasing Co., 596 F.Supp. 707, 710 (S.D.N.Y.1984) (citing Londino v. Health Ins. Plan of Greater New York, Inc., 93 Misc.2d 18, 401 N.Y.S.2d 950, 951 (1977)). Therefore, if the underlying cause of action is subject to dismissal for failure to state a claim under Rule 12(b)(6) or failure to plead fraud with particularity under Rule 9(b), the contribution claim will fail as well. Id. The applicability of in pari delicto as a defense to the underlying claim does not bar a claim for contribution, “since the entire purpose of CPLR article 14 is to codify the changes in tort law as to enable contribution among tortfeasors announced by the [New York] Court of Appeals in Dole v. Dow Chem. Co., 30 N.Y.2d 143 [331 N.Y.S.2d 382, 282 N.E.2d 288] (1972); see Board of Educ. of Hudson City School Dist. v. Sargent, Webster, Crenshaw & Folley, 125 A.D.2d 27, 29 [511 N.Y.S.2d 961] (1987), aff'd 71 N.Y.2d 21 *579[523 N.Y.S.2d 475, 517 N.E.2d 1360] (1987).” Rosenbach v. Diversified, Group, Inc., 85 A.D.3d 569, 570, 926 N.Y.S.2d 49 (1st Dept.2011).
In the case before the Court, the Trustee seeks contribution from the Defendant under the theory that the Defendant owed a duty to the Trustee, the Defendant breached that duty, and the breach caused or augmented the injuries suffered by Agape’s investors. Under the Trustee’s argument, while the Defendant may not be directly liable to Agape’s investors, and may not owe them any legal duty of care, the Trustee may nevertheless seek contribution from the Defendant for any amounts the Trustee pays to creditors in satisfaction of their allowed claims in excess of what the claims would have been, but for the conduct of the Defendant. The underlying basis for the right to seek contribution is the duty of care the Defendant owed to Agape, and the Defendant’s breach of that duty.
The Defendant makes a series of arguments in favor of dismissing the contribution claim, some of which are specific to the allegations contained in the Complaint, and some of which are broader in scope, based in part on the mere fact that the bankruptcy trustee is the plaintiff in this case. The first argument presented by the Defendant is that the Trustee has no right to assert any claim for contribution in this case as a matter of law. To support his argument, the Defendant cites to Picard v. HSBC Bank PLC, 454 B.R. 25 (Bankr.S.D.N.Y.2011) (“Picard v. HSBC”), and Picard v. JPMorgan Chase & Co., 460 B.R. 84 (Bankr.S.D.N.Y.2011) (“Picard v. JPMorgan Chase ”). In both cases, the District Court for the Southern District of New York ruled that Picard, as the trustee appointed in the Bernard L. Madoff Investment Securities liquidation proceeding commenced under the Securities Investor Protection Act (“SIPA”), could not rely on New York law to seek contribution from professionals retained by the debtor where a right to contribution was not expressly provided in the federal statutory scheme set forth under SIPA. Both decisions are predicated on the same legal conclusion, that because the right to contribution did not exist in the SIPA statute itself, Picard had no corresponding right to bring a contribution action. The Defendant seeks to apply the findings in these cases to the facts in this case.
This Court is not persuaded that the reasoning underlying the legal conclusions which form the basis for these decisions is applicable to this case. Under the Bankruptcy Code, the Trustee is armed with all of the rights that the debt- or had as of the petition date, which includes all causes of action the debtor could have brought prepetition. Hirsch v. Arthur Andersen & Co., 72 F.3d at 1093. The Bankruptcy Code does not provide a specific list of all of the claims a trustee may maintain, but there is nothing in the Bankruptcy Code which limits the trustee to some, but not all, of the claims a debtor could have brought prepetition. To the extent the Defendant reads Picard v. JPMorgan Chase and Picard v. HSBC to limit a bankruptcy trustee’s right to commence an action for contribution, the Court declines to adopt this conclusion. Both of those cases concern a trustee appointed under SIPA, which may contain restrictions on maintaining contribution claims that are inapplicable to the Trustee in this case. To the extent that the rights of the Trustee and a bankruptcy trustee appointed under SIPA to commence a claim on behalf of a debtor are identical, the Court declines to adopt the reasoning of these earlier cases. The fact that the Bankruptcy Code does not expressly authorize a trustee to seek contribution does *580not limit a trustee’s right to bring whatever action, including an action for contribution, that a debtor could have brought prepetition. While the Bankruptcy Code directs the Trustee to pay claims filed in the case pursuant to a statutory scheme, the duty to follow the statutory mandate seemingly has little to do with whether a trustee may seek contribution for the benefit of the estate. The Trustee’s right to bring a contribution claim is derived from state law, made applicable by Bankruptcy Code § 544, and not from Bankruptcy Code § 726 or any other Bankruptcy Code provision. Hill v. Day (In re Today’s Destiny, Inc.), 388 B.R. 737, 751 (Bankr.S.D.Tex.2008). To the extent the Trustee’s right to bring a contribution claim is based on the federal securities laws, “[i]t is well-established that contribution is a remedy available in cases involving violations of the federal securities law, but it is limited solely to recovery among joint tortfea-sors.” Jordan v. Madison Leasing Co., 596 F.Supp. at 711 (citing Stratton Group Ltd. v. Sprayregen, 466 F.Supp. 1180 (S.D.N.Y.1979)). Aside from the standing limitations imposed by the Wagoner rule, the Trustee’s right to maintain a contribution action is based on whether the contribution claim asserted falls within the requirements imposed by the CPLR.
The fact that the Trustee is charged with making a distribution to creditors of Agape’s estate does not invalidate the contribution claim. Judge Rakoff determined that the trustee’s obligation to pay claims in the Madoff SIPA proceeding was not equivalent to the trustee being “subject to liability” for damages as required by the New York contribution statute, because a SIPA trustee is merely carrying out his or her functions when funds are distributed. Picard v. HSBC, 454 B.R. at 38. However, the trustee’s obligation to make distributions in a bankruptcy case is dependent upon the filing and allowance of claims, not on the distribution scheme set forth in the Bankruptcy Code. So long as an action has been commenced by the injured parties (in this case the Agape investors) against the Agape estate, the requirement that the defendant be “subject to liability” is satisfied. CPLR § 1403 (McKinney 1997). See also Nassau Roofing & Sheet Metal Co., Inc. v. Facilities Dev. Corp., 71 N.Y.2d at 602, 528 N.Y.S.2d 516, 523 N.E.2d 803. To meet this requirement, the Trustee relies on the theory that “the filing ... of [a] proof of claim is analogous to the commencement of an action within the bankruptcy proceeding”, adopted by the Second Circuit in Nortex Trading Corp. v. Newfield, 311 F.2d 163, 164 (2d Cir.1962). The Court finds that the filing of claims in this case, which are subsequently allowed, is sufficient at this stage to satisfy the requirement that the Trustee be “subject to liability” under the New York contribution statute.
The remaining arguments asserted by the Defendant are: 1) the Wagoner rule, which deprives the Trustee of standing to sue the Defendant on the underlying claims, bars the Trustee from maintaining an action for contribution against the Defendant, 2) the Trustee and the Defendant do not have liability for the same injury, which is a required element under contribution, and 3) based on the overwhelming degree of Agape’s culpability, the Trustee will never pay out more than Agape’s fair share of damages to the injured investors, and without actual overpayment by the Trustee, a contribution claim cannot be maintained.
First, the Court shall consider the effect of the Wagoner rule on the contribution claim. Courts agree that a claim for contribution is not defeated by the doctrine of in pari delicto. Rosenbach v. Diversified Group, Inc., 85 A.D.3d at *581571, 926 N.Y.S.2d at 52. Any personal defenses the third party may have against the injured party will not preclude contribution. Ackerman v. Southern Wood Piedmont Co. et al., 409 F.Supp. 469, 471 (E.D.N.Y.1976).
However, an action for contribution “will not lie unless all the essential elements of a cause of action against the proposed contributor can be made out.” Calcutti v. SBU, Inc., 273 F.Supp.2d 488, 497 (S.D.N.Y.2008) (citing Jordan v. Madison Leasing Co., 596 F.Supp. 707, 710 (S.D.N.Y.1984) (other citation omitted)). The question for the Court to resolve is whether the Wagoner rule, which bars the Trustee from suing the Defendant for negligence or aiding and abetting Cosmo’s breach of his fiduciary duties to Agape, bars the Trustee’s claim for contribution as well. The Wagoner rule is based on the same underlying principles as in pari delicto, but the Wagoner rule has vastly different consequences in its application. The Wagoner rule is not a defense to a claim; it is a complete bar to a claim. As such, the Trustee is not entitled to seek relief on the underlying claims. Because the Defendant can never be “subject to liability” for the Trustee’s underlying claims (for malpractice and aiding and abetting breach of Cosmo’s fiduciary duty), the contribution claims fail as well.
This principle has been applied by at least one bankruptcy court. In Devon Mobile Commc’ns Liquidating Trust v. Adelphia Commc’ns Corp. (In re Adelphia Commc’ns Corp.), 322 B.R. 509 (Bankr.S.D.N.Y.2005), the Bankruptcy Court for the Southern District of New York denied a motion by a defendant to file a third party complaint against two parties for contribution in connection with a preference and fraudulent transfer action commenced against the defendant by a liquidating trust, as successor in interest to a limited partnership. The Bankruptcy Court determined that the defendant lacked standing to commence the third party action for contribution because the underlying claim against insiders of the transferor for breach of fiduciary duty to the transferor belonged solely to the trans-feror. The bankruptcy court held that only the trustee or the liquidating trust had standing to bring breach of fiduciary duty claims against insiders. As the bankruptcy court recognized, “[t]his standing requirement cannot be circumvented by the expedient of filing a third-party complaint and denominating the breach of fiduciary claims as claims for contribution and indemnity.” Id. at 528.
In Goldin v. Primavera Familienstiftung (In re Granite Partners), 194 B.R. 318 (Bankr.S.D.N.Y.1996), the Bankruptcy Court dealt with a similar issue in a different context. An individual invested in Granite Partners at the advice of TAG associates, a financial advisor, and its managing directors. Granite Partners, however, deviated from a conservative market strategy it promised to follow, which led to Granite’s collapse. Granite filed for bankruptcy under Chapter 11. TAG filed a claim against the bankruptcy estate for contribution. TAG also filed a third party action against the insiders of Granite for breach of fiduciary duty and negligence. The trustee sought to enjoin TAG from bringing the contribution action against the insiders of Granite as the action violated the automatic stay. The Court held that only the trustee of Granite had standing to bring a breach of fiduciary action against its insiders. Id. at 334. TAG could not assert claims that it lacked standing to bring “under the guise of contribution” and it violated the automatic stay in doing so. Id.
To the extent that the underlying claims are not barred by the Wagoner rule, the Trustee’s contribution claims must still be dismissed. The only underlying claim *582which could withstand dismissal under the Wagoner rule is the claim for malpractice. The Defendant’s failure to advise Agape that the investments were subject to registration requirements under the Securities Act may give rise to an argument that Agape did not participate in the formulation of this advice. However, as discussed above, this portion of the Complaint cannot survive the pleading requirements set forth in Ashcroft v. Iqbal. The facts as pleaded do not permit the Court to draw the inference that the Defendant is liable to Agape for the misconduct as alleged. The failure to register the investments as securities was a part of the Ponzi scheme at the outset and helped prevent detection of the scheme. Unlike the churning claim the bankruptcy trustee brought against the professionals in Wagoner, which was clearly distinct from the alleged fraudulent scheme against the bankrupt corporation’s investors, the alleged wrongdoing by the Defendant is too closely tied to the Ponzi scheme for the Court to find that the Defendant could be liable for any injury suffered by Agape.
The Trustee’s lack of standing to sue the Defendant for Agape’s injuries in which Agape participated does not deprive the investors from bringing whatever action they may have against the Defendant. The contribution claim relies solely on breach of the Defendant’s duty to Agape and does not seek contribution based on any tort committed by the Defendant against the investors directly. Because the Wagoner rule bars the majority of the underlying claims in the contribution action, and the remaining claim, based on the Defendant’s failure to properly advise Agape regarding the applicable registration requirements under the Securities Act, must be dismissed under Rule 8, the Eighth Claim shall be dismissed. Therefore, the Court need not consider the Defendant’s remaining arguments regarding the Eighth Claim.
5. Tolling Agreement
The only remaining grounds cited by the Defendant for dismissal of the Complaint relate to the Tolling Agreement. The Court declines to rule on whether the Trustee violated the Tolling Agreement and, if so, whether the proper sanction is dismissal of this adversary proceeding. The better course of conduct is to rule on the merits of the claims set forth in the adversary proceeding, not to decide this matter based on events that are extraneous to the allegations set forth in the Complaint.
Conclusion
For the reasons set forth above, the Motion is denied as to Counts One through Six, and is granted as to Counts Seven through Eleven. The Court shall enter an order simultaneously with this Memorandum Decision.
. Unless otherwise specified, "Agape” refers to all of the entities substantively consolidated in the Agape World, Inc. bankruptcy case (Agape World, Inc., Agape Merchant Advance LLC, Agape Community LLC, Agape Construction Management LLC, Agape World Bridges LLC, and 114 Parkway Drive South LLC).
. The Wagoner rule is derived from Shearson Lehman Hutton, Inc. v. Wagoner, 944 F.2d 114 (2d Cir.1991) and is discussed infra.
. Cosmo was a convicted felon whose broker’s license was previously revoked in 2000 and who was barred from future association in any capacity with any member of the National Association of Securities Dealers ("NASD”).
. DCL section 276 provides:
Conveyance made with intent to defraud. Every conveyance made and every obligation incurred with actual intent, as distinguished from intent presumed in law, to hinder, delay, or defraud either present or future creditors, is fraudulent as to both present and future creditors. (McKinney 2006)
. DCL section 276-a provides:
Attorneys’ fees in action or special proceeding to set aside a conveyance made with intent to defraud.
In an action or special proceeding brought by a creditor, receiver, trustee in bankruptcy, or assignee for the benefit of creditors to set aside a conveyance by a debtor, where such conveyance is found to have been made by the debtor and received by the transferee with actual intent, as distinguished from intent presumed in law, to hinder, delay or defraud either present or future creditors, in which action or special proceeding the creditor, receiver, trustee in bankruptcy, or assignee for the benefit of creditors shall recover judgment, the justice or surrogate presiding at the trial shall fix the reasonable attorney’s fees of the [bankruptcy trustee].
(McKinney 2006).
. Count Seven, pursuant to which the Trustee requests attorneys' fees pursuant to DCL § 276-a, requires a finding that the transferee receive the transfer with actual intent to defraud. However, this Count is only applicable if the Trustee is successful in Count Six pursuant to DCL § 276. Picard v. Cohmad, 454 B.R. at 332, n. 10 (citing In re Dreier LLP, 452 B.R. 391, 430 (Bankr.S.D.N.Y.2011)).
. The Court does not comment on whether the investors have a viable claim against the Defendant under any provisions of the Securities Act or under any other legal theory. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494662/ | OPINION
JOHN J. THOMAS, Bankruptcy Judge.
As is relatively common, a simple set of facts poses a question of law of some complexity. It comes to me by way of two objections filed to the Debtor’s Chapter 13 Plan.
The Debtor, Scott Kresge, filed a Chapter 13 bankruptcy on March 17, 2011. *778About the time of filing, his lawyer searched the county records and discovered that, in 2006, Scott’s parents, Carl and Sandra Kresge, deeded to Scott and his brother, David, a parcel of property upon which was located a construction business known as Carl L. Kresge and Sons, Inc. That business is solely owned by Carl Kresge, Debtor’s father. Neither the Debtor nor his brother are affiliated with the business. As he must, the Debtor disclosed his apparent “ownership” interest in the property on his bankruptcy Schedule A, as follows:
Garage Property Titled with Brother David Kresge
Was placed in their name unbeknownst to them by father. Father uses the property alone and pays all taxes and costs. Debtor never used the property, has no claim to it, never accepted it, and discovered ownership by post bankruptcy title search.
This conflicts slightly with the statement of Debtor’s counsel that this information was discovered shortly before the bankruptcy. Transcript of 9/13/2011 at 8.
Consistent with the Debtor’s position, he offered a Chapter 13 Plan that ignored the titled property as an asset of the estate. This position generated an Objection to the Plan by the Trustee, as well as a creditor, PNC Bank, N.A., which maintains a judgment against the Debtor filed in Luzerne County, effecting a lien against the property.
The factual testimony offered by the Debtor and his father was undisputed, with the controversy centering solely around the legal ramifications of the undisputed facts. To summarize, Carl Kresge testified that, in 2006, he, along with his spouse, deeded the property to his sons “to put it in their name so that just in case something happened to myself or Sandy,” but he had no intention of surrendering possession. Transcript of 9/13/2011 at 18. Carl stated that he used the property as a base of his business operations, paid all taxes and maintenance on the property, and never disclosed to his sons that the transfer was made. The Debtor testified that he had no knowledge of the “gift” until his bankruptcy lawyer noted it in a search of the records.
Carl is an established businessman of some 30 years experience in the construction industry. The deed was drafted by a lawyer and, apparently at Carl’s request, was recorded in the county records. The Debtor’s counsel opined that Carl was attempting to transfer a “future interest.” Transcript of 9/13/2011 at 13.
Debtor argues two theories in defending his Chapter 13 Plan. First, the Debtor acquired no title since he had no knowledge and he could not have accepted the deed. Second, if the deed is deemed accepted by him, the deed by his parents created a resulting trust which meant that no beneficial interest flowed to the Debtor.
An analysis of the facts of this case starts with an inquiry as to whether the deed recorded by the grantors, (Debt- or’s Exhibit 1), was delivered to the grantees. Property rights in bankruptcy are determined under state law. Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 59 L.Ed.2d 136 (1979). As to this first defense, Pennsylvania law is clear.
The presumption of delivery based on the action of the donor in having the instrument recorded may be rebutted by evidence that he did not intend the instrument to operate as a valid assignment. But the chancellor’s finding that there was in fact no delivery of the instruments was not a finding that the donor did not intend the assignment to be legally operative. The fact of no physical delivery of these instruments *779into the hands of the donees does not negative the fact of a legally operative delivery. By recording these instruments, the donor ended his power of disposition over them. Had he merely delivered the assignments, his power and control over the obligations assigned would not have ceased until the instruments were recorded. Once the assignments were recorded, title and all its incidents passed to the donees. Their ignorance of the transfers did not affect the fact of transfers. The assignments were for their benefit, and in such a case the title passes, subject only to being divested at the election of the donees upon their acquisition of knowledge.
Henderson v. Hughes, 320 Pa. 124, 127-128, 182 A. 392, 393-394 (Pa.1936) (emphasis mine).
State law in Pennsylvania is clear on the conclusion that delivery has occurred upon recordation.
Having found that there was delivery of the deed, is there any evidence on the record that the conveyance was rejected by the Debtor or his brother? While the implication of the language set forth in Schedule A of the bankruptcy filings and heretofore referenced, suggests an intent by the Debtor to reject the conveyance at some point, neither the Debtor nor his brother have indicated in the 13 Plan or otherwise, in writing or orally, that they, in fact, reject the transfer of the property. Presumably, the Chapter 13 Debtor has the power, subject to the provisions of the code, to reject the transfer since certain § 363 powers to convey property are specifically reserved to the Debtor and, I presume, that would include the power to reject a delivery. 11 U.S.C. § 1303. I find that no rejection has taken place.
The title of this property is, thus, in the hands of the Debtor and his brother.
The second inquiry centers around whether there is some limitation to the conveyance of property by Carl and Sandra Kresge to their two sons, David and Scott. The Debtor argues that he holds the property in question subject to a resulting trust so that its value should not be calculated when determining the value of property to be distributed pursuant to a thirteen plan under 11 U.S.C. § 1325(a)(4). Section 541(d) of the Bankruptcy Code makes clear that if the Debtor holds no equitable interest in property, then property of the estate is likewise limited. .
The concept of resulting trust finds its origin in 15th and 16th century England where it was common practice for landowners to have their land titled in others. It was generally assumed that if land was purchased and put in the name of another, the title holder would hold the land for the purchaser. Since it was presumed the land was held for the “use” of the purchaser, it was known as a resulting use. This doctrine has been applied to modern trusts and thus is known as a resulting trust. See V William F. Fratcher, Scott on Trusts § 440 at 134 et seq. (4th ed. 1989).
Section 404 of the Restatement (Second) of Trusts states:
A resulting trust arises where a person makes or causes to be made a disposition of property under circumstances which raise an inference that he does not intend that the person taking or holding the property should have the beneficial interest therein, unless the inference is rebutted or the beneficial interest is otherwise effectively disposed of.
Pennsylvania has embraced this provision of the Restatement. Mooney v. Greater New Castle Development Corp., 510 Pa. 516, 521-522, 510 A.2d 344, 346 (1986). Furthermore,
*780One who seeks to establish the existence of a resulting trust bears a heavy burden of proof; the evidence must be “clear, direct, precise, and convincing.” Policarpo v. Policarpo, 410 Pa. 543, 189 A.2d 171 (1963); see also Wosche v. Kraning, 353 Pa. 481, 46 A.2d 220 (1946); cf. Sayre Estate, 443 Pa. 548, 279 A.2d 51 (1971); Brose Estate, 416 Pa. 386, 206 A.2d 301 (1965). This Court had held that “unless the evidence of the existence of an oral trust is of the highest probative value, equity should not act to convert an absolute ownership into an estate of lesser quantity.” Sechler v. Sechler, 403 Pa. 1, 7, 169 A.2d 78, 81 (1961). The facts and circumstances from which a court may find a resulting trust should be of no lesser probative value.
Masgai v. Masgai, 460 Pa. 453, 333 A.2d 861 (1975).
Obviously, the Debtor can offer very little on this point because he was simply unaware of the conveyance until the time of filing bankruptcy. The Debtor relies solely on the testimony of Carl Kresge, one of the grantors, and a photocopy of the recorded deed from Carl and Sandra to the Debtor and his brother. Debtor’s Exhibit 1. The deed is on a typical fee simple form dated February 10, 2006, and presumably recorded contemporaneously with its execution. (The exact date of recordation is difficult to decipher from the exhibit.). No consideration passed to Carl or Sandra in exchange for deeding the property to the Debtor and his brother. This raises the interesting point that “the old doctrine that a resulting use arises upon a gratuitous conveyance has disappeared in the modern law of trusts.... ” Scott on Trusts, supra, § 405 at 14. Our jurisprudence expounds on this point and is articulated in Section 405 of the Restatement (Second) of Trusts:
§ 405. Gratuitous Conveyance
Where the owner of property transfers it without declaring any trust, the transferee does not hold the property upon a resulting trust although the transfer is gratuitous.
To date, there has been no effort to either reject the deed or enforce a resulting trust. I note that an action to enforce a resulting trust must, by statute, be commenced within five years. 42 Pa.C.S.A. § 5526(3). The bankruptcy was filed in excess of five years after the deed was executed. Carl and Sandra have taken no steps to declare a resulting trust and, in fact, they may be too late.
While Carl’s testimony makes it quite clear that he had no intention to part with possession of the real estate when he executed the deed, retention of possession is not fatal to making a gift. Henderson v. Hughes, 320 Pa. at 128, 182 A. at 394. “[T]he courts have ... recognized in numerous cases that an unexplained transfer of money or property from a parent to a child raises a rebuttable presumption that a gift was intended.” 83 Am. Jur. Proof of Facts 3d 295 (Feb. 2011). Carl’s testimony does little to rebut this presumption. He indicated that he and his wife conveyed the property to his two sons because his “mother and father did this for me.” He didn’t tell his sons of the transfer because he “didn’t believe in family squabbles.... ” While it was Carl’s intention to continue to operate the business out of the premises in question, he never suggested that the transfer was a mistake or that he didn’t intend to convey the beneficial interest in the property. He apparently never initiated any effort to reverse the transaction. Carl neither expressly nor impliedly suggested that he intended that his sons hold the property in trust for him and his spouse as beneficiaries under a trust. In fact, the failure to alert his sons of the *781transfer militates against that conclusion. Indeed, the very essence of a trust would suggest that there be some knowledge on the part of the recipient of legal title of the limitations of that grant.
I also note that the co-grantor of the deed, Sandy Kresge, did not testify. Being the mother of the Debtor, she would appear to have specific knowledge of the circumstances surrounding the transfer, and I could assume that the Debtor would have called her if her testimony would be helpful in establishing his argument.1
Debtor presents the Third Circuit Court of Appeals case of In re Stewart, as guiding the disposition of this case. In re Stewart, 825 Fed.Appx. 82, C.A.3 (Pa.), 20092.
In that ease, John Stewart filed bankruptcy owning property that his mother, Caroline Stewart, had deeded to him two years earlier. The deed was prepared by a staffer in the office of Mrs. Stewart’s legislative representative. Mrs. Stewart’s purpose was to minimize inheritance taxes. When the deed was prepared and executed, “... Mrs. Stewart and the Debtor subjectively considered Mrs. Stewart as continuing to be the owner of the Property.” In re Stewart, 868 B.R. 445, 448 (Bkrtcy.E.D.Pa.2007). (Emphasis mine). I point this pivotal fact out because there was certainly an understanding between grantor and grantee at the time of the execution of the deed that the beneficial interest would not pass. In fact, several months after the initial transfer, Mrs. Stuart recovered the property so she could re-deed that legal title to her two children. In advancing the theory of resulting trust, Stuart relied on parol evidence, which is admissible to establish the existence of such a trust. Galford v. Burkhouse, 330 Pa.Super. 21, 30, 478 A.2d 1328, 1333 (1984).
The Stewart decision was based on (1) a factual finding by the trial court that the grantor never intended to give away her home when she signed the deed to her son, the debtor, and (2) the legal conclusion that a resulting trust was created in the process.
This is precisely where the facts in the case before me differ from Stewart. Neither of the grantors here have offered any evidence that their intention was to retain the beneficial interest in the land when the property was deeded to two of their children. Sandra Kresge did not testify and Carl Kresge never once suggested that this presumed gift was not effective. The only one arguing the existence of a resulting trust is the Debtor who was completely oblivious of the terms of the transfer because he was kept in the dark as to the circumstances of the transaction. This is hardly the kind of “clear, direct, precise, and convincing” evidence required by the law to establish a resulting trust.
Finally, Scott on Trusts presents two examples to illuminate the issues before me. Where A purchases land and titles it to B, the presumption arises that B holds the land in trust for A. On the other hand, if A owns property and transfers it to B, one may infer that a gift was intended and *782the burden would be on A to establish an intention to create a trust. Scott on Trusts, supra, at 141-143. In this case, I conclude that Carl Kresge has not offered any evidence that he and his wife were attempting to create a trust by conveying this property. The Debtor, Scott, has no information to offer on this point. While Carl Kresge may have intended to create a life estate, the parol evidence rule would prevent the admissibility of testimony on that point.3 Manley v. Manley, 238 Pa.Super. 296, 309, 357 A.2d 641, 647 (Pa.Super.1976).
The Debtor can, however, attempt to reject the unexpected conveyance of land to himself. Until such time, the Debtor must account for the value of his interest in this parcel as if it was available for distribution under Chapter 7. Accordingly, the Plan must fail under 11 U.S.C. § 1325(a)(4).
My Order will follow.
. "It is generally agreed that when a potential witness is available and appears to have special information relevant to the case, so that his testimony would not merely be cumulative, and where his relaship (sic) with one of the parties is such that the witness would ordinarily be expected to favor him, then if such party does not produce his testimony, the inference arises that it would have been unfavorable.” General Elec. Credit Corp. v. Aetna Cas. & Sur. Co., 437 Pa. 463, 478, 263 A.2d 448, 457 (Pa.1970).
. I note that Stewart was not selected for publication by the Court.
. In In re Yasipour, I stated, as follows:
The rule is set out in the Restatement (Second) of Trusts § 38, as follows:
(1) If the owner of property transfers it inter vivos to another person by a written instrument in which it is declared that the transferee is to take the property for his own benefit, extrinsic evidence, in the absence of fraud, duress, mistake or other ground for reformation or rescission, is not admissible to show that he was intended to hold the property in trust. Restatement (Second) of Trusts § 38 (1959).
The Pennsylvania Supreme Court has adopted the Restatement (Second) of Trusts § 38 (1959). Truver v. Kennedy, 425 Pa. 294, 229 A.2d 468 (1967).
In addition, Pennsylvania case law advises that I am not permitted to look beyond the four corners of the deed where the grantor’s intentions are clearly expressed. 'All the language of the deed must be given effect and when the language of the deed is clear and unambiguous the intent of the parties must be gleaned solely from its language.’ In re Conveyance of Land Belonging to City of DuBois, 461 Pa. 161, 172, 335 A.2d 352, 358 (1975). '[I]t is not what the parties may have intended by the language used but what is the meaning of the words.' Teacher, et al. v. Kijurina, 365 Pa. 480, 486, 76 A.2d 197, 200 (1950).
In re Yasipour, 238 B.R. 289, 291 (Bkrtcy. M.D.Pa., 1999). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494663/ | MEMORANDUM OPINION
D. MICHAEL LYNN, Bankruptcy Judge.
Before the court is Reorganized Debtors’ Motion for Summary Judgment on Claims Asserted by Certain Live Oak, Florida Growers (the “Motion”) filed by Debtors by which Debtors ask that the claims of nine chicken growers (the “Growers”) 1 be summarily disallowed. The court conducted a hearing on the Motion on November 28, 2011.
The Growers had asserted claims for damages under a number of theories: 1) violation of the Packers and Stockyards Act, 2) violation of the Florida Deceptive and Unfair Trade Practices Act, 3) uncon-scionability, 4) reformation, 5) fraud, 6) breach of joint venture agreement, 7) promissory estoppel, and 8) breach of contract.
At the hearing, the court granted summary judgment as to all but the breach of contract claims. Following the hearing, at the court’s suggestion, Debtors and the Growers filed additional briefs in supplement to the briefs and summary judgment evidence previously provided to the court.
This matter is subject to the court’s core jurisdiction. 28 U.S.C. §§ 1334 and 157(b)(2)(B). This memorandum opinion contains the court’s findings of fact and conclusions of law. Fed. R. BankR.P. 7052 and 9014.
I. Background
Debtors, and specifically the parent debtor, Pilgrim’s Pride Corporation (“PPC”), are chicken integrators that process and sell chicken on the wholesale and *874retail markets. Debtors commenced these chapter 11 cases on December 1, 2008. Debtors’ plan, which provides for payment in full with interest of all unsecured claims, was confirmed on December 10, 2009.
The Growers owned and operated chicken farms in the vicinity of Debtor’s Live Oak, Florida, processing plant (the “Live Oak Plant”). Prior to commencement of these chapter 11 cases, the Growers had entered into contracts with PPC by which they grew chickens for processing at the Live Oak Plant. In December of 2008 and July of 2009,2 Debtors filed motions under section 365(a) of the Bankruptcy Code (the “Code”)3 by which they sought to reject and ultimately were authorized to reject the contracts between PPC and various chicken growers serving the Live Oak Plant including the Growers. The relationship between chicken growers and Debtors and the events and court proceedings surrounding the rejection of the Growers’ contracts are fully described in a prior opinion of this court. See In re Pilgrim’s Pride Corp., 403 B.R. 413 (Bankr.N.D.Tex.2009) (the “Rejection Opinion”).
By the Motion and associated briefs, Debtors contend that the Growers are not entitled to assert damage claims by reason of rejection of their contracts. See Code § 502(g)(1). The Growers, on the other hand, insist that rejection of their contracts led to substantial damages for which they are entitled to make claims under a theory of breach of contract.4 The Motion and this memorandum opinion deal only with Debtors’ liability, if any, to the Growers arising from the rejection of their contracts.5
II. Summary Judgment Standard
Rule 56(a) of the Federal Rules of Civil PROCEDURE, applicable to the Motion pursuant to Federal Rules of Baniíruptcy Pro-oedure 7056 and 9014, provides that “[t]he court shall grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Fed.R.Civ.P. 56(a); Fed. R. BaniírP. 7056 and 9014. “If a party fails to properly support an assertion of fact or fails to properly address another party’s assertion of fact ... the court may ... (3) grant summary judgment if the motion and supporting materials — including the *875facts considered undisputed — show that the movant is entitled to it....” Fed. R.Civ.P. 56(e). Rule 56 thus “mandates the entry of summary judgment ... against a party who fails to make a showing sufficient to establish the existence of an element essential to that party’s case, and on which that party will bear the burden of proof at trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 322, 106 S.Ct. 2548, 2552, 91 L.Ed.2d 265 (1986). “[Tjhere is no issue for trial unless there is sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 2511, 91 L.Ed.2d 202 (1986).
“[T]he [initial] burden on the moving party may be discharged by ‘showing’ ... that there is an absence of evidence to support the nonmoving party’s case.” Id. at 325, 106 S.Ct. 2505. Once the moving party has carried this initial burden, its opponent must establish that there exists a “genuine” issue of fact, something which requires “more than simply showing] that there is some metaphysical doubt as to the material facts.” Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 1356, 89 L.Ed.2d 538 (1986). The nonmoving party must rather come forward with “specific facts” showing that a genuine issue for trial exists. Id. at 587, 106 S.Ct. 1348. “Only disputes over facts that might affect the outcome of the suit under the governing law will properly preclude the entry of summary judgment.” Anderson, 477 U.S. at 248, 106 S.Ct. 2505. In determining whether the nonmoving party has properly shown that a genuine issue for trial exists, the court should “construe all facts and inferences in the light most favorable to the nonmoving party....” Murray v. Earle, 405 F.3d 278, 284 (5th Cir.2005).
In the case at bar most of the issues posed by the Motion require only that the court determine a legal question. At most, the court need but look to the contracts of the Growers to decide most of the issues. Where there is no factual finding required, summary judgment is appropriate. See City of Alexandria v. Cleco Corp., 735 F.Supp.2d 465, 472 (W.D.La.2010) (citing numerous cases in which courts have found it appropriate to grant motions for summary judgment because the issues were purely legal in nature). Moreover, though the Motion was filed by Debtors, under Rule 56(f)(1), the court may alternatively grant summary judgment in the Growers’ favor.6
III. Discussion
Rejection of a contract by a trustee or debtor in possession pursuant to section 365(a) is treated as a breach of the contract. See Code § 365(g); Stewart Title Guar. Co. v. Old Republic Nat’l Title Ins. Co., 83 F.3d 735, 741 (5th Cir.1996) (noting that “[t]he Code states that, except in certain narrowly circumscribed instances, rejection of an executory contract or lease constitutes a material breach.”); NLRB v. Bildisco & Bildisco, 465 U.S. 513, 530, 104 S.Ct. 1188, 1198, 79 L.Ed.2d 482 (1984) (stating that the “Bankruptcy Code specifies that the rejection of an executory contract which had not been assumed constitutes a breach of the con*876tract...The counterparty to the contract is entitled to a claim for its damages calculated as if the breach occurred immediately prior to the commencement of the bankruptcy case.7 See id.
In the case at bar, however, Debtors argue that rejection of the Growers’ contracts could not give rise to a claim for damages because (1) Debtors could have terminated the contracts by reason of economic necessity as provided in the contracts and would then have had no liability to the Growers; (2) the contracts permitted termination by either party between flocks;8 and (3) in any case, PPC was not required to provide any flocks ever to the Growers and so had no obligation to perform at all under the contracts except during the time when flocks were in fact placed. Alternatively, Debtors claim that the Growers have failed to mitigate damages when they had an opportunity to do so and, under the Growers’ contracts, Debtors cannot be held liable for consequential damages.
A. Economic Necessity
Debtors argue that the contracts with the Growers, according to their terms, could have been terminated by reason of economic necessity. They note that the court, in the Rejection Opinion, concluded that the Live Oak Plant was losing about $1,000,000 per week and that rejection of the contracts with growers would reduce that loss by $800,000 per week. Thus, Debtors state, the economic necessity of terminating the Growers was proven and Debtors consequently should owe the Growers no damages, just as would have been true if the contracts had been terminated, rather than rejected.9
But, in the first place, two of the contracts at issue do not even include a term allowing PPC to terminate on the basis of economic necessity.10 Second, as for those contracts that do allow for termination based on economic necessity, that is not what Debtors chose to do.
*877Under section 365(a), in order to be authorized to reject a contract, the trustee — or, as here, the debtor in possession — need only satisfy the business judgment test. See Richmond Leasing Co. v. Capital Bank, N.A., 762 F.2d 1303, 1309 (5th Cir.1985) (stating that “[i]t is well established that ‘the question whether a lease should be rejected ... is one of business judgment.’ ” (quoting Group of Inst. Investors v. Chicago, Milwaukee, St. Paul & Pac. R.R. Co., 318 U.S. 523, 550, 63 S.Ct. 727, 742, 87 L.Ed. 959 (1943))); Bildisco, 465 U.S. at 524-25, 104 S.Ct. 1188 (departing from the usual business judgment standard in considering the proper standard for rejection of a collective bargaining agreement under section 365(a)); In re Food City, Inc., 94 B.R. 91, 93 (Bankr.N.D.Tex.1988).
It was based on satisfaction of the business judgment rule, as interpreted by the court, that Debtors were authorized to reject the Growers’ contracts. See Rejection Opinion, 403 B.R. at 428-35. Had Debtors come before the court under section 363(c)(1) of the Code11 seeking authority to terminate the Growers’ contracts due to economic necessity, they would have been required to show not only that termination was consistent with their exercise of business judgment (so satisfying section 363(c)(1)) but also (at least if opposed) that economic necessity warranted termination of the contracts (so meeting the contractual requirement). Debtors did not make the additional showing that economic necessity warranted termination of the contracts, but only made the former showing that they met the business judgment test. A showing of economic necessity to terminate would require meeting a different and, perhaps, stricter test than the business judgment standard.
It also by no means is clear though that the losses at the Live Oak Plant, standing alone, would satisfy the standard of economic necessity. If PPC were, over all, healthy financially, it is unlikely that a court would find it economically necessary for the company to terminate contracts with growers serving an unprofitable processing plant. Even if a showing of the economic necessity for termination could have been made, in rejecting contracts with growers serving the Live Oak Plant the issue of whether economic necessity existed was not joined or resolved, and the Growers cannot now be held to have failed to controvert such an allegation.
B. Termination Between Flocks
Debtors next assert that, in any case, the Growers’ contracts are flock-to-flock and each contract allows either party to freely terminate a Grower’s contract between flocks. As it happens, though, only one of the Growers’ contracts does not have a term stated in years but rather has its term stated as flock-to-floek.12 To *878the extent that a contract specifies a term of years, that provision must be given meaning. See Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159 (Del.2010) (stating that “[w]e will read a contract as a whole and we will give each provision and term effect, so as not to render any part of the contract mere surplusage.” (quoting Kuhn Constr., Inc. v. Diamond State Port Corp., 990 A.2d 393, 396-97 (Del.2010))); Hargrave v. Hargrave, 728 So.2d 366, 367 (Fla.Dist.Ct.App.1999) (stating that “[e]very provision in a contract should be given meaning and effect, and apparent inconsistencies reconciled if possible”). Allowing either party to freely terminate between flocks would strip the stated term of their contract of meaning.
Furthermore, the court does not read the provision allowing termination between flocks as giving PPC the freedom to terminate it insists it had. Paragraph D of five of the contracts,13 the provision on which Debtors rely, states:
Either the Independent Grower or the Company shall have the right to terminate this Agreement and its Exhibits without any need for cause provided that written notice is given after a flock is settled and before a new flock is placed. Written notice from the Independent Grower should be given to the Live Production Manager or Broiler Manager. Written notice shall be given from the Company to the Independent Grower. Termination during a flock shall be in accordance with the other terms of this Agreement. Should such termination occur, the Company agrees to pay the Independent Grower for all services performed until termination of this Agreement, and the Independent Grower agrees to perform all obligations until termination of this Agreement. Once notice has been given by either party to terminate, the Company will not deliver new chicks, nor will the Independent Grower accept new chicks. Except for cause or economic necessity, Company will not terminate this Agreement without first requiring Independent Grower to follow the “Cost Improvement Program” as described in Exhibit B.
Thus, PPC may terminate between flocks without cause and in the absence of economic necessity only after “requiring [the] Grower to follow the ‘Cost Improvement Program.’ ” Though paragraph D is not free of ambiguity, the clear implication is that a grower that successfully completes the cost improvement program will not be subject to termination; at least that is a reasonable construction of paragraph D. As the contracts were drafted by Debtors, rather than dickered, whatever ambiguity there is in paragraph D must be resolved against. Debtors. See Nat’l Ropes, Inc. v. Nat’l Diving Serv., Inc., 513 F.2d 53, 59 (5th Cir.1975) (construing an agreement against a bank because it had been the drafter of the agreement); Twin City Fire Ins. Co. v. Del. Racing Ass’n, 840 A.2d 624, 627 (Del.2003) (citing Restatement (Second) of CONTRACTS § 206 cmt. a (1981)) (stating that Delaware follows the well-accepted contra proferentem principle of construction); Excelsior Ins. Co. v. Pomona Park Bar & Package Store, 369 So.2d 938, 942 (Fla.1979) (stating that ambiguities are to be construed against the drafter of the contract). The court therefore concludes that PPC could not freely terminate between flocks under paragraph D.
The Growers that had contracts including a paragraph D were not required to *879participate in the Cost Improvement Program. They never had the opportunity to argue that under paragraph D completing the Cost Improvement Program allowed a Grower to avoid termination. As with termination due to economic necessity, Debtors did not end their relationship with the Growers pursuant to paragraph D. Rather, they breached the contracts by rejecting them under Code § 365(a).
As for the remaining two contracts— Janet Brito’s and Glenda Hudson’s — there is no provision allowing termination between flocks, though Janet Brito’s contract states that its term is “flock to flock years [sic].” While these two contracts may be “at will” contracts as to PPC, and accordingly limited, the court need not reach that issue today.
C. Requirement for PPC to Perform
Debtors next point to the provision of the Growers’ contracts that specify that PPC shall “determine the number, frequency of placement ... of birds” (paragraph F(3)).14 Debtors construe this term as meaning that PPC had no obligation to place any flocks with any of the Growers. Because there was no obligation of PPC to place flocks, except while a flock was placed and in a grower’s possession, PPC had no contractual obligations to the grower.
The court is not prepared to find in the language of paragraph F(3) manifestation of an intent of the parties that PPC be free not to place any flocks with a grower. Indeed, the court questions whether PPC would wish a finding from it that its intent was to be free of any obligation to perform. Such a finding would evidence an intentional lack of good faith and fairness on PPC’s part in the formulation of the Growers’ contracts. Rather, the intent of the parties may be implied to have been that PPC was obligated to give some flocks to the grower; for example, a given grower could expect to receive flocks of roughly the same size and at roughly the same frequency as would other similarly situated growers. Paragraph F(3) is best interpreted as intended to ensure that PPC could not be held accountable because of minor differences in the placement of flocks among different growers.
In both Florida and Delaware — the states the law of which is to be applied in interpreting the Growers’ contracts15— case law supports implying in a contract a covenant of good faith and fair dealing. See Speedway SuperAmerica, L.L.C. v. Tropic Enters., Inc., 966 So.2d 1, 3 (Fla.Dist.Ct.App.2007) (discussing the covenant of good faith and fair dealing implied in all contracts governed by Florida law); Fla. Stat. § 671.203 (imposing “obligation of good faith” under Florida’s enactment of the Uniform Commercial Code); Dunlap v. State Farm Fire & Cas. Co., 878 A.2d 434, 440-42 (Del.2005) (stating that the “requirement that all parties to a contract act in ‘good faith’ toward one another spans at least three centuries of American legal thought.”). In turn, this permits the court to imply an obligation of PPC to place flocks with each of the Growers. See Gillenardo v. Connor Broad. Del. Co., 2002 WL 991110, at *7-8 (Del.Super.Ct. Apr. 30, 2002) (reading a duty of good faith into contractual provisions that otherwise appeared illusory, and implying contractual duties on that basis); Pharmathene, Inc. v. Siga Techs., Inc., 2008 WL 151855, at *880*11 (Del.Ch. Jan. 16, 2008) (stating that “Delaware courts try to avoid an interpretation that would render a provision illusory or meaningless.”); Great Am. Ins. Co. v. Sch. Bd. of Broward County, Fla., 2010 WL 4366865, at :,17-18 (S.D.Fla. Jul. 31, 2010) (interpreting Florida law and declining to find a contract void for lack of mutuality of obligation and looking to other applicable law to imply a duty).
The court therefore concludes that PPC had some obligation to place flocks with the Growers under their contracts. Because the contracts are now in breach, as provided in Code § 365(g) the Growers are entitled to claims for damages to the extent PPC has failed to fulfill that obligation. Exactly what PPC’s obligation was is an issue of fact, and the summary judgment evidence is inadequate for the court to resolve it.
D. Measure of Damages
Debtors argue further that the Growers’ damages, if any, should be limited by (1) an obligation to mitigate; and (2) the exclusion of consequential, or non-compensatory damages. The court will address these points first and then turn briefly to the measure of the Growers’ actual damages.
1. Mitigation
Both Delaware and Florida law require a party to a contract harmed by another party’s breach to mitigate its damages if possible. See NorKei Ventures, LLC v. Butler-Gordon, Inc., 2008 WL 4152775, at *2 (Del.Super.Ct. Aug. 28, 2008) (stating that in Delaware a “party has a general duty to mitigate damages if it is feasible to do so.”); Young v. Cobbs, 110 So.2d 651, 653 (Fla.1959) (applying Florida law to require a lessee to mitigate damages). It may well be that the Growers’ damages should be reduced because of a failure to mitigate — for example if a Grower failed to take advantage of an opportunity to service another chicken integrator.
The summary judgment evidence, however, does not include proof of such an opportunity. Rather, Debtors point to their offer of new contracts to the Growers, arguing that the Growers should have reduced any damages they suffered by entering into such contracts. But to obtain a new contract with Debtors a grower was required to release any claims the grower might have against Debtors such as those now at issue before the court.16 Such a requirement — that a contract party forfeit the very claim it is supposed to mitigate — taints the opportunity offered such that the court cannot fault the Growers for declining it. Mitigation of damages only requires an injured party to use ordinary and reasonable care to mitigate loss; it does not require forfeiture of property rights. See Sys. Components Corp. v. Fla. Dep’t of Transp., 14 So.3d 967, 982 (Fla.2009) (stating that “the injured party is only accountable for those hypothetical ameliorative actions that could have been accomplished through ‘ordinary and reasonable care,’ without requiring undue effort or expense.” (citing Graphic Assocs. v. Riviana Rest. Corp., 461 So.2d 1011 (Fla.Dist.Ct.App.1984) (stating that doctrine of mitigation of damages “prevents a party from recovering those damages inflicted by a wrongdoer which the injured party ‘could have avoid*881ed without undue risk, burden, or humiliation.’ ” (quoting Restatement (Seoond) of Contracts § 305(1) (1979))))). Thus, while mitigation may ultimately enter into the calculation of the Growers’ damages, the Growers’ failure to mitigate has not been shown to be a proper subject for summary judgment.
2. Consequential and Non-compensatory Damages
On the other hand, Debtors are entitled to summary judgment that they are not liable by reason of breach of the Growers’ contracts for consequential or non-compensatory damages. Each of the Growers’ contracts contains a term by which the parties forego that category of damages.17 Contractual provisions of this sort are enforceable under both Delaware and Florida law. See Delmarva Power & Light Co. v. ABB Power T & D. Co., 2002 WL 840564, at *3-6 (Del.Super.Ct. Apr. 30, 2002) (finding binding a contract provision that limited consequential, special, indirect or incidental damages (citing Del. Code Ann. tit. 6, § 2-719, which states that “[consequential damages may be limited or excluded unless the limitation or exclusion is unconscionable ... ”)); Orkin Exterminating Co. v. Montagano, 359 So.2d 512 (Fla.Dist.Ct.App.1978) (citing Middleton v. Lomaskin, 266 So.2d 678 (Fla.Dist.Ct.App.1972)) (stating that “[i]t is inescapable that Florida courts recognize and uphold, not only contracts with exculpatory clauses which limit liability, but also those which exempt liability altogether.”). As a result, the Growers, to the extent they claim these sorts of damages by reason of breach of their contracts, are not entitled to recover and Debtors shall have summary judgment to such effect.
3. Measure of Actual Damages
The parties have not briefed how to calculate damages to the Growers resulting from PPC’s breach of their contracts. Indeed, the method of calculation may vary between the Janet Brito and Glenda Hudson contracts and the other Growers’ contracts.
It appears to the court that there are a number of potential ways to calculate damages resulting from breach of the Growers’ contracts.18 Damages may run from a *882small sum or even zero to a very large amount depending on which method is applicable to the Growers’ contracts and what evidence is presented at trial.
IV. Conclusion
It is a fundamental premise of the American legal system that a party may elect its remedy for resolving a legal problem and that the party is then bound by the consequences of the remedy selected. See, e.g., State ex rel. Van Ingen v. Panama City, 126 Fla. 776, 779, 171 So. 760 (1937) (stating that the election of remedies “doctrine appears well settled that the election implies choice between alternative and inconsistent rights or remedies. The choice of one infers an election not to pursue the other. The person electing cannot enjoy both.”). Debtors elected in the instant matter to utilize section 365(a) of the Code to eliminate their future obligations under the Growers’ contracts. They thus chose to breach those contracts — rather than looking to the contracts and non-bankruptcy law for relief; now Debtors must accept the consequences of their breach.
The Motion will be
GRANTED as to consequential damages and otherwise DENIED.
Summary judgment will be GRANTED to the Growers to the extent that their claims are allowable in such amount as they might have been entitled to as damages had PPC breached their contracts immediately prior to commencement of these cases.
The parties are directed to obtain a setting for a status conference with the court to determine how to proceed in the future with disposition of the Growers’ claims. Counsel may attend that status conference by telephone or in person.
It is so ORDERED.
*883[[Image here]]
*884[[Image here]]
. The Growers are: 1) Adalberto Brito d/b/a AC Paradise, 2) Janet Brito d/b/a/ Brito Farm, 3) James Fountain, 4) Bruno Lazaro Garcia d/b/a Cullinane Farms, LLC, 5) David Hines, 6) Keith Hudson and Glenda Hudson, 7) Moisés Rodriguez, 8) Abel E. Tellechea d/b/a Able T Farms, and 9) Roman Vasallo d/b/a/ R & C Farm. James Fountain and David Hines did not respond to the Motion and the court granted summary judgment as to both at the hearing on November 28, 2011.
. The motions filed in July of 2009 were contemplated at the time of the earlier filing. See Rejection Opinion (as defined below), 403 B.R. at 417-18.
. 11 U.S.C. §§ 101 etseq.
. The Growers have made claims in the amounts listed below: 1) Adalberto Brito d/b/a AC Paradise — $7,088,548.70, 2) Janet Brito d/b/a Brito Farm — $3,430,320.00, 3) Bruno Lazaro Garcia d/b/a Cullinane Farms, LLC — $9,659,859.50, 4) Keith Hudson and Glenda Hudson — $2,443,735.00, 5) Moisés Rodriguez — $7,229,244.40, 6) Abel E. Telle-chea d/b/a Able T Farms — $2,104,100.00, and 7) Roman Vasallo d/b/a R & C Farm'— $4,173,757.44.
. Numerous growers who served other plants owned by Debtors filed claims in these chapter 11 cases following termination or rejection of their contracts. These claims, however, were not based on damages for breach including claims allowable under section 502(g)(1) of the Code — the latter category of damages having been resolved as to growers other than the Growers through various settlements (see, e.g., Order Pursuant to Rule 9019 of the Federal Rules of Bankruptcy Procedure Authorizing and Approving Settlement Resolving Certain Grower Claims (“The Second Grower Settlement Agreement”) at docket number 3864). The remaining claims of other growers have been addressed elsewhere by the court. See, inter alia, In re Pilgrim's Pride Corp., 2011 WL 3799835 (Bankr.N.D.Tex. Aug. 26, 2011); In re Pilgrim’s Pride Corp., 453 B.R. 691 (Bankr.N.D.Tex.2011); In re Pilgrim’s Pride Corp., 442 B.R. 522 (Bankr.N.D.Tex.2010).
. Though Rule 56(f) requires notice, the proceedings at the November 28th hearing and the effect of inviting further briefs provided sufficient notice that the court’s ruling might dispose of part of this matter in favor of the Growers. See Gibson v. Mayor & Council of Wilmington, 355 F.3d 215, 222-23 (3d Cir. 2004) (holding that the notice requirement is satisfied if " ‘the targeted party had reason to believe the court might reach the issue and received a fair opportunity to put its best foot forward.’ ” (quoting Leyva v. On the Beach, Inc., 171 F.3d 717, 720 (1st Cir.1999))).
. The Growers rendered performance to Debtors after commencement of these chapter 11 cases. Although Debtors compensated the Growers in accordance with their contracts, the general rule is that, consistent with Code § 503(b)(1), a counterparty is entitled to post petition payment (i.e., administrative expense treatment for post petition performance) under a rejected contract only to the extent of value (benefit) to the estate. See In re Templeton, 154 B.R. 930, 932 (Bankr.W.D.Tex.1993); United Trucking Serv., Inc. v. Trailer Rental Co. (In re United Trucking Serv., Inc.), 851 F.2d 159 (6th Cir.1988); but see In re Curry Printers, Inc., 135 B.R. 564 (Bankr.N.D.Ind.1991). This is so because the trustee or debt- or in possession's obligation to perform in accordance with a rejected contract is inapplicable post petition.
. See the Rejection Opinion, 403 B.R. at 418-20, for a description of the nature and placement of flocks.
. In their post hearing brief Debtors seem to adopt the position that PPC's ability to have terminated based on economic necessity constitutes a defense to a claim for damages. While the court need not address that argument today, it has found no authority — nor have Debtors cited any — that would support the view that a termination clause in a contract that might have been, but was not, invoked can be used a defense against a claim of breach. Though Debtors argue in their brief that they did in fact elect to “ ‘terminate,’ through the mechanism of rejection,” the court finds this argument unconvincing for the reasons explained in further detail below. See Reorganized Debtors’ Supplemental Brief in Support of Motion for Summary ludgment on Claims Asserted by Certain Live Oak, Florida Growers, docket number 6891, p. 13.
.Those contacts are with Janet Brito and Glenda Hudson. An analysis of, the relevant parts of all the Growers’ contracts is found in the appendix to this opinion (the "Appendix”).
. Debtors correctly note that termination of a grower's contract may be in the ordinary course of business. While that would be true of termination for, e.g., cause, it can hardly be said that the existence of economic necessity as a basis for termination is an element of the ordinary course of business. Thus, court authority would have been required to terminate the contracts on the basis of economic necessity as with any act a debtor or trustee proposes to take outside the ordinary course of business. See 3 Collier on Bankruptcy ¶ 363.03[1], 16th ed. 2010; In re Mickey Thompson Entm’t Group, Inc., 292 B.R. 415, 421-22 (9th Cir. BAP 2003) (citing In re Martin, 91 F.3d 389 (3d Cir.1996)) (applying broadly the principle that any transaction outside the ordinary course of business requires court approval pursuant to section 363).
. Only Janet Brito's contract states its term as flock-to-flock. For the terms of the other contracts (none of which had expired at the time of the Rejection Opinion), see the Appendix.
. The five contracts were those with 1) Adal-berto Brito d/b/a AC Paradise, 2) Bruno Láza-ro Garcia d/b/a Cullinane Farms, LLC, 3) Moisés Rodriguez, 4) Abel E. Tellechea d/b/a Able T Farms, and 5) Roman Vasallo d/b/a R & C Farm.
. The contracts of Janet Brito and Glenda Hudson, unlike the other five contracts, do not have a provision like paragraph F(3).
. The Janet Brito and Glenda Hudson contracts are governed by Delaware law. The other contracts of the Growers provide for application of Florida law.
. Debtors contend that new poultry growing contracts were offered to Roman Vasallo, Bruno Lazaro Garcia, Adalberto Brito, Moisés Rodriguez and Abel Tellechea in exchange for release of their claims. See Appendix to the Motion, Ex. B, Gillis Deck at ¶ 10. No evidence was presented as to whether Janet Bri-to and Glenda Hudson were offered similar contracts.
. See paragraph 4.3 of the Janet Brito and Glenda Hudson contracts and paragraph 14 of the remaining contracts.
. It appears to the court that there may be at least three potential measures of damages applicable here. First, the court could follow the damages model followed by the district court in Adams v. Pilgrim's Pride Corp., 2011 WL 5330301 (E.D.Tex. Sep. 30, 2011). In that case, the court calculated damages as the lost income for the length of the loan used to finance construction of the poultry houses (which was 15 years). Id. at *2, 7. The Adams court then adjusted that amount downward to reflect the fact that many of the poultry growers in that case were in various stages of repayment of the loans.
If the court were to determine that one or more of the Growers’ contracts were “at will,” the analysis would be different. Under Florida and Delaware law, an "at will” contract is terminable at will, provided that the terminating party give reasonable notice. See Maytronics, Ltd. v. Aqua Vac Sys., Inc., 277 F.3d 1317, 1320-21 (concluding that Florida law requires reasonable notification prior to the termination of an "at will” contract); Crawford v. David Shapiro & Co., 490 So.2d 993, 996-97 (Fla.Dist.Ct.App.1986) (holding that special damages may be awarded for damages that would not have been incurred but for lack of reasonable notice in terminating an "at will” contract); A.R. Dervaes Co. v. Houdaille Indus., Inc., 1981 WL 7625 (Del.Ch. Sep. 29, 1981) (holding that a contract silent as to termination was terminable at will by either party upon reasonable notice).
Alternatively, the opinion of the Court of Appeals in In re Continental Airlines Corp., 901 F.2d 1259 (5th Cir.1990), may provide a measure of damages for the present case. In Continental, the district court had reject*882ed all of the appellants’ claims for damages for breach of contract. The district court had based its holding upon a finding that but for unilateral changes to the contracts, the debtor would not have been able to continue its operations for want of necessary cash, and the appellants would not have recovered anything. The Court of Appeals reversed on the ground that the bankruptcy court had previously found that the debtor could have survived for approximately four more months without the changes to the contracts. The Court of Appeals reasoned that the appellants would have had a claim for damages, accruing until the debtor ceased operations after four months, if the contracts had not been rejected. Therefore, appellants were entitled to contract rejection damages for the same period. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494664/ | MEMORANDUM
JOAN N. FEENEY, Bankruptcy Judge.
I. INTRODUCTION
The matter before the Court is the Amended Complaint filed by Begashaw *26Ayele (“Mr. Ayele” or the “Debtor”) against Educational Credit Management Corporation (“ECMC”), through which Mr. Ayele seeks a discharge of his student loan obligations, totaling $30,605.88 as of October 20, 2011, pursuant to 11 U.S.C. § 523(a)(8). In his Complaint, Mr. Ayele, who has appeared in his Chapter 7 ease and this adversary proceeding pro se, has alleged that, based upon his current financial circumstances, repayment of his student loans would constitute an undue hardship. He asserts that he would be unable to maintain a minimal living standard if he were required to repay the loans.
ECMC answered the Complaint, and the Court issued a Pretrial Order. In compliance with that order, the parties filed a Joint Pretrial Memorandum in which they stipulated to facts which are admitted and require no proof. The Court conducted a trial on November 2, 2011. At the trial, Mr. Ayele was the only witness. Because he appeared pro se, the parties agreed that Mr. Ayele could provide a narrative statement as his direct examination, that ECMC’s counsel could then cross-examine him, and that Mr. Ayele could provide a further narrative statement in rebuttal.
In accordance with Fed. R. Bankr.P. 7052, the Court now makes the following findings of fact and conclusions of law. The only issue is whether Mr. Ayele sustained his burden of establishing that repayment of his student loan debt would impose an undue hardship upon him.
II. FACTS
A. The William D. Ford Direct Loan Program
Prior to the commencement of the trial, the Court took judicial notice of the William D. Ford Federal Direct Loan Program (the “Ford Program”), which was enacted by Congress pursuant to 20 U.S.C. § 1087a et seq., and is contained within the Code of Federal Regulations, see 34 C.F.R. §§ 685.100 through 685.402. The Ford Program provides for student loan consolidation under the guaranteed student loan program, see 34 C.F.R. § 685.220(b), and an income contingent repayment plan (“ICR Plan”). See 34 C.F.R. § 685.209. Under that plan, according to information provided by ECMC,
the monthly payment amount is calculated as the lesser of: (a) the amount that would be paid if the borrower repaid the loan in 12 years, multiplied by an annual income percentage factor that varies based upon the borrower’s annual income; or (b) 20% of the borrower’s discretionary income, which is defined as the borrower’s adjusted gross income (“AGI”) minus the poverty level for the borrower’s family size.
The Health and Human Services Poverty Guidelines, which are annually adjusted, are used in determining monthly payment amounts under ICR Plans. See 34 C.F.R. § 685.209. In addition to ICR Plans, student loan borrowers may be eligible for the Income-Based Repayment program (the “IBR program”) as part of the Ford Program. That program is part of the College Cost Reduction and Access Act of 2007, which amended the Higher Education Act of 1965. See 20 U.S.C. 1001 et seq. According to ECMC, which referenced a publication from Federal Student Aid, an office of the United States Department of Education, payments under the IBR program are annually adjusted based in part on changes to the federal poverty guidelines. ECMC summarized the program as follows:
Under the IBR, the amount an eligible borrower would repay each month under the IBR is based on the Borrower’s AGI and family size. The annual IBR repayment amount is 15 percent of the difference between the borrower’s AGI (or an *27alternate income amount) and 150 percent of the Federal HHS Poverty Guidelines, adjusted for family size. That amount is then divided by 12 to get the monthly IBR repayment amount. If that amount is higher than the 10-year standard repayment amount on the borrower’s loans, then the borrower’s required payment is the standard amount. The repayment amount under a 10-year standard plan is calculated based upon the total.
B. Stipulated Facts and the Debtor’s Testimony
The parties complied with the Court’s trial procedure and Mr. Ayele provided a narrative of his educational background, employment history, marital and health status, and the reasons for his refusal to participate in the repayment plans for student loans available under the Ford Program.
Mr. Ayele, a native Ethiopian, is a 53 year old. He is divorced and has no minor children.1 He filed a voluntary Chapter 7 petition on November 9, 2010. On Amended Schedule F-Creditors Holding Unsecured Nonpriority Claims, which he filed on December 22, 2010, he listed unsecured creditors holding claims totaling $34,867.91, including ECMC with a claim in the sum of $29,925.42.2
Mr. Ayele commenced the instant adversary proceeding on November 9, 2010, the same day he filed the Chapter 7 petition. He received a discharge of dischargeable debts on March 29, 2011.3 In the Joint Pretrial Memorandum, the parties agreed that ECMC holds three (3) federal student loans of the Plaintiff, as follows:
i. A student loan that disbursed on February 19, 1991, under the federal Supplement Loan for Students Program (“SLS”). As of April 11, 2011 the loan had an outstanding balance of $12,186.87, of which $8,321.18 is for principal, $1,663.89 is for interest, and $2,350.20 is for costs. The loan has a variable interest rate currently of 3.54% and a per diem of .81 cents.
ii. A student loan that disbursed on December 27, 1991, under the federal Guaranteed Student Loan Program (“GSLP”). As of April 11, 2011 the GSLP loan had an outstanding balance of $5,277.94, of which $3,664.67 is for principal, $607.13 is for interest, and $1,006.14 is for costs. The loan has a variable interest rate currently of 3.42% and a per diem of .34 cents.
iii. A student loan that disbursed on February 19, 1992 under the federal SLS program. As of April 11, 2011 the loan had an outstanding balance of $12,618.94, of which $8,512.55 is for prin*28cipal, $1,702.15 is for interest, and $2,404.24 is for costs. The loan has a variable interest rate currently of 3.54% and a per diem of .82 cents.
Mr. Ayele has lived in the United States for 29 years. During that time, he has not succeeded in obtaining salaried employment and has only held hourly wage positions. He currently resides in South Boston, Massachusetts in housing provided by the Boston Housing Authority for which he pays $405 per month.
Mr. Ayele has acquired several degrees from American educational institutions. He received an Associate Degree in Business Administration from South Central Community College in New Haven, Connecticut in 1988, and later a Bachelor of Science Degree from Southern Connecticut State University in New Haven, Connecticut in 1992. He attended Boston University between 1996 and 2000 and received a Master of Science Degree in Administrative Studies, while he worked as a parking lot attendant for the University. Mr. Ayele explained that his benefit package included tuition, but that he was responsible for books and other educational materials.
Mr. Ayele worked for a company called Globe Aviation Service from May 5, 2005 to December 9, 2005. In December of 2005, Globe Aviation Service was purchased by another entity called G2 Secure Staff, LLC (“G2”). Mr. Ayele worked for G2 until November 19, 2010. While employed by those two companies, Mr. Ayele worked as a ramp agent and provided assistance for flights at Logan Airport. He worked approximately 35 hours per week, earning $9.00 per hour. Mr. Ayele did not state reasons why his employment ceased.
Although Mr. Ayele does not keep records of his expenses, he set forth his monthly expenses on Schedule J, which totaled $1,062. They include: 1) $405 for rent, including utilities; 2) $40 for cell phone usage; 3) $46 for cable and internet service; 4) $225 for food; 5) $25 for clothing; 6) $15 for medical and dental care; 7) $60 for a monthly MBTA pass; 8) $25 for recreation; 9) $25 for charitable giving; 10) $160 toward a garnishment payment which ceased when he filed for bankruptcy; and 11) $36 for printer ink, paper and software. Mr. Ayele also indicated that he sends money to his sister to support her and her family in Africa. He testified that the amount and timing of the payments varies depending upon his financial circumstances.
Mr. Ayele has been collecting unemployment payments of $700 per month for the past nine months. At the time of trial, he testified that he was entitled to three additional months of unemployment benefits. Mr. Ayele has been unable to find employment since leaving G2.
Mr. Ayele testified that he has sent out over 600 resumes and job applications in his attempt to find employment suited to his educational level. He testified that his inability to find suitable employment was due to racism or his accent. At the present time, Mr. Ayele testified that he will no longer accept employment as a security guard or parking lot attendant. He explained that if he accepted such employment “life will never change.” He added: “All this job, it’s out of mind. It was yesterday and it is now. I will never, never take that job to pay student loan.” Mr. Ayele further explained that he wished to find employment as a paralegal or professional so that he could advance his career prospects. Mr. Ayele also testified that he never considered a second, part-time job during the five year period when he worked as a ramp agent because he uses his free time writing a book and attending religious services on Sundays.
*29Mr. Ayele attempted to introduce written evidence pertaining to his medical conditions at trial. Specifically, he attempted to submit medical records that show that his gallbladder was removed and that he is physically unable to stand for extended periods of time due to a leg problem. Because of his physical limitations, Mr. Ayele maintained that he cannot apply for all types of jobs. ECMC objected to the admission of Mr. Ayele’s medical and other evidence on the basis of hearsay and lack of authentication. The Court sustained its objection.4
As noted above, the Court took judicial notice of the Ford Program and the student loan consolidation options that are available to debtors. Mr. Ayele testified that obtaining the discharge of his student loan debt was the sole purpose of his decision to file a bankruptcy petition. At trial, he testified that he did not apply for a federal loan consolidation through the Ford Program, because he “want[ed] the Judge to decide [the case] based on [his] economic status.” When asked if he would pay back his debts if he obtained a full time job, Mr. Ayele responded in the affirmative; when asked if he understood that under an ICR Plan or the IBR program his payments might be zero until such time as he could make enough money to support himself and his sister’s family, he again responded in the affirmative. Mr. Ayele chose not to apply to the Ford Program because he did not wish to be burdened by the knowledge of his continuing liability for the student loan debts as it would deprive him of his “peace of mind.” He explained:
But the problem is I will get a job 16,000 a year. If it is 15,000 I will not pay. If its 16,000,1 will pay. For the difference between 15 and 16 is 1,000. For that 1,000 difference, you commit to pay the student loan, for years to come. So that really doesn’t make sense.
He added, “it’s not the issue of paying every month, but it’s the issue of paying all the debt, including the interest, including the collection fee, whatever.” In short, he did not wish to admit that he owed obligations in excess of the principal or to commit to disclosing his future income, indicating that it was “another vicious cycle.”
Mr. Ayele claims to be depressed and humiliated because he is unable to find professional employment with a Master’s Degree. He indicated that he also is hampered in finding employment because he does not own a motor vehicle, or even a bicycle. He stated that if he is unable to discharge his student loan debt, he will be forced to move back to Africa.
III. POSITIONS OF THE PARTIES
Mr. Ayele maintains that repayment of his student loan debt would present an undue hardship because he cannot currently afford to repay the debt, and he is unlikely to be able to repay it in the foreseeable future.
*30ECMC argues that Mr. Ayele failed to sustain his burden of establishing the existence of undue hardship. It asserts that Mr. Ayele failed to show that his future prospects are bleak enough to warrant the discharge of his student loan debt. It concludes that his request for an exception to discharge must be rejected in view of his right to consolidate his debts under the Ford Program.
IV. DISCUSSION
A. Applicable Law
Under 11 U.S.C. § 523(a)(8), the creditor has the initial burden of establishing that the debt qualifies as the type excepted from discharge, and the debtor has the burden of establishing that excepting the debt from discharge will cause an undue hardship on the debtor or his or her dependents. See Bronsdon v. Educ. Credit Mgmt. Corp. (In re Bronsdon), 435 B.R. 791, 796 (1st Cir. BAP 2010) (citations omitted). In Stevenson v. Educ. Credit Mgmt. Corp. (In re Stevenson), 463 B.R. 586 (Bankr.D.Mass.2011), this Court recently addressed the legal standards governing the discharge of student loan debt, extensively referencing the decision of the United States Bankruptcy Appellate Panel of the First Circuit in Bronsdon. The Court repeats that discussion from Stevenson here.
The Bankruptcy Code prohibits the discharge of student loan debt “unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor’s dependents.” 11 U.S.C. § 523(a)(8). In determining whether a debtor has satisfied her burden in showing undue hardship, courts are split on the proper test to apply. Several circuit courts have adopted the Second Circuit’s test set forth in Brunner v. New York State Higher Educ. Servs. Corp., 831 F.2d 395 (2d Cir.1987) (“the Brunner test”). The Brunner test is a three-part test which requires the debtor to prove:
(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.
Brunner, 831 F.2d at 396. See e.g., Educ. Credit Mgmt. Corp. v. Polleys, 356 F.3d 1302, 1309 (10th Cir.2004); U.S. Dept. of Educ. v. Gerhardt (In re Gerhardt), 348 F.3d 89, 91 (5th Cir. 2003); Hemar Ins. Corp. v. Cox (In re Cox), 338 F.3d 1238, 1241 (11th Cir.), reh’g denied, 82 Fed.Appx. 220 (11th Cir.2003), cert. denied, 541 U.S. 991, 124 S.Ct. 2016, 158 L.Ed.2d 496 (2004); Ekenasi v. Educ. Res. Inst. (In re Ekenasi), 325 F.3d 541, 546 (4th Cir.2003); United Student Aid Funds, Inc. v. Pena (In re Pena), 155 F.3d 1108, 1112 (9th Cir.1998); Pa. Higher Educ. Assistance Agency v. Faish (In re Faish), 72 F.3d 298, 306 (3d Cir.1995), cert. denied, 518 U.S. 1009, 116 S.Ct. 2532, 135 L.Ed.2d 1055 (1996); and In re Roberson, 999 F.2d 1132, 1135 (7th Cir.1993). See also Oyler v. Educ. Credit Mgmt. Corp. (In re Oyler), 397 F.3d 382, 385 (6th Cir. 2005) (in which the Sixth Circuit abandoned its hybrid-Brunner test and adopted the Brunner test).
Other courts have adopted “the totality of the circumstances test” which requires the court to consider “(1) the debtor’s past, present, and reasonably reliable future financial resources; (2) a calculation of the debtor’s and her de*31pendent’s reasonable necessary living expenses; and (3) any other relevant facts and circumstances surrounding each particular bankruptcy case.” Long v. Educ. Credit Mgmt. Corp. (In re Long), 322 F.3d 549, 554 (8th Cir.2003). The United States Court of Appeals for the First Circuit has not adopted either test. In Nash v. Conn. Student Loan Foundation (In re Nash), 446 F.3d 188 (1st Cir.2006), the First Circuit stated:
We see no need in this case to pronounce our views of a preferred method of identifying a case of “undue hardship.” The standards urged on us by the parties both require the debtor to demonstrate that her disability will prevent her from working for the foreseeable future. Appellant has a formidable task, for Congress has made the judgment that the general purpose of the Bankruptcy Code to give honest debtors a fresh start does not automatically apply to student loan debtors. Rather, the interest in ensuring the continued viability of the student loan program takes precedence. TI Fed. Credit Union v. DelBonis, 72 F.3d 921, 937 (1st Cir. 1995).
Nash, 446 F.3d at 190-91.
While the First Circuit has not adopted either test, this Court in Nash v. Conn. Student Loan Foundation (In re Nash), No. 02-1466, Slip op. (Bankr.D. Mass. June 18, 2004), aff'd, 330 B.R. 323, 327 (D.Mass.2005), and the United States Bankruptcy Appellate Panel for the First Circuit have adopted the “totality of the circumstances test.” Bronsdon v. Educ. Credit Mgmt. Corp. (In re Bronsdon), 435 B.R. 791, 801 (B.A.P. 1st Cir.2010). The Bankruptcy Appellate Panel, and the majority of courts in Massachusetts, have adopted the “totality of the circumstances test” because “the Brunner test ‘test[s] too much’ ” and because the good faith requirement lacks support within the language of § 523(a)(8). Bronsdon, 435 B.R. at 800-801. While noting that undue hardship is measured at the time of trial, 435 B.R. at 800, the panel in Bronsdon observed:
Although the two tests do not always diverge in function, they do in form. In re Hicks, 331 B.R. [18] at 26 [ (Bankr.D.Mass.2005) ]. As the In re Hicks court noted: “While under the totality of the circumstances approach, the court may also consider ‘any additional facts and circumstances unique to the case’ that are relevant to the central inquiry (i.e., the debtor’s ability to maintain a minimum standard of living while repaying the loans), the Brunner test imposes two additional requirements on the debtor that must be met if the student loans are to be discharged.” Id. (emphasis in original). Looking to the bankruptcy court’s extensive analysis of the predominant tests in In re Kopf, the In re Hicks court agreed with In re Kopf that the Brunner test “test[s] too much.” Id. at 27.
At first blush, the second Brunner requirement—a showing that the debtor’s “state of affairs is likely to persist for a significant portion of the repayment period of the student loan”—seems merely to resonate with the forward-looking nature of the undue hardship analysis. That is, under any undue hardship standard the debtor must show that the inability to maintain a minimum standard of living while repaying the student loans is not a temporary reality, but will continue into the foreseeable future.
Many courts interpreting and applying the second Brunner prong, *32however, place dispositive weight on the debtor’s ability to demonstrate “additional extraordinary circumstances” that establish a “certainty of hopelessness.” This has led some courts to require that the debtor show the existence of “unique” or “extraordinary” circumstances, such as the debtor’s advanced age, illness or disability, psychiatric problems, lack of usable job skills, large number of dependents or severely limited education .... And, in the absence of such a showing, the court may conclude that the debtor has failed the second Brunner prong and the student loans will not be discharged ....
Requiring the debtor to present additional evidence of “unique” or “extraordinary” circumstances amounting to a “certainty of hopelessness” is not supported by the text of § 523(a)(8). The debtor need only demonstrate “undue hardship.” True, the debtor must be able to prove that the claimed hardship is more than present financial difficulty. See [In re] Kopf, 245 B.R. [731] at 742, 745 [ Bankr.D.Me.2000 ]. And the existence of any of the factors mentioned above may be highly relevant to a finding that the hardship will persist into the foreseeable future. But whether or not this Court subjectively views the debtor’s circumstances as “unique” or “extraordinary” is, in a word, overkill.
In re Hicks, 331 B.R. at 27-28. We agree with this rationale and conclude that Brunner takes the test too far. Furthermore, we agree that the “good faith” requirement of Brunner is “without textual foundation.” Id. at 28 (citing In re Kopf, 245 B.R. at 741). Ultimately, the debtor must establish by a preponderance of the evidence that her present and future actual circumstances would impose an undue hardship if her debts are excepted from discharge. Irrespective of the test, the decision of a bankruptcy court, whether the failure to discharge a student loan will cause undue hardship to the debtor and the dependents of the debtor under § 523(a)(8), rests on both the economic ability to repay and the existence of any disqualifying action(s). The party opposing the discharge of a student loan has the burden of presenting evidence of any disqualifying factor, such as bad faith. The debtor is not required under the statute to establish prepetition good faith in absence of a challenge. The debtor should not be obligated to prove a negative, that is, that he did not act in bad faith, and, consequently, acted in good faith.
Bronsdon, 435 B.R. at 800-801 (footnote omitted).
In addition to adopting the “totality of the circumstances test,” the Bankruptcy Appellate Panel, in Bronsdon, determined that the availability of the William D. Ford Direct Loan Program ..., and the options offered through that program to borrowers, in particular the Income Based Repayment Plan ..., was a factor to be weighed by the court but was not dispositive as to the issue of undue hardship. It stated:
Courts considering the ICRP [Income Contingent Repayment Plan] as a factor under the totality of the circumstances test evaluate both the benefits and drawbacks of the program for the individual debtor within his or her unique circumstances. Brooks v. Educ. Credit Mgmt. Corp. (In re Brooks), 406 B.R. 382, 393 (Bankr. *33D.Minn.2009). Although these courts acknowledge that the ICRP reduces the immediate debt burden of the student loan debtor, they are often concerned about the longer term debt and tax consequences of the program. They recognize that, although it may be appropriate to consider whether a debtor has pursued her options under the ICRP, participation in that program may not be appropriate for some debtors because of the impact of the negative amortization of the debt over time when payments are not made and the tax implications arising after the debt is cancelled. Because of these considerations, the ICRP may be beneficial for a borrower whose inability to pay is temporary and whose financial situation is expected to improve significantly in the future. See In re Vargas, 2010 WL 148632, at *4-5, 2010 Bankr.LEXIS 63, at *12-13 [ (Bankr.C.D.Ill.2010) ]. Where no significant improvement is anticipated, however, such programs may be detrimental to the borrower’s long-term financial health. See id.; see also In re Wilkinson-Bell, 2007 WL 1021969, at *5, 2007 Bankr.LEXIS 1052, at *16. Central to this analysis is the idea that because forgiveness of any unpaid debt under the ICRP may result in a taxable event, the debtor who participates in the ICRP simply exchanges a nondischargeable student loan debt for a nondischargeable tax debt. Such an exchange of debt provides little or no relief to debtors. See Thomsen v. Dep’t of Educ. (In re Thomsen), 234 B.R. 506, 514 (Bankr. D.Mont.1999); see also In re Booth, 410 B.R. at [672] 675-76 [ (Bankr.E.D.Wash.2009) ]; Durrani v. Educ. Credit Mgmt. Corp. (In re Durrani), 311 B.R. 496, 509 (Bankr. N.D.Ill.2004), aff'd, 320 B.R. 357 (N.D.Ill.2005); but see In re Brunell, 356 B.R. at 580-81 (holding that “[t]o the extent that the Debtor satisfies the requirements for participation in the Ford program, any tax liability based on the forgiven balance at that time is discharged.”). For example, in In re Booth, the bankruptcy court stated:
Application of the ICRP does not result in a discharge of the debt nor relieve the debtor from personal liability on the debt. Further action may, and will, be taken to collect the obligation, even if that action is simply requiring the debtor to provide annual financial information to the Department of Education. The ICRP does not grant a discharge, but lapse of a period as long as 25 years may result in cancellation or forgiveness of the debt. There is no provision in the regulation for “partial” cancellation or forgiveness of the obligation. Unlike a discharge, cancellation or forgiveness of a debt results in a tax liability. As interest accrues during the 25 years or lesser repayment period, the amount of debt cancelled will be quite large. The resulting tax liability would not be subject to discharge in a later bankruptcy proceeding.
The focus of the ICRP is on deferral, not discharge, of debt. This is the antithesis of a fresh start. Congress has provided bankruptcy debtors relief which is not provided in the ICRP regulations. Compliance with ICRP regulations will not result in the same relief which can be granted by the courts under 11 U.S.C. § 523(a)(8).
410 B.R. at 675-76. In addition, many of these courts are concerned that the *34ICRP allows the Department of Education to substitute its administrative determination regarding undue hardship for the bankruptcy judge’s statutorily mandated discretion under § 523(a)(8). See id.; see also In re Durrani, 311 B.R. at 509.
Bronsdon, 435 B.R. at 802-803.
Stevenson, 2011 WL 3420428 at *5-9.
Following this Court’s decision in Stevenson, the United States Court of Appeals for the First Circuit in an unpublished judgment, dated September 23, 2011, affirmed the decision of the United States Bankruptcy Appellate Panel in Bronsdon. It noted that the debtor had demonstrated undue hardship under both the totality of the circumstances test and the Brunner test. The First Circuit stated that it would not rule on which of the two tests is appropriate.
In Stevenson, the debtor argued that the ICR Plan and the IBR program were not an option for her because they would result in a tax liability. The Court rejected her assertion because the forgiveness of her loans through the IBR program or an ICR Plan would result in a tax liability only if her assets exceeded her liabilities when the loans were forgiven. 26 U.S.C. §§ 108(a)(1)(B), 108(d)(3). See Educ. Credit Mgmt. Corp. v. Bronsdon, 421 B.R. 27, 34 (D.Mass.2009), vacating and remanding Bronsdon v. Educ. Credit Mgmt. Corp. (In re Bronsdon), No. 08-1062, 2009 WL 95038 (Bankr.D.Mass. Jan. 13, 2009) (rejecting as “legal error” Bankruptcy Court’s conclusion that forgiveness of debt “would result” in a tax liability); cf. Bronsdon, 435 B.R. at 802 (noting that forgiveness of debt “may result” in a taxable event). In other words, the debtor in Stevenson would incur a tax liability arising out of loan forgiveness only if her future circumstances vastly improved-a circumstance which she claimed would not occur. This Court in Stevenson addressed the potential tax liability issue by giving the debtor the option to having any remaining debt discharged, rather than forgiven, at the end of the repayment period in order to avoid any potential tax impact. See Stevenson, 2011 WL 3420428 at *11. This Court, citing 11 U.S.C. § 105(a), stated:
Accordingly, rather than enter an order discharging a potential contingent and unliquidated tax debt without notice to appropriate governmental authorities, the Court shall enter an order discharging any student loan debt Ms. Stevenson is unable to repay following her participation in the Ford Program. If Ms. Stevenson were to participate in the Income Based Repayment Plan Option and so inform the Court, and if Ms. Stevenson faithfully abides by the terms and provisions of either the IBRP option or an ICRP, any student loan debt which she may have at the expiration of the plan is discharged.
Id.
B. Analysis
Regardless of whether this Court applies the Brunner test or the “totality of the circumstances test,” the Court concludes that Mr. Ayele failed to satisfy his burden of establishing undue hardship as of the time of trial. Under the “totality of the circumstances test,” which unlike the Brunner test does not “test too much,” the Court first considers Mr. Ayele’s past, present, and reasonably reliable future financial resources. Mr. Ayele has had a long history of jobs paying between $9 and $10 per hour. He currently is unemployed and is receiving unemployment benefits. He testified that he will no longer seek employment in areas where he has succeeded in obtaining employment in the past. Although he has not been successful *35in obtaining higher paying employment, he is well-educated with multiple degrees, including a Master’s Degree in Administrative Studies from Boston University.
Mr. Ayele has had a history of employment as a parking attendant, a security guard, and an airline ramp agent. His educational accomplishments and his persistent efforts in applying for hundreds of jobs attest to the likelihood that he will eventually obtain employment, particularly if the economy improves. Given his long history of hourly wage jobs, however, the Court concludes it is unlikely that Mr. Ayele will be able to obtain employment as a paralegal or as an administrator without additional course work to burnish his skills. Mr. Ayele is intelligent and resourceful as exemplified by his efforts in representing himself in his bankruptcy case and in this proceeding. In addition, he spends his spare time writing a book. Although his health issues pose some challenges, they are not debilitating in the sense that he is disabled from obtaining employment and his future prospects are not hopeless. While Mr. Ayele introduced evidence concerning his job history, his current unemployment situation, and his health issues, the evidence he presented suggests hardship. Mr. Ayele did not submit sufficient evidence to permit a finding of “undue hardship.” This is particularly the case in view of the First Circuit’s observation that a debtor must demonstrate that his circumstances will prevent him from working for the foreseeable future, and Congress’s judgment that the fresh start does not automatically apply to student loan debtors. See Nash, 446 F.3d at 190-91. Accordingly, the Court finds that the Debtor failed to sustain his burden of proof under the “totality of the circumstances test.” Accordingly, he also failed to satisfy the more stringent Brunner test in that he submitted no evidence of good faith efforts to repay his loans. Indeed, he attempted to discharge them in the early 1990s in a prior bankruptcy case.
The Court recognizes that Mr. Ayele’s financial situation—especially the duration of unemployment compensation benefits, and the continuation of his existing expenses, coupled with his desire to provide for his sister’s family—is not enviable. Were he to lose his unemployment compensation without obtaining employment, his financial position could become precarious. Were he to participate in the Ford Program, however, he would not be obligated to repay his student loan debt unless his prospects improved dramatically.
Mr. Ayele testified that he considered and understood the options under the Ford Program which are available to him but rejected them. As the panel in Bronsdon observed, in considering the Ford Program as a factor in determining whether the debtor has shown undue hardship under the totality of the circumstances test, courts must “evaluate both the benefits and drawbacks of the program for the individual debtor within his or her unique circumstances.” 435 B.R. at 803 (citing Brooks v. Educ. Credit Mgmt. Corp. (In re Brooks), 406 B.R. 382, 393 (Bankr.D.Minn.2009)).
The Court concludes that Mr. Ayele’s eligibility for an ICR Plan or participation in the IBR program supports its determination that his student loan debt is not dischargeable. As this Court observed in Stevenson, however, it has reservations about the prospective discharge of a potential tax liability. Accordingly, the Court has taken a slightly different route to achieve the type of equitable result espoused by the court in Brunell v. Citibank (S.Dakota), N.A. (In re Brunell), 356 B.R. 567 (Bankr.D.Mass.2006), in which the court determined that “to the extent that the Debtor is obligated under any tax lia*36bility as may exist under the tax laws in effect at that time, the presence of any such liability at the end of one’s working life would be a tremendous undue hardship incurred as the result of the student loan.” 356 B.R. at 580-81. In Brunell, the court held that “[t]o the extent that the Debtor satisfies the requirements for participation in the Ford Program, any tax liability based on the forgiven balance at that time is discharged.” Id. at 581. See also Fahrenz v. Educ. Credit Mgmt. Corp. (In re Fahrenz), No. 05-1657, 2008 WL 4330312 (Bankr.D.Mass.2008).
As noted in Stevenson, the Court agrees with those courts which have ruled that § 105(a) gives the bankruptcy court authority to fashion equitable relief in appropriate circumstances in student loan discharge cases. Like the Stevenson case, this case cries for a form of equitable relief. Accordingly, the Court shall enter an order discharging any student loan debt Mr. Ayele is unable to repay following his participation in the Ford Program. If Mr. Ayele were to participate in the Ford Program and so inform the Court, and if he faithfully abides by the terms and provisions of either the IBR program or an ICR Plan, then the Court prospectively discharges any student loan debt which he may have at the expiration of the plan period so as to avoid any negative tax consequences.
V. CONCLUSION
For the foregoing reasons, the Court shall enter a judgment in favor of the Defendant and against the Plaintiff with the proviso that if Mr. Ayele informs the Court within 14 days of the date of this decision that he will participate in the Ford Program and, if he represents that he in good faith will abide by the provisions of the IBR program option or the ICR Plan option, then the Court shall enter a judgment partially discharging his student loan debt to the extent any remains at the expiration of the repayment plan.
. In his original Complaint, he revealed that he first traveled to the United States as a tourist. He eventually became eligible for a “green card” and became a U.S. citizen.
. The Court notes that Mr. Ayele did not file Schedule I-Current Income of Individual Debtor(s). On Schedule J-Current Expenditures of Individual Debtor(s), he listed his average monthly income, ostensibly from an unfiled Schedule I, as $1,100.70. He calculated that sum by multiplying his hourly wage of $9.00 by the number of hours worked per day (seven), using a five day work week and a four week month. He deducted $159.30 from that sum for state and federal taxes. He utilized the sum of $1,260 as his monthly income on Form 22A, the Chapter 7 Statement of Current Monthly Income and Means-Test Calculation. In his Statement of Financial Affairs, he set forth an annual income of $16,780 for an unspecified year.
. In his First Amended Complaint to Determine Dischargeability of a Student Loan Debt, Mr. Ayele referenced a bankruptcy case which he commenced in Connecticut in 1991. He attempted to discharge his student loan debt in that case but was unsuccessful.
. In conjunction with his post-trial brief, Mr. Ayele filed an Appendix containing medical records, income and expense information, and Western Union telegrams showing money transfers to his sister in Ethiopia. ECMC filed a "Motion to Strike Portions of the Addendum and Brief filed by the Plaintiff." Mr. Ayele objected to ECMC's motion. The Court shall enter an order granting the ECMC's Motion. The Court, however, reviewed Mr. Ayele's submissions and notes that the medical records are not recent and that his testimony was adequate to illuminate his current health issues. In short, the Court finds that, even if it were to consider Mr. Ayele's unauthenticated medical records and other documentary evidence, it would not affect the Court’s decision as to the dischargeability of his student loans. Accordingly, Mr. Ayele is not prejudiced by the allowance of ECMC's Motion to Strike. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494665/ | FINDINGS OF FACT AND CONCLUSIONS OF LAW FOLLOWING TRIAL
JACK B. SCHMETTERER, Bankruptcy Judge.
INTRODUCTION
This proceeding is related to the Chapter 7 bankruptcy case filed by Debtors Michael and Margaret O’Neill (“Debtors”). Creditor James Rutili (“Plaintiff’), filed this two-count Adversary Complaint objecting to their discharge and discharge-ability of debt owed by Debtors for a loan by Plaintiff to them.
Count 1, brought under 11 U.S.C. § 727(a)(4) and (5) alleged that Debtors failed to list ownership of F.C. Pilgrim & Co. and Pilgrim Mgmt. Co. among their assets in the bankruptcy petition and schedules or to report loss of that asset pre-bankruptcy, thereby making false oath and failing to explain loss of assets. The Complaint also alleged Debtors failed to list ownership of certain real property. The defense has argued that Debtors have amended their schedules so as to list fully their former interests in those properties and thereby corrected all initial omissions. They also assert that the interests initially not listed had no value, had been lost prior to their bankruptcy filing, were not material, and that any failure to list those interests was due to failure of their counsel.
Count II, brought under 11 U.S.C. § 523(a)(2)(A) alleges false representations by Debtor Michael O’Neill concerning ownership in F.C. Pilgrim & Co. and Pilgrim Mgmt. Co. made in order to induce Plaintiff to make a large loan to them. Debtors argue, first, that the statements made by Michael O’Neill regarding ownership interests were not misrepresentations because Michael in fact was the controlling shareholder of a holding company that *315owned 100% of companies at issue. Debtors also argue that Plaintiff did not rely on the statements asserted because those statements made by Michael were oral, general in nature, and were not part of or directly connected to the loan agreements; and also because Plaintiff had his own reason for investing separate from whatever Michael’s ownership interests might have been. Debtors also argue that Plaintiff did no due diligence with respect to Michael’s asserted representations and, therefore, did not justifiably rely on any. Finally, Debtors argue that the oral statements in issue were “statements respecting financial condition” that are not actionable under § 523(a)(2)(A) and no financial statement was given by Debtors that might have been actionable under § 523(a)(2)(B).
The following Findings of Fact and Conclusions of Law are made and entered following trial. Pursuant thereto, judgment will enter for Defendants on both Counts.
Incorporated in the discussion below is also analysis of Plaintiffs post-trial Motion to “correct” the Stipulations admitted into evidence. For reasons set forth that Motion will be denied.
Former Interests of Defendants in “Pilgrim”
1. Michael O’Neill and Margaret B. O’Neill (the “Defendants”, and occasionally referred to individually as “Michael” or “Defendant Husband” and “Michael’s Wife” or “Defendant Wife” to distinguish this Margaret O’Neill, i.e., “Michael’s Wife,” from Michael’s mother, named Margaret T. O’Neill), are married to each other. Plaintiffs Exhibit (hereinafter referred to as “PX”) 64, 65, 66.
2. Michael O’Neill is the son of John E. O’Neill (“John O’Neill”) and Margaret T. O’Neill (“Margaret O’Neill”) (collectively, the “Defendant Husband’s Parents”, and occasionally referred to as “Defendant’s Father” or “John” and “Defendant’s Mother” or “Margaret”) and, the brother of Mary 0. Bresnahan (“Mary”). PX 19.
3. Pilgrim Companies, Inc., (“Pilgrim Companies”) F.C. Pilgrim & Co. (“F.C. Pilgrim”), and Pilgrim Management Companies (“Pilgrim Management”) (collectively, the “Companies”), are Illinois corporations, each having their respective, principal places of business located in Illinois. PX 1, 2, 3.
4. F.C. Pilgrim was formed on or about 1938 and has operated as a real estate broker and realtor, and related functions, in Oak Park, Illinois, and nearby areas since 1938. PX 2.
5. John O’Neill and Margaret T. O’Neill, respectively, owned as of the year 2000, the outstanding shares of F.C. Pilgrim. John owned 59 shares and Margaret owned 41 shares. PX 19.
6. Beginning in the year 2000 and continuing up through April 19, 2011, Michael has been the President of F.C. Pilgrim, a licensed real estate broker. Trial Transcript (hereinafter referred to as “TR”) 143:2-12, TR 144:9-11.
7. In the year 2000, Mary worked for F.C. Pilgrim. PX 7, 8, 9,19.
8. Pursuant to an Acquisition Agreement dated March 16, 2000, (the “Acquisition Agreement”) Pilgrim Companies purchased from John and Margaret all of their respective, issued and outstanding shares of capital stock of F.C. Pilgrim and Pilgrim Management for the sum of One Million Four Hundred Thousand and 00/100 Dollars ($1,400,000.00), plus the issue of two promissory notes, one note being issued to John and the second note issued to Margaret, as described below. PX 19; TR 146:3-13.
*3169. From and after the date of the Acquisition Agreement, Pilgrim Companies owned 100% of the stock of F.C. Pilgrim, and Pilgrim Companies functioned as a holding company that did not operate any business separate from F.C. Pilgrim and Pilgrim Management.
From April 2000 through December 2009, Michael O’Neill owned 66% of the stock of Pilgrim Companies, Inc. and Pilgrim Management Company. [TR 257:11-17; Trial Stip. at ¶ 7; Defendant’s Exhibit (hereinafter referred to as “DX”) 8; DX 10; DX 11] From April 2000 through December 2009, the owner of F.C. Pilgrim & Co. was Pilgrim Companies, Inc., and Michael O’Neill was the majority owner/shareholder of Pilgrim Companies, Inc. [Trial Stip. at ¶7; DX 8-11; TR 257:11-17; DX 8; DX 10; DX 11]. Therefore, Michael O’Neill had a controlling ownership interest in F.C. Pilgrim and Co. from April 2000 through December 2009. [Trial Stip. at ¶ 7; DX 8-11; TR 257:11-17; DX 8; DX 10; DX 11].
10. Pursuant to an Installment Note dated January 1, 2000, Pilgrim Companies promised to pay John O’Neill the principal sum of Eight Hundred Twenty Six Thousand and 00/100 Dollars ($826,000.00) (“John’s Installment Note”). PX 17.
11. John’s Installment Note was secured by (A) 1,770 voting common shares and 1,770 nonvoting common shares of Pilgrim Companies stock, (B) 59 voting common shares of F.C. Pilgrim stock and (C) 590 voting common shares of Pilgrim Management stock. PX 17.
12. Pursuant to an Installment Note dated January 1, 2000, Pilgrim Companies promised to pay Margaret the principal sum of Five Hundred Seventy Four Thousand and 00/100 Dollars ($574,000.00) (“Margaret’s Installment Note”). PX 18.
13. Margaret’s Installment Note was secured by (A) 1,230 voting common shares and 1,230 nonvoting common shares of Pilgrim Companies stock, (B) 41 voting common shares of F.C. Pilgrim stock and (C) 410 voting common shares of Pilgrim Management stock. PX 18.
14. Michael, as President of Pilgrim Companies executed the John O’Neill and Margaret O’Neill Installment Notes (collectively the “Installment Notes”). PX 17, 18.
15(a). The Installment Notes dated January 1, 2000, both state that a default will occur when:
a. “[T]here is a breach of the Pledge Agreement by Pilgrim Companies, Inc. to and in favor of John E. O’Neill, dated January 3, 2000”;
b. “[T]here is a breach of the Pledge Agreement between Michael M. O’Neill and Mary O. Bresnahan, to and in favor of John E. O’Neill, dated January 3, 2000”; or,
c. “[A]t any time payment is not made for at least three (3) months from the due date of the installment payment unless waived in writing by either John E. O’Neill or Margaret T. O’Neill.”
PX 17,18.
15(b). Paragraph 8 of the Installment Notes dated January 1, 2000 provided that upon any default, the Installment Notes would become immediately due and payable without demand or notice, which were waived. Paragraph 8 also provided that upon default John E. O’Neill or Margaret O’Neill could foreclose upon the stock provided as security for the Installment Notes in the form of Assignments Separate From Certificate. Trial Stip. at ¶ 14; DX 2-3; PX 18-19.
16. Pursuant to a Pledge Agreement dated January 3, 2000, attached to the *317Acquisition Agreement as Exhibit 9A, Pilgrim Companies pledged, among other assets, its 59% interest in the stock of F.C. Pilgrim to John to secure payment of John’s Installment Note. PX 19H.
17. Pursuant to a Pledge Agreement dated January 3, 2000, attached to the Acquisition Agreement as Exhibit 9B, Michael pledged, among other assets, his 41% interest in the stock of Pilgrim Companies and Pilgrim Management to Margaret to secure payment of Margaret’s Installment Note. PX 190.
18. Pursuant to an Escrow Agreement dated January 3, 2000, attached to the Acquisition Agreement as Exhibit 9C, Pilgrim Companies, deposited all of the shares representing its 59% stock interest in F.C. Pilgrim into escrow, with Richard Burke, Esq., as escrowee, with directions to transfer said shares upon default by Pilgrim Companies, Inc. of John’s Installment Note. PX 19J.
19. Pursuant to an Escrow Agreement dated January 3, 2000, attached to the Acquisition Agreement as Exhibit 9D, Michael deposited all of the shares representing his 59% interest in Pilgrim Companies and Pilgrim Management into escrow, with Richard Burke, Esq., as escrowee, with directions to transfer said shares upon default by Pilgrim Companies, Inc. of Margaret’s Installment Note. PX 19K.
20. Pursuant to an Assignment Separate From Certificate dated January 3, 2000, Pilgrim Companies assigned and transferred to John O’Neill a 59% interest in all the shares of F.C. Pilgrim represented by Certificate Numbers 107, which is attached to the Acquisition Agreement as Exhibit 9E. PX 19L.
21. Pursuant to an Assignment Separate From Certificate dated January 3, 2000, Michael O’Neill and Mary Bresnahan assigned and transferred to John O’Neill a 59% interest in all the shares of Pilgrim Management, represented by Certificate Numbers 2 and 3, which is attached to the Acquisition Agreement as Exhibit 9F. PX 19M.
22. Pursuant to an Assignment Separate From Certificate dated January 3, 2000, Michael O’Neill and Mary Bresnahan assigned and transferred to John O’Neill a 59% interest in all the shares of Pilgrim Companies represented by Certificate Numbers VI, V2, V3, NV1, NV2 and NV3, which is attached to the Acquisition Agreement as Exhibit 9G. PX 19N.
23. Pursuant to an Assignment Separate From Certificate dated January 3, 2000, Pilgrim Companies assigned and transferred to Margaret O’Neill a 41% interest in all the shares of F.C. Pilgrim represented by Certificate Numbers 107, which is attached to the Acquisition Agreement as Exhibit 10E. PX 19S.
24. Pursuant to an Assignment Separate From Certificate dated January 3, 2000, Michael O’Neill and Mary Bresnahan assigned and transferred to Margaret O’Neill a 41% interest in all the shares of Pilgrim Management, represented by Certificate Numbers 2 and 3, which is attached to the Acquisition Agreement as Exhibit 10F. PX 19T.
25. Pursuant to an Assignment Separate From Certificate dated January 3, 2000, Michael O’Neill and Mary Bresnahan assigned and transferred to Margaret O’Neill a 41% interest in all the shares of Pilgrim Companies represented by Certificate Numbers VI, V2, V3, NV1, NV2 and NV3, which is attached to the Acquisition Agreement as Exhibit 10G. PX 19U.
26. Pursuant to the Pledge Agreements 9A, 9B, 10A and 10B attached to the Acquisition Agreement Michael, Mary and Pilgrim Companies all acknowledged and agreed that the Defendant Husband’s Par*318ents could foreclose on the capital stock of F.C. Pilgrim and Pilgrim Management if F.C. Pilgrim or Pilgrim Management incurred debt in excess of $1,200,000.00. PX 19H, 191,190,19P; TR 146:14-147:1.
Transactions of Defendants With Plaintiff
27. During the year 2005, the Defendant Husband told Plaintiff that he wanted to acquire and develop the real property commonly known as 844 South Humphrey, Oak Park, Illinois (the “Humphrey Property”), in order to remodel and convert the existing units of the Humphrey Property and sell them as individual residential condominium units. TR 293:18 -294:5; TR 301:6-20.
28. The Defendant Husband was the first party to suggest the Humphrey Property as a possible real estate investment opportunity. TR 293:24-294:2.
29. On an occasion between February 2005 and April 2005, the Plaintiff, Defendant Husband and the Defendant Husband’s roofer and plumber inspected the Humphrey Property, and the Defendant Husband stated to the Plaintiff that he was the owner of F.C. Pilgrim in the presence of the Defendant Husband’s roofer and plumber; and no one contradicted the Defendant Husband’s statements. TR 332:15-21; TR 333:2-334.11.
30. On or about March 8, 2005, the Land Trust commonly known as Cosmopolitan L and Trust no. 32019 (the “Land Trust”) was created granting the Plaintiff a 100% beneficial interest in the Land Trust. PX 24, 25. .
31. On or about the year 2005 and at the time the Land Trust was created, Plaintiff and Defendant Husband discussed that the Plaintiff intended to be a lender in possible real estate investment opportunities with the Defendant, including the Humphrey Property. TR 254:7-17; TR 293:10-23; TR 295:22-296:2.
32. On or about April 19, 2005, the Land Trust acquired title to the Humphrey Property. PX 25, 26; TR 249:14r-18; TR 294:12-21.
33. The Humphrey Property was purchased by the Land Trust because the Defendant Husband believed that properties such as the Humphrey Property would have many buyers and would be sold very quickly. TR 294:22-295:9.
34. The Defendant Husband said that during the year 2005 the real estate investment market was a so-called “hot market” and that the Humphrey Property was a “hot property”. TR 255:23-256:10.
35. In order to place a down payment on the Humphrey Property the Defendant Husband requested that the Plaintiff lend $50,000 for a down payment on the Humphrey Property, to which the Plaintiff agreed. TR 295:10-296:7.
36. On May 4, 2005, Plaintiff and the Defendants entered into a Loan Agreement (“the Loan Agreement”). PX 29; TR 297:9-19.
37. Pursuant to Paragraph 1 of the Loan Agreement, the promissory note was signed by the land trust and guaranteed by the Debtors. [PX 31]. Thereby the Defendants jointly and severally promised to pay to the order of the Plaintiff the total of all advances, loans and finance charges, together with all costs and expenses for which the Defendants were responsible under the Loan Agreement. PX 29.
38. Pursuant to Paragraph 2 of the Loan Agreement, the Plaintiff loaned the total amount of One Million One Hundred Seventy Six Thousand Seven Hundred Fifty Seven and 73/100 Dollars ($1,176,757.73) (the “Original Indebtedness”) (including $50,000 previously paid by the Plaintiff) to the Defendants to be utilized by the De*319fendants for their activities intended to accomplish the acquisition and development of the Humphrey Property. [PX 29; TR 297:9-19]. The promissory note was signed by the land trust and guaranteed by the Debtors. PX 31.
39. Pursuant to Paragraph 2 of the Loan Agreement, the Defendants acknowledged the existence of the Original Indebtedness to the Plaintiff and agreed to repay the Original Indebtedness pursuant to the Loan Agreement. PX 29.
40. Pursuant to Paragraph 3 of the Loan Agreement the Defendant Husband, upon execution of the Loan Agreement, was to deliver to the Plaintiff a Promissory Note to the Plaintiff in the total amount of One Million One Hundred Seventy Six Thousand Seven Hundred Fifty Seven and 73/100 Dollars ($1,176,757.73) (the “Initial Promissory Note”) dated May 4, 2005. PX 29, 31.
41. Pursuant to Paragraph 7 of the Loan Agreement, the Defendants acknowledged and represented to the Plaintiff that the sum total of the Original Indebtedness was being utilized by the Defendants for business purposes within the meaning of the Illinois Interest Act, and that the specific use of the Indebtedness was for the acquisition, remodeling, development as a conversion condominium, and resale of the Humphrey Property. PX 29.
42. On or about May 12, 2005, the Plaintiff and the Defendants executed a collateral assignment of the beneficial interest of the Plaintiff dated May 4, 2005 (the “Assignment”), relating to the Plaintiffs interest in the Land Trust. PX 28; TR 250:24-251:9; TR 297:20-298:17.
43. The Assignment transferred the Plaintiffs beneficial interest in the Land Trust to the Defendant Husband, and the Defendant Husband gave the Plaintiff a collateral assignment of the same beneficial interest executed on or about May 12, 2005. PX27, 28; TR 250:3-6; TR 250:24-251:16.
44. Pursuant to the Initial Promissory Note, the Defendants jointly and severally, unconditionally guaranteed the payment of all principal, interest and other charges due under the Initial Promissory Note and payable to the order of the Plaintiff by signing the Guaranty therein. PX 31.
45. Further, pursuant to the Initial Promissory Note, the Defendants each personally guaranteed the full performance by Cosmopolitan Bank and Trust, as Trustee under Trust Agreement No. 32019, of all other obligations of the maker of the Initial Promissory Note. PX 31.
46. On July 29, 2005, Cosmopolitan Bank and Trust, as Trustee under Trust Agreement No. 32019, executed and delivered a Promissory Note to the Plaintiff in the total amount of Two Hundred Sixty Thousand and 00/100 Dollars ($260,000.00) (the “Second Promissory Note”) in connection with the re-finance of the Humphrey Property by The Private Bank, which resulted in the satisfaction of the Initial Promissory Note. PX 32.
47. Pursuant to the Second Promissory Note, the Defendants executed and delivered to Plaintiff a Guaranty by which Defendants, jointly and severally, unconditionally guaranteed the payment of all principal, interest and other charges due under the Second Promissory Note and payable to the order of the Plaintiff by signing said Guaranty. PX 32.
48. The Defendants each executed the Guaranty attached to the Second Promissory Note, wherein the Defendants personally guaranteed the full performance by Cosmopolitan Bank and Trust, as Trustee under Trust Agreement No. 32019, of all other obligations of the maker of the Sec*320ond Trust Promissory Note. PX 32; TR 253:7-13.
49. Pursuant to Paragraph 5 of the Loan Agreement, the Defendants executed a Promissory Note dated May 4, 2005, whereby the Defendants agreed to pay the total amount of Fifteen Thousand and 00/100 Dollars ($15,000.00) (the “Third Promissory Note”) to the Plaintiff. PX 31.
50. In order to protect his interests, Plaintiff requested and obtained the guarantee from Defendants on both the Initial Promissory Note and the Second Promissory Note. [TR 301:21-302:9]. Such guarantee was discussed in connection with the Loan Agreement when the loan documents were provided for execution by Plaintiffs counsel to Debtors’ counsel. TR 188:13-189:5,191:8-22.
Alleged Representations
51. On or about May 2002, the Defendant Husband first stated to the Plaintiff that he owned F.C. Pilgrim when he signed a burglar alarm system contract with the Plaintiff. TR 308:2-12.
52. The Defendant Husband stated to the Plaintiff that he owned F.C. Pilgrim in subsequent conversations during May 2002 at the offices of F.C. Pilgrim, the real property commonly known as 1037 Chicago Avenue. TR 308:2-309:11.
53. Employees of F.C. Pilgrim were present during these subsequent conversations at the offices of F.C. Pilgrim, and at no time did any individual contradict the statements made by the Defendant Husband regarding his ownership of F.C. Pilgrim. TR 309:12-312:23.
,54. On or about January or February 2003, the Defendant Husband stated to the Plaintiff that he was the owner of F.C. Pilgrim in front of numerous F.C. Pilgrim employees and the Defendant Wife at F.C. Pilgrim’s offices; and, again no one contradicted the Defendant Husband’s statements. TR 313:21-314:21.
55. On or about December 2004, the Defendant Husband stated to the Plaintiff that he was the owner of F.C. Pilgrim during a business meeting with the Plaintiff, Jim Dorsey and Craig Silverman; and, no one contradicted the Defendant Husband’s statements. TR 315:6-316:18.
56. On or about December 2004, during a meeting between the Defendant Wife and Plaintiff, the Defendant Wife stated that she and the Defendant Husband had purchased F.C. Pilgrim. TR 365:20-22; TR 366:10-17; TR 366:25-367:16.
57. In 2005 the Defendant Husband used a business card that stated the Defendant Husband was the “Broker/Owner” of “F.C. Pilgrim & Company.” PX 75; TR 253:14-25.
58. On or about January 2005, the Defendant Husband stated to the Plaintiff that he was the owner of F.C. Pilgrim and Pilgrim Management during a meeting with the Plaintiff, Jim Dorsey and April Moon, an employee of F.C. Pilgrim. TR 316:19-318:3.
59. However at no time during or after any of those conversations did Plaintiff ask Debtors for any written representations in connection with the Loan Agreement or written financial statement. He never asked for a written representation that Michael O’Neill owned F.C. Pilgrim & Co. [TR 184:24-185:1, 185:16-19]. The Debtors never provided any representations to the Plaintiff in connection with the Loan Agreement or in terms of the Loan Agreement. [DX 17; TR 189:11-15; 191:5-18] Moreover, the Loan Agreement did not contain any written representations to Plaintiff, including any representation that Michael O’Neill owned F.C. Pilgrim & Co. [DX 17; TR 185:12-15, 389:9-12] Although the Plaintiff testified that on various occa*321sions beginning in 2002 Michael O’Neill told the Plaintiff that Michael O’Neill owned F.C. Pilgrim & Co., none of those statements were made in connection with the May 2005 Loan Agreement or at any time during which the Plaintiff and the Debtors were negotiating the terms and conditions of the Loan Agreement in April and May 2005. TR 179:2-4, 180:15-25, 182:17-25, 183:11-14; 296:6-17, 293:10-23, 308:2-339:18, 365:20-367:16, 370:16-371:15.
60(a). On or about February 2005 a meeting was held at First Bank of Oak Park-a bank used by the Defendant Husband-where Michael Kelly, the Plaintiff and Defendant Husband were present, the purpose of which was for the Plaintiff to check the credit references of the Defendant Husband. TR 321:2-322:8; TR 322:23-323:6.
60(b). During the February 2005 meeting, the Defendant Husband stated that he was the owner of F.C. Pilgrim and that he had a longstanding relationship with the First Bank of Oak Park as the owner of F.C. Pilgrim and Pilgrim Management, and no one contradicted the Defendant Husband’s statements. [TR 323:7-25]. But, once again, no written financial statement or representation of his assets was requested or given to Plaintiff.
61. Plaintiff claims that it was important to him that the Defendant Husband was the owner of F.C. Pilgrim and Pilgrim Management because it would provide an asset that would allow the Defendants to repay the money loaned to them by the Plaintiff. [TR 304:20-305:4], However, Plaintiff did not ask for a written representation of such ownership, and the weight of trial evidence established that Plaintiff made the loan with the Debtors in reliance on the interest obtained by investing in real estate and the personal guarantee rather any statement that Michael O’Neill owned F.C. Pilgrim & Co. On various occasions in 2003 and 2004, the Plaintiff indicated to Michael O’Neill that the Plaintiff was interested in investing in real estate as a lender. [TR 173:18-174:10, 174:20-175:17,254:9-255:22,293:10-17], On April 19, 2005, the Plaintiff funded the acquisition of the Humphrey Property in anticipation of executing a loan agreement with the Debtors at a later date, under which the Debtors would repay the Plaintiff, with interest, for the purchase price of the Humphrey Property. [TR 180:15-25, 182:17-183:5; 249:14-18; DX 57], At the time that Plaintiff funded his closing on the Humphrey Property there was no loan agreement in place with the Debtors, and the parties had not even discussed any terms and conditions relating to the loan. TR 179:2-4, 180:15-25, 182:17-25, 183:11-14; 296:6-17.
Indeed, not only did Plaintiff not demand any written representations regarding ownership of F.C. Pilgrim & Co., he did not investigate the F.C. Pilgrim & Co. ownership structure. The Loan Agreement that the parties executed in May 2005 did not contain any representations to Plaintiff; there were no representations that Michael O’Neill owned F.C. Pilgrim & Co. [DX 17; TR. 185:12-15, 389:9-12], Moreover, the Plaintiff did not request any personal or corporate financial information or corporate records, and the Plaintiff did not perform any investigation regarding the asserted “representation” that Michael O’Neill owned F.C. Pilgrim & Co. TR 185:20-186:22, 187:22-188:11, 386:9-13, 387:5-389:8.
62. The Plaintiff contends that he would not have executed the Loan Agreement with the Defendants without the assurance that the Defendant Husband owned F.C. Pilgrim. [TR 304:9-12; TR 368:23-369:12], but that contention is contradicted by the evidence. See Finding No. 61.
*322
Default by Defendants
63. During 2007, the Defendants failed to make their requisite payments pursuant to the Second Promissory Note and Third Promissory Note. TR 201:21-202:4.
64. On or about November 21, 2007, the Plaintiff commenced an action against the Defendants, et al., in the Circuit Court of Cook County, Chancery Division, commonly known as Julius J. Rutili v. Michael O’Neill, et al., which was assigned Case No. 07 CH 34171 (the “Circuit Court Case”). PX 37.
65. On April 27, 2009, the Circuit Court of County entered a Judgment order against the Defendants and in favor of the Plaintiff (the “Judgment”). PX 37.
66. Subsequent to April 27, 2009, the Plaintiff commenced post-judgment and supplementary proceedings related to the Judgment including, but not limited to, citations to discover assets and garnishment proceedings. TR 59:17-60:20; TR 303:9-304:2.
67. No payment was ever made or collected on the Judgment. TR 60:21-61:1.
Defendants Loss of “Pilgrim” Interests
68. In the same year as the Judgment, on December 7, 2009, John O’Neill signed and caused to be delivered to Defendant Husband and Defendant Wife a Notice of Intended Disposition of Collateral Pursuant to 810 ILCS 5/9-611 listing John as the Secured Party and Pilgrim Companies as the Debtor, and the Defendants and Pilgrim Companies as Pledgees of the collateral. The collateral is defined therein as “(a) 59% interest in all of the issued and outstanding shares of common stock of Pilgrim Companies, Inc.; (b) 59% interest in all of the issued- and outstanding shares of common stock of Pilgrim Management Company, an Illinois corporation; and (c) 59% interest in all issued and outstanding shares of common stock (both voting and non-voting) of F.C. Pilgrim & Co., an Illinois corporation.” PX 39; TR 145:22-146:2.
69. On December 7, 2009, Mary O’Neill executed and caused to be delivered a Notice of Intended Disposition of Collateral Pursuant to 810 ILCS 5/9-611 listing Margaret as the Secured Party, and Pilgrim Companies as the Debtor; and, Michael, Mary and Pilgrim Companies as Pledgees of the collateral. The collateral is defined therein as “(a) 41% interest in all of the issued and outstanding shares of common stock of Pilgrim Companies, Inc.; (b) 41% interest in all of the issued and outstanding shares of common stock of Pilgrim Management Company, an Illinois corporation; and (c) 41% interest in all issued and outstanding shares of common stock (both voting and non-voting) of F.C. Pilgrim & Co., an Illinois corporation.” PX 40.
70. On or about December 18, 2009, John O’Neill and Margaret O’Neill executed a joint Direction to Escrowee to Transfer Stock Collateral Pursuant to Pledge Agreements and Escrow Agreements, authorizing and directing Richard W. Burke, Esq., Escrowee under four Escrow Agreements dated January 3, 2000, to deliver the following to John and Margaret:
a. 1,000 shares of the common stock of Pilgrim Management;
b. 1,000 shares of the common voting stock of Pilgrim Companies;
c. 5,000 shares of the common stock of Pilgrim Companies;
d. 100 shares of the common stock of F.C. Pilgrim; and,
e. Assignments regarding the shares set forth in subsections (a)-(d).
PX 41.
The Bankruptcy Case Filed by Defendants
71. Two months later, on February 20, 2010 (the “Petition Date”), the Defendants *323filed their voluntary petition for relief under Chapter 7 of the United Stated Bankruptcy Code without Schedules and Statement of Financial Affairs and thereby commenced Case No. 10-6832 (the “Bankruptcy Case”). (BK Docket 1). PX 42.
72. Schedules and the Statement of Financial Affairs are required to be filed within fifteen (15) days after the date of filing, or in this case by March 7, 2010. 11 U.S.C. § 521. The issue presented here lies over the Statement of Financial Affairs (“SFA”) that was initially incomplete.
73. On March 5, 2010, the Defendants filed a Motion to Extend Time to File Schedules and Statement of Financial Affairs (the “First Motion to Extend”); and, on March 11, 2010, this Court granted the First Motion to Extend, granting the Defendants leave to file their Schedules A-J and Statement of Financial Affairs on or before March 18, 2010. (BK Docket 10, 12). PX 43, 44.
74. On March 18, 2010, the Defendants filed a Second Motion to Extend Time to File Schedules or Provide Required Information (the “Second Motion to Extend”); and, on March 22, 2010, this Court granted the Second Motion to Extend, granting the Defendants leave to file their Schedules AJ and Statement of Financial Affairs on or before April 8, 2010. (BK Docket 15, 16). PX 45, 46.
75. On March 31, 2010, the Defendants filed Schedules A-J (the “Initial Schedules”), and Statement of Financial Affairs (the “Initial SFA”). (BK Docket 17). PX 47, 48.
76. The Initial Schedules filed on March 31, 2010, did not list any prior or current ownership interest in F.C. Pilgrim, Pilgrim Companies or Pilgrim Management. PX no. 47. However, the Second Amended Statement of Financial Affairs (“Second Amended SFA”) filed May 12, 2010, corrected the Debtors’ bankruptcy filings. TR 94:13-18 [“THE COURT: By May, he had correct—they had corrected their schedules; isn’t that right? At least to reveal the transactions that you’re complaining about? MR. QUAID: Yes, for the first time.”]; TR 410:11-19.
77. The Initial SFA filed did not list ownership or loss of any ownership interests) in any business entities for the six years prior to the Petition Date, or any transfer of any interest(s) in any business entities, including F.C. Pilgrim, Pilgrim Companies, and Pilgrim Management. [PX 48]. That is, the SFA filed on March 31, 2010 did not list in Paragraph 4(b) that Michael O’Neill’s ownership interests in Pilgrim Companies, Inc., Pilgrim Management Co. or Bonnie Brae Development, LLC had been attached, garnished or seized, so did not disclose the loss of those interests only two months pre-bankruptcy. But, as Plaintiff conceded at trial, the Second Amended SFA corrected that omission. [TR 94:13-18] Plaintiff does not contend that the Second Amended SFA was false.
78. On or before March 31, 2010, the Defendant Husband reviewed each page of the Initial Schedules and signed the Initial Schedules with the Defendants’ attorney, Eugene Crane (“Defendant’s Attorney”). PX 47; TR 224:13-225:1.
79. The Defendant Husband did not make any changes to the Initial Schedules. TR 224:13-225:1.
80. The Defendant Husband had the opportunity to ask Defendants’ Attorney questions regarding the Initial Schedules. TR 225:16-21; TR 226:18-227:11.
81. The Defendant Husband did not ask the Defendants’ Attorney any questions regarding the Initial Schedules. TR 226:18-227:11; TR 228:13-20.
*32482. On or before March 31, 2010, the Defendant Husband reviewed each page of the Initial SFA and signed the Initial SFA with the Defendant’s Attorney. PX 48; TR 231: 2-5; TR 231:14-16.
83. The Defendant Husband did not make any changes to the Initial SFA. TR 231:17-20.
84. The Defendant Wife did not sign the Initial Schedules or Initial SFA. PX 47, 48.
85. The First Meeting of Creditors under Section 341 of the Bankruptcy Code was set to be held on April 1, 2010, but was continued by the trustee to May 6, 2010. (BK Docket 24). PX64.
86. On April 19, 2010, the Defendants filed Amended Schedules A-J (the “Amended Schedules”) and Amended Statement of Financial Affairs (the “Amended SFA”). (BK Docket 28, 32). PX 49, 50.
87. The Amended Statement of Affairs did not list the pre-bankruptcy loss of any ownership interest in any business entities including, but not limited to, F.C. Pilgrim, Pilgrim Companies or Pilgrim Management. [PX 49]. That omission was not corrected until the Second Amended SFA.
88. The Amended SFA did not list any ownership interest(s) in any business entities for the six years prior to the Petition Date, or any transfer of any interest(s) in any business entities including, but not limited to, F.C. Pilgrim, Pilgrim Companies, or Pilgrim Management. [PX 50]. That omission was not corrected until the Second Amended FSA.
89. On or before April 19, 2010, the Defendant Husband and Defendant Wife reviewed and signed the Amended Schedules and Amended SFA. TR 232:5-233:1; TR 234:11-235:2.
90. The Defendant Husband and Defendant Wife did not ask Defendants’ Attorney any questions regarding the Amended Schedules or Amended SFA. TR 235:5-13.
This Litigation
91. On May 4, 2010, two and one-half months after the bankruptcy case filing, the Plaintiff filed this Adversary Complaint against the Defendants pursuant to 11 U.S.C. §§ 523(a)(2)(A) and 727(a)(4)(A) and (5) (the “Complaint”) that was assigned Case No. 10 A 1084 (the “Instant Case”). (BK Docket 38). PX51.
92. On May 6, 2010, a Meeting of Creditors was held and continued by the Trustee until June 3, 2010 for the Defendants to produce additional documentation. (BK Docket 39). PX 64; TR 62:12-25.
93. At the May 6, 2010, Meeting of Creditors Timothy Okal, Esq., (“Okal”) appeared as counsel for Plaintiff. TR 61:15-24; TR 62:12-18.
94. Subsequent to the May 6, 2010, Meeting of Creditors, Okal engaged in numerous document requests to Defendants’ Attorney. PX 52, 54, 55, 58, 60, 62; TR 61:15-24.
95. On May 12, 2010, Okal sent correspondence to, and which was received by, Defendants’ Attorney demanding production of various documents pertinent to the personal financial assets and liabilities of the Defendants and several of the Pilgrim Companies. PX 52; TR 65:14-66:5.
96. Okal did not receive copies of all the documents requested in his May 12, 2010, correspondence. [TR 66:6-17]. However the Debtors notified Mr. Okal that the Debtors were not in possession of certain requested documents. DX 44.
97. On May 21, 2010, the Defendants filed a Second Amended Statement of Financial Affairs (the “Second Amended SFA”). (BK Docket 43). PX53.
*32598. The Second Amended SFA for the first time listed previously unidentified information including: (1) the seizure of ownership interests in Pilgrim Companies and Pilgrim Management on December 18, 2009; (2) the seizure of ownership interests in Bonnie Brae Development, LLC, on February 16, 2010; and, (3) ownership interests in F.C. Pilgrim, Pilgrim Companies, Pilgrim Management, and Bonnie Brae Development, LLC, during the six years prior to the Petition Date. PX 53; TR 239:2-24.
99. The Defendant Husband selected and paid Defendants’ Attorney to represent him in the Bankruptcy Case. TR 245:20-24.
100. On June 3, 2010, a Meeting of Creditors was conducted and continued by the Trustee until July 1, 2010. (BK Docket 46). PX 64.
101. At the June 3, 2010 Meeting of Creditors Okal repeated his May 12, 2010 request that the Defendants provide, among other documents, the Acquisition Agreement [Plaintiffs Group Exhibit 19], and signed documents including escrow agreements and notes. TR 66:18 -67:24.
102. On June 24, 2010, Okal sent correspondence to, and which was received by, Defendants’ Attorney requesting production of the Acquisition Agreement and executed copies of several documents as described in said correspondence. PX 54.
103. Okal’s June 24, 2010 correspondence related to a June 24, 2010 telephonic conversation Okal had with Defendants’ Attorney regarding the previously unproduced Acquisition Agreement and additional signed documents. TR 71:9-72:9.
104. On or about September 2010, the Plaintiff formally served requests for production and interrogatories earlier in May. TR 75:4-19.
105. On July 2, 2010, the Meeting of Creditors was continued by the Trustee until August 5, 2010. (BK Docket 51). PX 64.
106. On or before July 20, 2010, Okal and Defendants’ Attorney conducted a telephonic conference during which Okal again requested that Defendants produce the documents requested in his June 24, 2010 correspondence. TR 74:5-19.
107. On July 20, 2010, Okal sent correspondence to, and which was received by, Defendants’ Attorney seeking compliance by the Defendants with the demand for production made by Okal to Defendants’ Attorney in Okal’s correspondence dated June 24, 2010. PX 5.5; TR 75:20-76:17.
108. On July 23, 2010, the Defendants filed an Answer to the Complaint (the “Answer”). (Adversary Docket 11). PX 56.
109. On July 26, 2010, the Defendants filed an Attachment to the Second Amended SFA (the “Attachment to the Second Amended SFA”). (BK Docket 52). PX 57.
110. On August 5, 2010, the Meeting of Creditors was continued by the Trustee until September 2, 2010. (BK Docket 52). PX 64.
111. During the August 5, 2010, Meeting of Creditors, Okal’s colleague, John Spina, appeared on behalf of the Plaintiff to see if the Defendants would be producing the Acquisition Agreement requested three months earlier in Okal’s May 12, 2010 correspondence. The Acquisition Agreement was not produced and John Spina repeated the Plaintiffs May 12, June 24 and July 20, 2010 request for the Acquisition Agreement. [TR 76:22-77:13]. Mr. Okal did receive the signed Acquisition Agreement in August 2010. TR 112:22-113:7; DX 48 at p. 1.
*326112. On September 3, 2010, the Meeting of Creditors was continued by the Trustee until October 7, 2010. (BK Docket 56). PX 64.
113. On September 14, 2010, the Defendants filed an Amended Answer to the Adversary Complaint (the “Amended Answer”). (Adversary Docket 16). PX 59.
114. On September 30, 2010, the Trustee filed an Initial Report of Assets, and the Clerk of the Court issued a Notice of possible dividend and setting the last date for creditors to file their proofs of claim. (BK Docket 67). PX64.
115. On September 30, 2010, Okal sent an email to Defendants’ Attorney regarding the timing for the compliance by the Defendants with the demands for the production of documents made by “Plaintiffs First Request for Production” that had been served earlier in September 2010. [PX 60; TR 126:16-20]. Defendants’ Attorney responded on September 30, 2010 by email to Okal’s message. PX 60; TR 84:5-22.
116. On or about September 30, 2010, Okal conducted a telephonic conference with Defendants’ Attorney and granted Defendants’ Attorney an additional one week extension to produce documents; and, on or about October 8, 2010, Okal received additional documents from Defendants’ Attorney. TR 84:23-85:10.
117. On October 7, 2010, the Trustee concluded the Meeting of Creditors. PX 64.
118. On October 21, 2010, Okal sent correspondence to, and which was received by, Defendants’ Attorney repeating and reiterating Okal’s demand that the Defendants comply with Okal’s First Request for the Production of Documents. PX 62.
119. Okal did not receive all the documentation that he requested from the Defendants. [TR 90:14-91:12], However, it has not been demonstrated by Plaintiff that documents that were requested but not produced would be material to disputed issues in this adversary proceeding.
120. On December 23, 2010, the Plaintiff filed Proof of Claim No. 5 against the estate of the Defendants claiming to be the holder of a $406,057.02 unsecured claim based on the Second Trust Promissory Note and the Third Promissory Note, together with interest, attorneys fees and collection charges asserted to constitute a part of the debt owed by the Defendants to Plaintiff. (Claims Register). PX 63.
121. The Defendants’ failure to satisfy its obligations to the Plaintiff has resulted in a substantial financial loss to the Plaintiff who has not been repaid in full for the debt due to him.
122. Facts stated in the Conclusions of Law are deemed to be additional Findings of Fact.
CONCLUSIONS OF LAW
Jurisdiction and Venue
1. Jurisdiction lies here pursuant to Title 28 U.S.C. § 1334 and Internal Operation Procedure 15 for the Northern District of Illinois.
2. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I) and (J).
Introduction
3. The bankruptcy system is designed to aid the “honest but unfortunate debtor.” Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
4. A debtor has no fundamental right to a discharge and so does not have a sufficient interest in a discharge to warrant a heightened standard of proof. Id. at 286, 111 S.Ct. 654.
*327
Count I Seeks to Bar Discharge
5. This Adversary Complaint seeks to bar the Debtors’ discharge under 11 U.S.C. § 727(a)(4)(A) and 11 U.S.C. § 727(a)(5). [Adversary Dkt. 1, Adversary Compl. at 113].
6. Pursuant to 11 U.S.C. § 727(a) a party must establish grounds for denial of discharge by proving each required element by a preponderance of the evidence. In re Scott, 172 F.3d 959, 966-967 (7th Cir.1999).
Under that provision, “... the court shall grant the debtor a discharge, unless:
(4) the debtor knowingly and fraudulently, in or in connection with the case—
(A) made a false oath or account;
(B) presented or used a false claim;
(C) gave, offered, received, or attempted to obtain money, property, or advantage, or a promise of money, property, or advantage, for acting or forbearing to act; or
(D) withheld from an officer of the estate entitled to possession under this title, any recorded information, including books, documents, records, and papers, relating to the debtor’s property or financial affairs; [or]
(5) the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities.”
Count I § 727(a)(4)(A)
7. “The purpose of § 727(a)(4) is to ensure that dependable information is supplied to those interested in the administration of the bankruptcy estate so that they can rely upon it without having to make an extraordinary effort to dig out the true facts through examinations or investigations.” In re Hasan, 245 B.R. 550, 554 (Bankr.N.D.Ill.2000) (citing In re Carlson, 231 B.R. 640 (Bankr.N.D.Ill.1999); In re Syrtveit, 105 B.R. 596, 596-597 (Bankr.D.Mont.1989)).
8. “To prevail under section 727(a)(4)(A), an objecting party must establish that (1) the debtor made a statement under oath; (2) the statement was material to the bankruptcy case; (3) the statement was false; (4) the debtor knew the statement was false; and (5) the statement was made with an intent to deceive.” In re Hansen, 325 B.R. 746, 757 (Bankr.N.D.Ill.2005). See also In re Olbur, 314 B.R. 732, 745 (Bankr.N.D.Ill.2004); In re Costello, 299 B.R. 882, 899 (Bankr.N.D.Ill.2003); In re Bostrom, 286 B.R. 352, 359 (Bankr.N.D.Ill.2002); In re Senese, 245 B.R. 565, 574 (Bankr.N.D.Ill.2000).
9. “To receive a ‘fresh start’ under the Bankruptcy Code, a debtor must present full and accurate information about himself and his affairs [and] all assets and ownership interests must be disclosed, and all questions in the schedules and statement of financial affairs must be answered completely and honestly.” In re Hansen, 325 B.R. at 757.
10. Under § 727(a)(4), a debtor’s petition and schedules, statement of financial affairs, and statements made at a meeting of creditors under 11 U.S.C. § 341 constitute statements that are made under oath. In re Stamat, 395 B.R. 59, 73 (Bankr.N.D.Ill.2008); In re Broholm, 310 B.R. 864, 879 (Bankr.N.D.Ill.2004) (citing In re Bostrom, 286 B.R. at 359).
11. The filing of false schedules with material omissions or representations with an intent to mislead creditors as to the debtor’s financial condition constitutes a false oath under § 727(a)(4). In re Stamat, 395 B.R. at 73.
*32812. Debtors must disclose all ownership interests that they hold in property. In re Costello, 299 B.R. 882, 899 (Bankr. N.D.Ill.2003).
13. “The trustee and creditors are entitled to honest and accurate signposts on the trail showing what property has passed through the debtor’s hands during the period prior to his bankruptcy. It is not the debtor’s responsibility to decide which assets are to be disclosed to creditors; rather, his job is simply to address each question and answer it accurately and completely.” Id.
14. “The cumulative effect of a number of false oaths by the debtor with respect to a variety of matters establishes a pattern of reckless and cavalier disregard for the truth by the debtor.” Id.
15. Fraudulent intent may be inferred from circumstantial evidence or by inferences based on a course of conduct. In re Stamat, 395 B.R. at 74.
16. An issue is presented here whether Defendants acted in bad faith or with reckless disregard in filing the Initial Schedules, Initial SFA, Amended Schedules and Amended SFA.
The evidence does show that Debtors assembled and provided documents and information relating to their financial condition and history to their bankruptcy counsel for drafting the bankruptcy filings. [TR 206:11-17, 208:11-17, 217:15-23, 219:23-220:17]. The documents and information that Debtors were required to provide to their bankruptcy counsel for preparing the bankruptcy filings included materials relating to Michael O’Neill’s loss of membership interest in Bonnie Brae, and loss of interest in Pilgrim Management Company and Pilgrim Companies, Inc. [TR 207:9-19, 208:20-209:3, 219:23-220:11]. The Debtors testified that they did not intentionally withhold any financial or other information from their bankruptcy counsel in connection with preparing the bankruptcy filings. [TR 209:4-8, 217:15-23, 219:23-220:17, 232:18-234:4, 234:20-235:13]. Counsel for the Debtors drafted the bankruptcy filings. [TR 208:4-19]. The Debtors say they relied on their bankruptcy counsel to prepare the bankruptcy filings completely and accurately from the many records and information supplied to him by them. [TR 209:9-12, 217:15-23, 219:23-220:13, 227:13-25].
The Debtors reviewed their bankruptcy filings for completeness and accuracy before signing and filing the documents. [TR 209:13-212:22, 216:20-23, 232:18-234:4, 234:20-235:13]. Michael O’Neill testified he reviewed every page of the bankruptcy filings before signing. [TR 224:21-23]. The Debtors testified that they were truthful and accurate in reviewing the bankruptcy filings and did not have any intent to withhold information on their bankruptcy filings or otherwise defraud or deceive in connection with the bankruptcy filings. [TR 210:20-212:22, 216:20-23, 219:23-220:17, 232:18-234:4, 234:20-235:13]. The Debtors said that they were not aware of any information that was inaccurate or missing from the bankruptcy filings and believed the bankruptcy filings to be complete and accurate. [TR 212:15-22, 216:12-23, 219:23-220:17, 228:13-24, 232:18-234:4, 234:20-235:13],
17. The Initial Schedules, Initial SFA, Amended Schedules and Amended SFA contained omissions regarding the prebankruptcy loss of Defendants’ assets. However, Debtors argue that the omissions were neither intentional nor material. Assets to which Debtors lost ownership interest prior to the bankruptcy filing, and that were omitted from disclosure in the original bankruptcy filings, had no material impact on the bankruptcy. Bonnie Brae *329had a negative net worth in February 2010. [TR 427:3-17; DX 33 at p. 58; DX 34], In 2009, Pilgrim Companies, Inc. and F.C. Pilgrim & Co. reported negative $43,325 in business income. [PX 72 at p. 1], In 2010, Pilgrim Companies, Inc. and F.C. Pilgrim & Co. reported negative $14,507 in business income. [PX 76 at p. 3]. Moreover, the Plaintiff did not establish value of the assets that were initially not reported, and therefore did not prove materiality as required.
18. The Schedules and Statements of Financial Affairs were corrected many months before conclusion of the Meeting of Creditors or closing of the case. [Trial Stip. at ¶ 52 & 64; DX 43; PX 53], The Defendants finally cured the omissions found in the Initial SFA upon the filing of the Attachment to the Second Amended SFA on July 26, 2010, approximately five months after the Petition filing date of February 20, 2010. Moreover, on May 27, 2010, counsel for the Debtors produced documents and a cover letter to the bankruptcy Trustee Philip Martino and counsel for Plaintiff in follow-up letter to the May 6, 2010 Meeting of Creditors, which included documents explaining the circumstances under which Michael O’Neill had lost his ownership interest in Bonnie Brae, Pilgrim Management Co. and Pilgrim Companies, Inc. before the bankruptcy filing. [Trial Stip. at ¶ 53; DX 44; TR 66:6-12, 259:8-260:25]. The documents produced by counsel for the Debtors on May 27, 2010 included the documents referenced in the Second Amended SFA as attachments. [Trial Stip. at ¶ 59; TR 259:8-260:25],
On July 26, 2010, the Debtors filed Attachments to the Second Amended SFA (the “Attachments to the Second Amended SFA”). The Attachments to the Second Amended SFA were documents explaining the circumstances under which Michael O’Neill had lost his ownership interest in Bonnie Brae, Pilgrim Management Co. and Pilgrim Companies, Inc. before the bankruptcy filing. These same documents had been produced to the Trustee and counsel for the Plaintiff on May 27, 2010. [Trial Stip. at ¶ 59; DX 44; DX 47; PX 57].
19. The Defendants did not cure the defects in the Initial SFA until after the filing of the Complaint in the Instant Case. The Second Amended SFA was filed after the Adversary Complaint was filed. However, that Complaint was filed only two and one-half months after the bankruptcy case was filed and cannot be considered the only reason why the correction was made in the Second Amended SFA. The Debtors claim that they were not aware that there was a mistake with the previous bankruptcy filing that required the Second Amended SFA until their bankruptcy counsel notified them and provided an explanation. [TR 212:4-13, 214:4-15, 216:4-19, 226:12-17, 239:2-12, 243:5-11], It must be noted that the bankruptcy schedules and SFA require a great amount of information on particular forms and it is not unusual for debtors in bankruptcy to make some mistakes that require correction. Not all omissions or mistakes show fraudulent intent to hide assets. A judgment to bar discharge or dischargeability or debt places a heavy burden on debtors. An error or omission that has no consequence to the bankruptcy estate may be, but is not always, the product of fraudulent intent. The key to whether fraud occurs is usually the question whether the error or omission is “material,” which usually means whether it has hidden something valuable from the Chapter 7 Trustee. As discussed below, that did not happen here because the initial omission neither hid valuable assets nor impeded the Trustee and so was not “material” as the statute requires.
20. The Defendants did not properly amend their Initial SFA and Amended *330SFA until the Plaintiff demanded that Defendants produce information relating to their ownership interests in F.C. Pilgrim, Pilgrim Companies, Pilgrim- Management, and Bonnie Brae Development, LLC. The Debtors said they were not aware that there was an omission with the previous bankruptcy filing that required the Second Amended SFA until explanation by their counsel. [TR 212:4-13, 214:4-15, 216:4-19, 226:12-17, 239:2-12, 243:5-11].
21. The Defendant Husband is an educated businessman who reviewed every page of the Initial Schedules and Initial SFA and failed to disclose the business ownership interests lost pre-bankruptcy that he had held within six years prior to the bankruptcy filing.
22. Plaintiff asserts that both Defendants should be denied a discharge because the Defendants have failed to demonstrate that they acted in good faith in conducting their affairs and filing their Initial SFA and Amended SFA until filing their Second Amended SFA.
23. Plaintiff argues that Defendants’ amendments, including the final accurate amended filing, would not have been made if not for the Plaintiffs persistent efforts to obtain the information finally revealed.
24. The Defendants’ delay in filing their final complete and accurate Second Amended Statement of Financial Affairs to about five months after bankruptcy filing demonstrated careless reading of their earlier SFA filings, failure to read fully and carefully the requirements therein, and then to disclose all required details of their financial matters and history. But there are two questions in that regard. First, whether the initial omissions were intentional and fraudulent, and second, whether they were material. For reasons stated below, it is concluded that they were neither intended and fraudulent nor material.
The Debtors Did Not Knowingly Or With Reckless Disregard Make A False Statement
25(a). The Debtors’ Initial and Amended SFA did not identify Michael O’Neill’s pre-petition loss of his ownership interests in Pilgrim Companies, Inc., Pilgrim Management Company and Bonnie Brae as required in the look-back provision of Paragraph 4(b) of the SFA form. However, the trial evidence established that this omission was not done intentionally and the Debtors did not act with reckless disregard. The evidence showed that Debtors assembled and provided detailed documents and information relating to their financial condition to their bankruptcy counsel for preparation of the Schedules and SFA. [TR 206:11-17, 208:11-17, 217:15-23, 219:23-220:17]. The documents and information the Debtors provided to their bankruptcy counsel included documents showing the loss of membership interest in Bonnie Brae, and loss of interest in Pilgrim Management Company and Pilgrim Companies, Inc. [TR 207:9-19, 208:20-209:3, 219:23-220:11]. The Debtors relied on their bankruptcy counsel to prepare the bankruptcy filings completely and accurately from records they supplied to them. [TR 209:9-12, 217:15-23, 219:23-220:13, 227:13-25]. It is not found or concluded that the Debtors intentionally withheld any financial or other information from their bankruptcy counsel in connection with preparing the bankruptcy filings. [TR 209:4-8, 217:15-23, 219:23-220:17, 232:18-234:4, 234:20-235:13].
The trial evidence also demonstrated that the Debtors reviewed their bankruptcy filings for completeness and accuracy before signing and filing the documents. [TR 209:13-212:22, 216:20-23, 232:18-234:4, 234:20-235:13], Michael O’Neill testified he reviewed every page of the bankruptcy filings before signing. [TR 224:21-*33123]. The Debtors did not have any motive to withhold the omitted information on their bankruptcy filings, or otherwise to defraud or deceive anyone in connection with the bankruptcy filings. [TR 210:20-212:22, 216:20-23, 219:23-220:17, 232:18-234:4, 234:20-235:13]. The Debtors were careless with regard to the historical prebankruptcy information that initially was inaccurate or missing from the SFA but believed in good faith that their otherwise detailed bankruptcy filings were complete and accurate. [TR 212:15-22, 216:12-23, 219:23-220:17, 228:13-24, 232:18-234:4, 234:20-235:13]. On April 19, 2010, the Debtors filed the Amended Schedules and the Amended SFA. [Trial Stip. at ¶ 46; DX 39-40; PX 49-50]. The Amended Schedules and Amended SFA added the Debtor Wife’s signature and were otherwise the same as the original filings. The Debtors reviewed the Amended Schedules and Amended SFA before signing and filing. [TR 212:23-213:21, 232:5-12, 232:18-234:4, 234:20-235:13].
The Debtors’ conduct in filing the Second Amended SFA after omissions were identified in the earlier Amended SFA demonstrates the Debtors were not knowingly filing false pleadings or acting with reckless disregard. On May 6, 2010, a Meeting of Creditors was held and attended by Plaintiff and counsel for Plaintiff, Debtors and counsel for Debtors, and the Trustee Phillip Martino. Debtors’ ownership interest in various properties and businesses, including the Pilgrim entities and Bonnie Brae, were discussed at this meeting. [Trial Stip. at ¶ 49; DX 52; PX 64; TR 213:22-214:3]. This meeting alerted counsel for the Debtors that information regarding Michael O’Neill’s loss of these business assets had not been included in response to Paragraph 4(b) of the Original or Amended SFA. [TR 212:4-13, 214:4-15, 216:4-19, 226:12-17, 239:2-12, 243:5-11],
On May 21, 2010, before conclusion of the Meeting of Creditors, the Debtors filed the Second Amended SFA. [Trial Stip. at ¶ 52; DX 43; PX 53], The Second Amended SFA explained that Debtor Michael O’Neill had lost his ownership interest in Bonnie Brae, Pilgrim Management Co. and Pilgrim Companies, Inc. before the bankruptcy filing, and the circumstances under which Michael O’Neill lost the ownership interests, by stating: “On or about 12/18/09, Michael O’Neill’s interest in Pilgrim Management Co and Pilgrim Co.’s Inc. were forfeited pursuant to a disposition of collateral pursuant to 810 5/9-611”; and “On or about 2/16/10, Michael O’Neill’s interest in Bonnie Brae Development, LLC was terminated”. [Trial Stip. at ¶ 52; DX 43 at ¶ 4 (p. 4); PX 53]. The Debtors’ bankruptcy counsel prepared the Second Amended SFA and the Debtors reviewed the Second Amended SFA to make sure it was complete and accurate before signing and filing it. The Debtors were not aware that there was a mistake with the previous answers to the SFA that required the Second Amended SFA until their bankruptcy counsel notified them and provided an explanation. [TR 212:4-13, 214:4-15, 216:4-19, 226:12-17, 239:2-12, 243:5-11], Plaintiff conceded at trial that the Second Amended SFA corrected the Debtors’ bankruptcy filings. [TR 94:13-18, “THE COURT: Listen, I’m still trying to figure out the relevance here. By May, he had correct—they had corrected their schedules; isn’t that right? At least to reveal the transactions that you’re complaining about. MR. QUAID: Yes, for the first time.”; TR 410:11-19]. Moreover, the Second Amended SFA was filed before the Trustee concluded the Meeting of Creditors on October 7, 2010. [Trial Stip. at ¶ 64; DX52; PX 64].
*332
The Debtors Did not Have an Intent To Defraud In Connection With Their Bankruptcy Filings
25(b). The trial evidence established that the Debtors lacked fraudulent intent. Instead, the evidence established that the Debtors made an honest mistake in the Initial and Amended SFA.1 “A discharge cannot be denied when items are omitted from the schedules by honest mistake.” Beaubouef v. Beaubouef (In re Beaubouef), 966 F.2d 174, 178 (5th Cir. 1992); Bank of Homewood v. Rossi 1986 WL 8508, *5 (N.D.Ill.1986). The honest mistake resulted from the Debtors providing voluminous information and documents to their bankruptcy counsel in reliance on counsel to completely and accurately complete the SFA and then reviewing the SFA and Amended SFA without sufficient care for their completeness.2
The Debtors’ lack of fraudulent intent was also evidenced by their filing of the Second Amended SFA shortly after they were alerted by their bankruptcy counsel that the Initial and Amended SFA was not complete, and that the Second Amended SFA was filed before termination of the Meeting of Creditors. A debtor who mistakenly or inadvertently provides false information or fails to disclose pertinent information and takes steps to amend his filings to correct them prior to conclusion of the Meeting of Creditors does not possess the requisite fraudulent intent to deny discharge under § 727(a)(4)(A).3
Plaintiffs Pos1>-Trial Brief contends that the Debtors hid Michael O’Neill’s loss of business ownership assets in order to re-aequire the assets from his father through a “testimonial transfer” (i.e. *333a parental will). [Adversary Dkt. 95 at p. 8]. Plaintiffs post-trial argument was first raised in his Posh-Trial Brief was not supported by evidence at trial. This suggestion of a conspiracy between the parents and Defendants is speculative. Moreover, the argument is defeated by Plaintiffs own admissions at trial that the Second Amended SFA was accurate and corrected the Debtors’ bankruptcy filings. [TR 94:13-18, 410:25-411:4—“THE COURT: Counsel, do you contend that the final iteration of the schedules was false?” MR. QUAID: “No, that it was too late, and that it was a part of a plan to try to throw people off the track.”; TR 411:19-25, “THE COURT: You have not demonstrated from the evidence that it was—a final iteration of the schedules was false, have you?” MR. QUAID: “I have not.”] The Plaintiff did not challenge by trial evidence or separate litigation asserting fraudulent transfer under § 546 of the Code the legitimacy of the transactions identified in the Second Amended SFA by which Defendants lost the assets in issue before the bankruptcy was filed. He might have done so either with leave of court or by the Trustee abandoning such claim.4 Plaintiffs arguments now challenging those transactions indirectly are not substitute for such litigation or a basis for holding them invalid. Plaintiffs post-trial motion (discussed below) to withdraw one stipulation because another stipulation is said to show that the cancellation of Defendants’ rights in “Pilgrim” interests might have been arguably premature falls far short of an action or evidence to show that transaction was improper. Moreover, the lack of proof that the information initially omitted did not hide assets of any value to the bankruptcy estate or its administration shows that Defendants had no motive to hide that information.
The Plaintiffs failure to establish the existence of the requisite intent alone warrants a denial of the objection to discharge brought under § 727(a)(4)(A).
Plaintiff’s Post-Trial Motion to Amend Joint Trial Simulation
As part of the effort to buttress his suggestion that the transfer of interests was a fraudulent scheme, Plaintiff moved post-trial to amend one of the Joint Trial Stipulations entered into pretrial and not questioned during the trial.
Many months after conclusion of trial and the close of evidence, the Plaintiff now moves to “correct” the Joint Trial Stipulations (Adversary Dkt. 105) by deleting Paragraph 21, in which the parties stipulated to the following facts:
21. Pilgrim Companies, Inc.’s last monthly payment to John O’Neill and Margaret T. O’Neill under the Installment Notes was made on *334April 2, 2009. Pilgrim Companies, Inc. did not make the scheduled payments under the Installment Notes for May 2009 through November 2009.
The Plaintiffs motion is untimely and is an improper attempt to re-open the proofs and re-argue the evidence in the case. Despite having the opportunity to do so, the Plaintiff failed in all respects to introduce any evidence at trial challenging the validity of the underlying foreclosure transactions identified in the Debtors’ Second Amended Statement of Financial Affairs. The instant Motion is a belated and improper attempt to re-open the evidence to introduce arguments challenging the underlying foreclosure transactions by contending for the first time that there were no missed payments to justify foreclosure of Debtor Michael O’Neill’s ownership interest in the Pilgrim Companies, Inc. and Pilgrim Management Company. However, the close of evidence has long since passed and the Debtors structured their arguments and evidence based on the Joint Trial Stipulations and the evidence actually introduced at trial.
The Motion also has no basis substantively because the Plaintiff made no challenge to Paragraph 21 of the Joint Trial Stipulations throughout the trial by failing to introduce any evidence to challenge the stock foreclosure and by indicating to this Court and Debtors that Plaintiff was instead limiting his case in Count I to the lack of disclosures in the Debtors’ Initial and Amended Statement of Financial Affairs. The Motion is furthermore belied by the factual record, including the trial testimony and the trial exhibit attached to the Motion itself. For these reasons, the Motion should be denied.
The Motion Is Untimely and Improper
It is a “well settled rule” that a stipulation of fact that is fairly entered into is controlling and conclusive on the parties and this Court is bound to enforce it. Illinois Cent. Gulf R. Co. v. Tabor Grain Co., 488 F.Supp. 110, 122 (N.D.Ill.1980). The trial stipulation at issue in the motion before this Court is purely factual, and involves whether payments were or were not made. Therefore, the stipulation is controlling and conclusive and this Court is bound to enforce it.
The Plaintiff has not contended that he did not freely enter into the Joint Trial Stipulations. The Plaintiff deposed the Debtor Michael O’Neill and his father John O’Neill (one of the persons that foreclosed on the stock). Moreover, the Plaintiff had a full and complete opportunity to examine the document productions and trial exhibits, including the Debtors’ Trial Exhibit 12, before entering into the Joint Trial Stipulations. Having taken the depositions and reviewed the documents, the Plaintiff agreed to the Joint Trial Stipulations and they were filed on April 18, 2011 on the first day of trial (Adversary Dkt. 85). The Joint Trial Stipulations were also filed without objection a second time by both parties on July 15, 2011 to add citations to the trial exhibits (Adversary Dkt. 104). The Debtors, in turn, reasonably relied on the Joint Trial Stipulations in evaluating and presenting their case [See TR 404:17-405:7 & 414:1-5] (reflecting the understanding of counsel for Debtors that the Plaintiff had stipulated to the basis for the stock foreclosure). It is clearly untimely and improper for the Plaintiff to attempt to strike a factual stipulation nearly eight months after the end of trial and close of evidence.
The Contentions of a “Mistake” are not Supported
Plaintiffs argument in support of his Motion rests on another Exhibit admitted into evidence, Defendants’ Trial Exhibit *33512. Trial Exhibit 12 is said by Plaintiff to show the “[s]tatus of Accounts purporting to show what payments, were, in fact, actually made or were not made that were due from Pilgrims Companies, Inc. and Michael O’Neill to his father (John O’Neill) and mother (Margaret T. O’Neill) pursuant to the Installment Notes given as the purchase price for the purported purchase of the stock of Pilgrim’s Companies, Inc., including, F.C. Pilgrim, by Michael O’Neill and his sister from his father and mother.” Plaintiff argues that Defendants’ Trial Exhibit 12 contradicts Paragraph 21 of the Joint Trial Stipulations in that it shows “that the scheduled payments due under the promissory note were, in fact, made beyond April, 2009, and were made through November, 2009, for the note to John O’Neill (Page 2) and through October, 2009, for Margaret O’Neill....”
The Plaintiff claims in the Motion that the factual stipulation in Paragraph 21 of the Joint Trial Stipulations is “most likely a mutual mistake of fact”, as Trial Exhibit 12 “contradicts” Paragraph 21 of the Joint Trial Stipulations (Adversary Dkt. 105 ¶¶ 3 & 9). However, Trial Exhibit 12 could be read to show that payments were not made for the time period May 2009 through November 2009, as stated in Paragraph 21 of the Joint Trial Stipulations. Moreover, the portions relied upon by the Plaintiff as purporting to show that payments were made do not identify the “Payee” and do not provide check numbers for the alleged payments in the “Reference]” column (See Tr. Ex. 12, p. 3, 9.) These missing pieces of information were provided for all other payment entries from earlier time periods covered by Trial Exhibit 12 when payments were actually made. The absence of this information in the entries on Trial Exhibit 12 relied upon by the Plaintiff calls into question the Plaintiffs new contention that the requisite payments were in fact made. Had the Plaintiff asserted his challenges to Paragraph 21 of the Joint Trial Stipulations in a timely manner at trial, the accuracy of the entries on Trial Exhibit 12 could have been investigated at trial. Moreover, the undisputed trial testimony established that Pilgrim Companies, Inc. failed to make all required payments [TR 146:14-16]. Therefore, the contention upon which the Plaintiffs motion is based (that Trial Exhibit 12 “contradicts” Paragraph 21 of the Joint Trial Stipulations) is unsupported by the evidence admitted at trial.
The Stock Foreclosure Was Not Material
The Plaintiff argues that striking Paragraph 21 would be significant because the failure to make the payments at issue in Paragraph 21 was the alleged basis for foreclosure on the stock held in escrow as collateral for the Notes, and if the payments were in fact made then the foreclosure was “improper and therefore, void.” (Adversary Dkt. 105, p. 4 at ¶ 4.) However, the Plaintiff never introduced at trial any evidence regarding the purported value of the stock that was foreclosed upon, and therefore has not articulated how striking Paragraph 21 of the Joint Trial Stipulations could support his positions. For example, the Plaintiff did not provide any expert testimony on valuation, or even attempt to introduce evidence regarding the purported fair market value of the stock. Therefore, there is no basis in the record or this Court to find that any material information was not disclosed on the Debt- or’s SFA. “A claim or statement is material if it hinders the administration of the estate.” In re Agnew, 818 F.2d 1284, 1290 (7th Cir.1987) (holding materiality element not satisfied under § 727(a)(4) where proceeds from sale of asset subject to false oath could not have been reached by creditors to satisfy debts); In re Calisoff, 92 B.R. 346, 355 (Bankr.N.D.Ill.1988). The *336trial evidence, including the Trustee’s filing of a no-asset report in January 2011 failed to show that the stock that was foreclosed upon in Pilgrim Companies, Inc., Pilgrim Management Company and F.C. Pilgrim & Co. had sufficient material value to pursue. (Trial Stip. at ¶ 67 (“On January 5, 2011, the bankruptcy trustee filed a no-asset report”); PX 72 at p. 1 (showing that in 2009, Pilgrim Companies, Inc. and F.C. Pilgrim & Co. reported negative $43,325 in business income); PX 76 at p. 3 (in 2010, Pilgrim Companies, Inc. and F.C. Pilgrim & Co. reported negative $14,507 in business income)).
The Motion Seeks to Elevate Argument to the Status of Evidence
Plaintiff contends that the continuation of the payments beyond the April, 2009 date, stated in the Joint Trial Stipulations to and through October, 2009 and November, 2009 respectively, supports the Plaintiffs theory of the ease that Michael O’Neill had a very concrete motive in concealing the alleged foreclosure of his ownership interest in the stock of Pilgrim’s Companies, Inc., from his Chapter 7 Trustee and the inquiring creditors, including and especially, the Plaintiff. Combined with the fact that Michael O’Neill’s father and mother were by contract to honor a ninety (90) day cure period for any failure of monetary payments due under the promissory note from Pilgrim Companies, Inc., and its guarantors, Michael O’Neill and his sister, foreclosure under the Uniform Commercial Code of the stock interests of Michael O’Neill and his sister is said now by Plaintiff to have been improper and therefore, void. The continuation of the monetary payments through October and November 2009 did not permit a foreclosure on December 6, 2009, due to the need to give the ninety (90) day cure.” [Plaintiff Reply Brief 4.]
Arguing further, Plaintiffs Reply Brief states that “[if] the October and November, 2009, dates are correct for the last payments made on the Installment Notes, then the ninety (90) day cure period would have delayed any foreclosure action until March, 2010.” [Id. at 4.] Then, without the having of any witness being offered to interpret Exhibit 12 Plaintiff gives his own interpretation.
On page 3 of the Defendants’ Trial Exhibit 12, payments are shown to be made to Michael O’Neill’s father through November 13, 2009. On page 5 of the same document, the last line shows a payment to Michael O’Neill’s mother on October 15, 2009. Therefore, these later dates contradict paragraph number 21 of the Joint Trial Stipulations and in the interest of manifest justice, must be corrected.
That interpretation merely represents Plaintiffs opinion concerning a document about which no witness familiar with it has testified.
Standards for Allowing Withdrawal of Stipulations
The Plaintiff argues that two grounds exist warranting the court to “correct” the Joint Trial Stipulations in Paragraph 21, either on the grounds that the dates therein “constitute mutual mistake of facts on the part of the Plaintiff and Defendants or to serve manifest justice.”
It is true that an initial mistake of fact in a stipulation can be corrected if that be demonstrated. Whitaker v. Associated Credit Services, Inc., 946 F.2d 1222, 20 Fed R. Serv.3d 1275 (6th Cir.1991); In re Martinez, 393 B.R. 27, 32-33 (Bankr.D.Nev.2008). Also, it has been held that a stipulation alone does not prevent a court from reviewing what may be a “manifest” injustice. Metro Tech Service Corp. v. Payless Shoe Source, Inc., 2007 *337WL 2003039, *3 (N.D.Ill.2007) A court has the power to relieve a party from a stipulation if the facts show that it is reasonable to do so. Id. at *3 (citing Cates v. Morgan Portable Building Corp., 780 F.2d 683 (7th Cir.1985)).
But otherwise, stipulations entered into freely and fairly are not to be set aside except to avoid manifest injustice. Fairway Const. Co. v. Allstate Modernization, Inc., 495 F.2d 1077, 1079 (6th Cir. 1974) (citing Sherman v. U.S., 462 F.2d 577 (5th Cir.1972); Fenix v. Finch, 436 F.2d 831 (8th Cir.1971)).
Courts have been unwilling to set aside stipulations where the court determines that a stipulation was freely and fairly entered into and manifest injustice did not arise. Id.
A party’s pre-trial stipulation is binding “unless relief from the stipulation is necessary to prevent a ‘manifest injustice’ or the stipulation was entered into through inadvertence or based on an erroneous view of the facts or law.” In re Ebro Foods, 449 B.R. 759, 764 (Bankr. N.D.Ill.2011) (citing Graefenhain v. Pabst Brewing Co., 870 F.2d 1198, 1206 (7th Cir.1989) (citation omitted)). “As with other matters of trial management, the [trial] court has ‘broad discretion’ to decide whether to hold a party to its stipulations; the [trial] court’s decision will be overturned on appeal only where the court has clearly and unmistakably abused its discretion.” Id.
Grounds for relieving a party from a stipulation are that it was entered into as a result of fraud, misrepresentation, mistake of fact, or excusable neglect, or that the facts have changed, or that there is some other special circumstance rendering it unjust to enforce the stipulation; the fact that the party has changed attorneys is not such a circumstance. People v. Trujillo, 136 Cal.Rptr. 672, 67 Cal.App.3d 547 (Ca.App.1977).
“Under federal law, stipulations and admissions in the pleadings are generally binding on the parties and the Court.” PPX Enters., Inc. v. Audiofidelity, Inc., 746 F.2d 120, 123 (2d Cir.1984) (citation omitted). A court may also disregard a stipulation “if it would be manifestly unjust to enforce the stipulation,” or “the evidence contrary to the stipulation is substantial.” Id.; In re West Pan, Inc. 372 B.R. 112, 122 (S.D.N.Y.2007).
In this case, the effort to amend or avoid Paragraph 21 of the Stipulation as it reads is not warranted by any of the exceptions to the rule of law that enforces stipulations freely entered into. Plaintiffs Motion to do so rests entirely on his lawyer’s interpretation of another stipulated statement that no witness has interpreted or testified about. Plaintiff thereby seeks by his interpretation, and argument based on it, to expand the trial record long after both parties rested and the trial record was closed. He thereby seeks to introduce new meaning to the evidence post-trial that he reads into another stipulation, a supposed meaning argued without introducing a witness to interpret the document and without allowing Defendants an opportunity to rebut Plaintiffs interpretation by evidence at trial.
Therefore, Plaintiff Motion will by separate order be denied.
Omission of Information From The Initial And First Amended SFA Did Not Have a Material Effect on Property or Administration of the Bankruptcy Estate
25(c). “A claim or statement is material if it hinders the administration of the estate.” In re Calisoff, 92 B.R. 346, 355 (Bankr.N.D.Ill.1988); In re Agnew, 818 F.2d 1284, 1290 (7th Cir.1987) (holding *338materiality element not satisfied under § 727(a)(4) where proceeds from sale of asset subject to false oath could not have been reached by creditors to satisfy debts). The omissions at issue in this case were not material for a number of reasons. First, they were corrected long before conclusion of the Meeting of Creditors so that potential recovery of assets was not jeopardized.5 Second, the trial evidence, including the Trustee’s filing of a no-asset report in January 2011, demonstrated that the assets were not recoverable and, even if they were recoverable, did not have value to pursue. [Trial Stip. at ¶ 67; DX 52; PX 64; PX 72 at p. 1 (in 2009, Pilgrim Companies, Inc. and F.C. Pilgrim & Co. reported negative $43,325 in business income); PX 76 at p. 3 (in 2010, Pilgrim Companies, Inc. and F.C. Pilgrim & Co. reported negative $14,507 in business income); TR 427:3-17 (Bonnie Brae had a negative net worth in February 2010)]. No evidence of value of the lost assets as of the date of bankruptcy filing was offered.
For lack of materiality of the initial omission, the action under § 727(a)(4) also fails.
Count I § 727(a)(5)
26. In furtherance of § 727(a)(5), “for purposes of determining whether the debtor’s discharge should be denied for failing to explain the absence of assets, the debtor’s explanations must consist of more than vague, indefinite, and uncorroborated reasons. To be satisfactory, the explanation must demonstrate that debtor has exhibited good faith in conducting his affairs and explaining loss of assets.” In re Hasan, 245 B.R. 550, 554 (Bankr.N.D.Ill.2000) (citing In re Bryson, 187 B.R. 939, 956 (Bankr.N.D.Ill.1995)).
27. Once the party objecting to discharge presents evidence of the disappearance of substantial assets, the burden then shifts to the debtors to explain those losses. Id. at 554-5 (citing In re Volpert, 1994 WL 605894 (Bankr.N.D.Ill.1994)); In re Potter, 88 B.R. 843, 849 (Bankr.N.D.Ill.1988); In re Martin, 141 B.R. 986, 999 (Bankr.N.D.Ill.1992).
28. Under § 727(a)(5) proof comes in two stages, the first of which is that the Plaintiff bears the burden of demonstrating that the Defendants “at one time owned substantial and identifiable assets that are no longer available to [their] creditors.” In re Stamat, 395 B.R. 59, 73 (Bankr.N.D.Ill.2008) (citing In re Olbur, 314 B.R. 732, 740 (Bankr.N.D.Ill.2004) (quoting In re Bostrom, 286 B.R. 352, 359 (Bankr.N.D.Ill.2002)); In re Hermanson, 273 B.R. 538, 545 (Bankr.N.D.Ill.2002)).
29. Once the Plaintiff makes such showing, the Defendants then have *339the burden to offer a “satisfactory explanation” for the unavailability of those assets, and it is in the court’s discretion to determine whether the explanation is satisfactory. In re Stamat, 395 B.R. at 76.
30. By penalizing a debtor who is insufficiently forthcoming about what happened to his assets, § 727(a)(5) is designed to “relieve creditors and courts of the full burden of reconstructing the debtor’s financial history and condition, placing it instead upon the debtor.” In re Hansen, 325 B.R. 746, 757 (Bankr.S.D.S.C.2006) (citing In re Hermanson, 273 B.R. at 553).
31. Under § 727(a)(5), the bankruptcy judge has “broad power to decline to grant a discharge ... where the debtor does not adequately explain a shortage, loss, or disappearance of assets.” In re D’Agnese, 86 F.3d 732, 734 (7th Cir.1996).
32. The bankruptcy judge is not concerned with wisdom of the debtor’s disposition of their assets and income but rather focuses on “the completeness and truth of the debtor’s explanation.” In re Stamat, 395 B.R. at 76; In re Costello, 299 B.R. at 901.
33. Based on Conclusions earlier discussed, it was held and found that Defendants did not act in bad faith in filing the Initial Schedules, Initial SFA, Amended Schedules or Amended SFA.
34. The Defendants’ signatures on their Initial SFA and Amended SFA demonstrate that they were careless in reading their initial filings that omitted disclosure of assets lost before their bankruptcy filing, but did not knowingly and fraudulently made a false oath.
35. The Plaintiff has demonstrated that the Defendants at one time owned identifiable assets that are no longer available to their creditors. But, as earlier shown, those were lost before the bankruptcy filing when they had no demonstrated value, and their former existence within Debtors’ assets did not have any effect or materiality on efforts of the Trustee or creditors to find assets available to the bankruptcy estate.
36. Plaintiff argues under § 727(a)(5) that Defendants have failed to explain satisfactorily their loss of ownership interests in F.C. Pilgrim, Pilgrim Companies, Pilgrim Management, and Bonnie Brae Development, LLC. To the contrary a full explanation of all that was given.
On May 21, 2010 the Debtors filed an Amended Statement of Financial Affairs (the “Second Amended SFA”). [Trial Stip. at ¶ 52; DX 43; PX 53], The Second Amended SFA explained that Debtor Michael O’Neill had lost his ownership interest in Bonnie Brae, Pilgrim Management Co. and Pilgrim Companies, Inc. before the bankruptcy filing and the circumstances under which Michael O’Neill lost the ownership interests, by stating “On or about 12/18/09, Michael O’Neill’s interest in Pilgrim Management Co and Pilgrim Co.’s Inc. were forfeited pursuant to a disposition of collateral pursuant to 810 5/9-611” and “On or about 2/16/10, Michael O’Neill’s interest in Bonnie Brae Development, LLC was terminated”. [Trial Stip. at ¶ 52; DX 43 at ¶ 4 (p. 4); PX 53],
Plaintiff conceded at trial that the Second Amended SFA corrected the Debtors’ bankruptcy filings. [TR 94:13-18, “THE COURT: ... By May, ... they had corrected their schedules; isn’t that right? At least to reveal the transactions that you’re complaining about. MR. QUAID: Yes, for the first time.”; TR 410:11-19]. Plaintiff does not contend that the Second Amended SFA was false. [TR 410:25-411:4, “THE COURT: Counsel, do you contend that the final iteration of the schedules was false?” MR. QUAID: “No, that it was too late, and that it was a part *340of a plan to try to throw people off the track.”; TR 411:19-25, “THE COURT: You have not demonstrated from the evidence that it was—a final iteration of the schedules was false, have you?” MR. QUAID: “I have not.”].
37. Plaintiff has argued that the acts terminating the former interests were carried out before Defendants were actually in default in their payments, and he finds the early termination to be suspicious. Stipulated documents do show that there might have been an arguable basis for delaying the termination of interests. However, given the lack of proof of value in the lost assets, there was no economic reason demonstrated for Debtors to resist disclosure of their former interests.
The Plaintiff Did Not Establish An Objection To Discharge Under 11 U.S.C. § 727(A)(5)
38. Trial evidence established that the Debtors satisfactorily explained their loss of assets in the Second Amended SFA and provided documentation to substantiate their loss of interests in discovery and in the Attachment to the Second Amended SFA.6 A creditor objecting to discharge based on debtor’s alleged failure to satisfactorily explain loss of assets has the initial burden of identifying the assets in question by appropriate allegations in the complaint, and proof showing that the debtor at one time had assets but that they are no longer available for debtor’s creditors. Once the creditor has introduced some evidence of the disappearance of substantial assets, the burden shifts to the debtor to explain satisfactorily the losses or deficiencies. In re Potter, 88 B.R. 843, 849 (Bankr.N.D.Ill.1988). The Second Amended SFA explained the prebankruptcy loss of Michael O’Neill’s ownership interests in Bonnie Brae, Pilgrim Management Co. and Pilgrim Companies, Inc. [Trial Stip. at ¶ 52; DX 43 at ¶ 4 (p. 4); PX 53].7 Moreover, the Plaintiff conceded at trial that the Second Amended SFA corrected the Debtors’ bankruptcy filings, and the Plaintiff did not contend that the Second Amended SFA was false. [TR 94:13-18, 410:25-411:4], The Plaintiff did not dispute at trial that Michael O’Neill lost his stock in Pilgrim Companies, Inc. and Pilgrim Management Co in the December 2009 foreclosure, months before the bankruptcy was filed. [TR 29:15-30:17]. The Plaintiff also did not dispute at trial that Michael O’Neill lost his membership interest in Bonnie Brae on February 16, 2010, before the bankruptcy was filed. [TR 31:22-24].
*341By the Plaintiffs own admission, prior to the final meeting of creditors the Second Amended SFA truthfully explained Michael O’Neill’s loss of assets and the Plaintiffs objection to discharge fails. Under 11 U.S.C. § 727(a)(5), the Court is not concerned with the wisdom of the debtor’s disposition of their assets and income but rather the Court focuses on “the completeness and truth of the debtor’s explanation.” In re Stamat, 395 B.R. 59, 76 (Bankr.N.D.Ill.2008); In re Costello, 299 B.R. 882, 901 (Bankr.N.D.Ill.2003). In our case, the Plaintiff did not contest the completeness and truth of the Debtors’ explanation provided in the Second Amended SFA. [TR 94:13-18, 410:25-411:4].
39. The accuracy of the information contained in bankruptcy schedules and statements of financial affairs is the responsibility of the debtors, and the debtors have a duty to consider carefully all questions posed to them and ensure that complete and correct answers are provided. In re Saylor at 193. See also In re Dawley, 312 B.R. 765, 787 (Bankr.E.D.Pa.2004); In re Sofro, 110 B.R. 989, 991 (Bankr.S.D.Fla.1990) (citing In re Burke, 83 B.R. 716 (Bankr.D.N.D.1988)); In re Dias, 95 B.R. 419, 424 (Bankr.N.D.Tex.1988); In re Diodati, 9 B.R. 804, 808 (Bankr.D.Mass.1981).
40. It is true, as Plaintiff argues, that “an attorney’s conduct must be imputed to his client in any context.” U.S. v. DiMucci, 879 F.2d 1488, 1496 (7th Cir.1989) . “Ultimately, it is debtors who are responsible for the accuracy of the information contained in their bankruptcy schedules and statement of affairs [and] it is they who have the duty to carefully consider all of the questions posed and to see that they are completely and correctly answered.” Watson v. Moss, 619 F.2d 775, 776 (8th Cir.1980). However, In re Radloff, 418 B.R. 316, 326 (Bankr.D.Minn. 2009), it was pointed out that “the Debtor’s reliance in fact on counsel to complete the form in a way responsive to the statutory requirements bolsters a finding of no knowledge or fraudulent intent on the Debtor’s part.”
Therefore, the following trial evidence is relevant:
The Debtors assembled and provided documents and information relating to their financial condition to their bankruptcy counsel for drafting the bankruptcy filings. [TR 206:11-17, 208:11-17, 217:15-23, 219:23-220:17]. The documents and information the Debtors provided to their bankruptcy counsel for preparing the bankruptcy filings included Michael O’Neill’s loss of membership interest in Bonnie Brae and loss of stock in Pilgrim Management Company and Pilgrim Companies, Inc. [TR 207:9-19, 208:20-209:3, 219:23-220:11]. The Debtors did not intentionally withhold any financial or other information from their bankruptcy counsel in connection with preparing the bankruptcy filings. [TR 209:4-8, 217:15-23, 219:23-220:17, 232:18-234:4, 234:20-235:13], Counsel for the Debtors drafted the bankruptcy filings. [TR 208:4-19]. The Debtors relied on their bankruptcy counsel to prepare the bankruptcy filings completely and accurately. [TR 209:9-12, 217:15-23, 219:23-220:13, 227:13-25].
41. Plaintiff must show intent to deceive, but that is lacking here. The Debtors in the instant case did not recklessly disregard the accuracy of the information in their bankruptcy filings like the Debtors in In re Saylor, 339 B.R. at 193 (“the debtors testified that they were allowed to sign the statement of affairs and schedules without having read them. The documents were simply handed to them by someone at counsel’s office who instructed them where to sign and the debtors did so; they signed the documents without any *342effort to study them, verify their accuracy, or question the information they contained”). These Debtors read their lengthy filings, but not with sufficient care.
42. It is correctly argued by Plaintiff that “[A] debtor’s reckless disregard for the truth of the information contained in its bankruptcy statements and schedules is sufficient to bar a discharge and may be regarded as the equivalent of actual fraud on the part of a debtor who submits false or inaccurate information.” Id. See also, [In re] Montgomery, 86 B.R. [948], 957 [ (Bankr.N.D.Ind.1988) ]; In re Yonikus, 974 F.2d 901, 905 (7th Cir.1992); In re Tully, 818 F.2d 106, 112 (1st Cir. 1987). However, that legal concept does not apply under the facts found above.
43. “If the bankruptcy schedules reflect such an indifference to the truth then no further evidence of fraud is necessary.” In re Saylor, 339 B.R. 190, 193 (Bankr.N.D.Ind.2006). Reckless disregard means “not caring whether some representation is true or false.” In re Chavin, 150 F.3d 726, 728 (7th Cir.1998). See also, In re Diodati, 9 B.R. 804, 809 (Bankr.D.Mass.1981) (quoting Le Lievre v. Gould, 1 Q.B. 491,498(1893)).
44. The debtors in Saylor were recklessly indifferent to the truth of the information they provided because (1) they testified that they did not understand the questions posed to them while completing the statement of affairs; (2) even though they did not know what was being asked of them; (3) they did not disclose their lack of understanding or ask any questions to clarify or explain; and (4) the debtors were allowed to sign the statement of financial affairs and schedules without having read them and signed them without any effort to study them, verify their accuracy, or question the information contained therein. In re Saylor 339 B.R. at 193.
45. Conduct by the debtors in Saylor showed a classic example of “not caring whether some representation is true or false” and demonstrate a reckless disregard for their accuracy. In re Saylor at 193 (quoting In re Chavin, 150 F.3d at 728). See also In re Olbur, 314 B.R. at 746; In re Sims, 148 B.R. 553, 557 (Bankr. E.D.Ark.1992).
However, for reasons detailed above, Defendants have met their burden of explanation under § 727(a)(5) and so Plaintiff is denied judgment under that provision.
Count II § 523(a)(2)
46. Pursuant to 11 U.S.C. § 523(a)(2) 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.” (emphasis supplied.). The standard of proof for the dischargeability exceptions under 11 U.S.C. § 523(a) is preponderance-of-the-evidence. Grogan v. Garner, 498 U.S. 279, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). In Count I, Plaintiff contended that Defendants had assets that they held from the Bankruptcy Trustee or could not explain the loss of. In Count II, Plaintiff contends that Defendant represented in loan negotiations that they actually had such assets but that such representations were false because Defendants assertedly never possessed the assets represented. While nothing bars inconsistent pleading in the alternative, the proof in Count I of interests formerly owned by Defendants contradicts the argument in Court II that those same or related assets were never owned by either Defendant. In short, if Defendants represented in the negotiations with Plaintiff something about assets *343owned, that was proved in Count I to have been substantially true.
47. In order to except false pretenses or a false representation from dischargeability, the Plaintiff must establish the following elements: (1) the Defendants obtained funds through representations that the Defendants either knew to be false, or made with such reckless disregard for the truth as to constitute willful misrepresentations; (2) the Defendants possessed the requisite scienter, i.e., they actually intended to deceive the Plaintiff; and (3) to his detriment, the Plaintiff justifiably relied on the Defendants’ misrepresentations. In re Jairath, 259 B.R. 308, 314 (Bankr.N.D.Ill.2001) (citing Caez v. Jacob (In re Jacob), No. 97-A-01664, 1998 WL 150493, *4 (Bankr.N.D.Ill.1998); Mayer v. Spanel Int’l Ltd. (In re Mayer), 51 F.3d 670, 673 (7th Cir.1995), cert. denied, 516 U.S. 1008, 116 S.Ct. 563, 133 L.Ed.2d 488 (1995)). However, the Plaintiff must also establish that his reliance was justifiable. Mayer v. Spanel Int’l Ltd., 51 F.3d 670, 673 (7th Cir.1995).
Does the Law Require Due Diligence of Plaintiff?
48. One legal issue is whether Plaintiff was required, as a matter of law, to conduct due diligence before making his loan. Debtors argue that Plaintiff did no due diligence and, therefore, cannot be found to have justifiably relied on the statements. In In re Ojeda, a Panel of Seventh Circuit Judges noted: “As the Supreme Court held in Feld [Field] v. Mans, 516 U.S. 59, 71, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995), creditors have no duty to investigate if they are unaware of the potential falsity.” 599 F.3d 712, 718 (7th Cir.2010), though outside information received by the creditor could trigger such a duty. Id. Debtor argues that Plaintiff could have seen from corporate documents had he requested them the nature of the ownership structure. But the evidence did not show that Plaintiff received information that should have aroused suspicion, and thereby no duty to investigate became evident.
Can an Oral Statement be a “Statement of Financial Condition”?
49. Another legal issue is whether Michael’s statements regarding discussing ownership of F.C. Pilgrim & Co. was a “statement of financial condition” and therefore beyond the scope of § 523(a)(2)(A). Debtors argue that those statements concerned their financial condition and therefore should have been in writing to be actionable under the “other than ...” clause of the statutory provision. If those statements are “statements of financial condition” then they may not be grounds for a non-dischargeability action unless they are in writing and otherwise satisfy the requirements of § 523(a)(2)(B). Subsections 523(a)(2)(A) and (a)(2)(B) are mutually exclusive. If a statements respecting the debtor’s financial condition is communicated orally, a legal issue arises. The difficulty lies in determining whether a particular representation is a statement respecting the debtor’s financial condition.8
*344As observed in Collier’s on Bankruptcy, neither the phrase “respecting the debtor’s ... financial condition” [in § 523(a)(2)(A) ] nor the term “financial condition” [in § 523(a)(2)(B) ] is defined in the Code. Opinions are divided on the proper scope of those terms. Collier’s P. 523.08 (citing cases). Some hold that the term “financial condition” refers only to the debtor’s overall financial condition, such as the debtor’s overall financial health. Id. This narrow construction might permit alleged oral misrepresentations regarding facts such as the ownership of specific property to fall within § 523(a)(2)(A). This construction avoids the statutory requirement found in § 523(a)(2)(B) that requires the misrepresentation to be in writing. Other opinions rely on the statutory text and conclude that factual representations regarding ownership of an asset “go to the very heart of a [debtor’s] financial condition” and have held that the term “financial condition” requires a writing. Engler v. Van Steinburg, 744 F.2d 1060 (4th Cir.1984); In re Redburn, 202 B.R. 917, 928 (Bankr.W.D.Mich.1996). In an action under § 523(a)(2)(A), the statute expressly excludes “a statement respecting the debt- or’s ... financial condition,” while § 523(a)(2)(B) expressly requires a “statement in writing ... respecting the debtor’s ... financial condition ...” Based on the statutory text, it would seem in the absence of definitive higher authority that Plaintiffs lack of a writing can be viewed as fatal to Count II.
It is not clear what approach would apply in the Seventh Circuit Court of Appeals if the issue were directly decided. In In re Ojeda supra, the debtor-defendants orally represented their continued ownership in two McDonald’s restaurants after they had sold those restaurants. 599 F.3d at 714-15. The creditor-plaintiff argued that the representations were false and committed with the intent to deceive. Id. at 716. The Circuit Panel opinion ruled the debt owed was non-dischargeable. Id. at 720. The Panel did not expressly adopt a position on the scope of § 523(a)(2)(A) and did not discuss whether the statements regarding ownership of the restaurants was a “statement of financial condition.” The central issue in that case was whether the creditor-plaintiffs reliance on those oral statements (in addition to a written pledge of stock in another company) was justifiable. Id. at 716-18.
A Panel of the Fourth Circuit expressly ruled in a short opinion on the issue in Engler v. Van Steinburg, 744 F.2d 1060 (4th Cir.1984). In that case, the Opinion upheld a Bankruptcy Judge’s holding that the debtor’s oral representations that he owned property free and clear related to his financial condition. Id. at 1060-61. The Panel reasoned that “Congress did not speak in terms of financial statements. Instead, it referred to a much broader class of statements-those ‘respecting the debtor’s ... financial condition.’ ” Id. The Panel went on to say, “[a] debtor’s assertion that he owns certain property free and clear of other liens is a statement respecting his financial condition.” Id. at 1061. Under this broad view, Michael’s statements regarding ownership of F.C. Pilgrim & Co. might be a “statement ... respecting the debtor’s ... financial condition,” actionable under § 523(a)(2)(B), but not actionable under § 523(a)(2)(A).
In this case, Plaintiff does not contend that § 523(a)(2)(B) applies nor does he sue under that provision. Rutili argues that Debtors’ conduct falls within § 523(a)(2)(A). His arguments did not *345thoroughly address the issue whether oral statements regarding ownership of F.C. Pilgrim & Co. are statements of financial condition and therefore beyond the scope of § 523(a)(2)(A).
However, even assuming without deciding that Count II is not foreclosed by the statutory language, this ease turns on the basic contention that representations of ownership in a company were made and relied on so as to obtain the loan by false pretense or misrepresentation. Since neither falsity nor reliance was proven, this Count of the Complaint is lost whether or not the statutory language bars the action in the absence of a written representation of financial statement.
As for falsity, Plaintiffs proof under Count I showed that Defendants did hold some interest in a “Pilgrim” entity, so therefore Defendant’s oral references to that interest before the loan was made were substantially accurate, particularly where no written representation was requested or given to define the nature of the interest. The purported “representation” that Michael O’Neill owned F.C. Pilgrim & Co. was substantially true because Michael O’Neill then held a controlling ownership interest in F.C. Pilgrim & Co. [Trial Stip. at ¶ 7; DX 8-11; TR 257:11-17].
50. On the issue of reliance, Plaintiff asserts that he would not have entered into the First Promissory Note, Second Promissory Note or Third Promissory Note if the Defendant Husband did not own F.C. Pilgrim.
No such reliance was written into the transaction documents, and no documentation as to such ownership was requested. On various occasions in 2003 and 2004, the Plaintiff indicated to Michael O’Neill that the Plaintiff was interested in investing in real estate as a lender. [TR 173:18-174:10, 174:20-175:17, 254:9-255:22, 293:10-17], On April 19, 2005, the Plaintiff funded the acquisition of the Humphrey Property in anticipation of executing a loan agreement with the Debtors at a later date, under which the Debtors would repay the Plaintiff, with interest, for the purchase price of the Humphrey Property. [TR 180:15-25, 182:17-183:5, 249:14-18; DX 57]. At the time the Plaintiff funded closing of the Humphrey Property there was no loan agreement in place with the Debtors, and the parties had not even discussed any terms and conditions relating to the loan. [TR 179:2-4, 180:15-25, 182:17-25,183:11-14; 296:6-17].
The trial evidence established that the Plaintiff did not demand any specific representation regarding ownership of F.C. Pilgrim & Co. nor did he investigate the F.C. Pilgrim & Co. ownership structure or value of that ownership’s interest. The Loan Agreement that the parties executed in May 2005 did not contain any representations to Plaintiff at all, let alone any representation that Michael O’Neill owned F.C. Pilgrim & Co. [DX 17; TR 185:12-15, 389:9-12], Also, none of the alleged “representations” were made in connection with the May 2005 Loan Agreement. [TR 308:2-339:18, 365:20-367:16]. None of the purported “representations” that the Plaintiff testified to were made at any time during which the Plaintiff and the Debtors were negotiating the terms and conditions of the Loan Agreement in April and May 2005. [TR 179:2-4, 180:15-25, 182:17-25, 183:11-14; 296:6-17, 293:10-23, 308:2-339:18, 365:20-367:16, 370:16-371:15]. Moreover, the Plaintiff did not request any personal or corporate financial information or corporate records, and the Plaintiff did not perform any investigation regarding the purported “representation” that Michael O’Neill owned F.C. Pilgrim & Co. [TR 185:20-186:22, 187:22-188:11, 386:9-13, 387:5-389:8].
The trial evidence established that the Plaintiff never asked the Debtors for any *346representations in connection with the Loan Agreement, including never asking for a specific representation that Michael O’Neill owned F.C. Pilgrim & Co. [TR 184:24-185:1, 185:16-19]. The Debtors never provided any representations of fact to the Plaintiff referring or relating the Loan Agreement, and never spoke to the Plaintiff regarding the terms of the Loan Agreement. [DX 17; TR 189:11-15; 191:5-18].
51. The Plaintiff generally investigated the Defendant Husband and may well have conferred with colleagues and professionals who worked with and for the Defendant Husband to confirm that the Defendant Husband held some ownership interest in F.C. Pilgrim. However, he did not request any written representation of the details concerning such ownership nor did he request any arrangement by which Pilgrim assets would guarantee or secure the loan. Moreover, the alleged “misrepresentations” at issue in Count II were of a general nature and not directed at the loan. [TR 36:4:10, “THE COURT: Did you just tell me that misrepresentations you rely on were of a general nature in communications between the parties but not necessarily directed at either of these two transactions? MR. QUAID: Leading up to and including the transactions.”] Accordingly, Plaintiff did not justifiably rely upon the Defendant Husband’s comments about owning Pilgrim interests when he loaned $1,176,000.00 to the Defendants.
Therefore, Count II also fails.
CONCLUSION
By reason of the foregoing, Final Judgment will be separately entered on both Counts in favor of Defendants.
. It is undisputed that the Debtor Wife did not sign the Initial SFA, and the Plaintiff did not even attempt to introduce any evidence that the Debtor Wife intended to defraud with respect to Michael O'Neill’s loss of business assets. Plaintiff must establish the elements of 11 U.S.C. Section 727(a)(4)(A) against both Debtors, and more than marital relationship is necessary to impute fraudulent intent between debtor spouses. Cole Taylor Bank v. Yonkers (In re Yonkers), 219 B.R. 227, 233 (Bankr.N.D.Ill.1997); In re Cooper, 399 B.R. 637, 649 (Bankr.E.D.Ark.2009).
. In re Radloff, 418 B.R. 316, 326 (Bankr.D.Minn.2009) ("the Debtor’s reliance in fact on counsel to complete the form in a way responsive to the statutory requirements bolsters a finding of no knowledge or fraudulent intent on the Debtor’s part.”).
. In re O'Neal, 436 B.R. 545 (Bankr.N.D.Ill.2010) (holding following trial that adversary defendant should not be denied discharge under 11 U.S.C § 727(a)(4) where asserted false statements under oath did not show intent to defraud or reckless indifference, and were corrected); In re Oliver, 414 B.R. 361, 374-75 (Bankr.E.D.Tenn.2009); In re Larrieu, 230 B.R. 256, 270-271 (Bankr.E.D.Pa.1999) (Debtor voluntarily amended schedules after learning of error, and Court found no intent to defraud); In re Carter, 203 B.R. 697, 707 (Bankr.W.D.Mo.1996) ("While debtors’ original schedules contain some inaccuracies and omissions, debtors did file corrected schedules after the case was converted to Chapter 7. In light of those corrections, I cannot find that Darin knowingly and fraudulently lied when he signed his bankruptcy schedules.”); In re Merena, 413 B.R. 792, 816-817 (Bankr.D.Mont.2009); In re Burzee, 402 B.R. 8, 18 (Bankr.M.D.Fla.2008) ("The Debtor did not fraudulently omit information from her schedules and statements. She unintentionally omitted information relating to her USAA Rollover Account through inadvertence. Her disclosure regarding the April 21, 2004 Rogel transfers was imprecise, but she disclosed the transfers. She remedied the omission and imprecision in her amended schedules immediately after engaging new counsel. She fully cooperated with the Trustee and provided to him detailed information early on in her Chapter 7 proceedings. The Debtor did not knowingly and fraudulently make a false oath or account. The Plaintiff has failed to establish the elements of 11 U.S.C. Section 727(a)(4)(A).”)
. The implication of Plaintiff’s argument is that the transfer of interests that deprived Debtors of the interests in question might be avoidable under 11 U.S.C. § 548 as a transfer in fraud of creditors. A creditor who wishes to pursue such an action that a Chapter 7 trustee does not wish to pursue may either ask the trustee to abandon the claim so the creditor may pursue it for his own benefit, or petition the court to allow him to bring the claim on behalf of the bankruptcy estate.
A creditor's standing to pursue a § 548 action on behalf of the estate requires court permission where the trustee unreasonably declines to bring it. Fogel v. Zell, 221 F.3d 955, 966 (7th Cir.2000) or where the trustee consents. Banque Nationale de Paris v. Murad, 310 F.3d 64, 70-71 (2d Cir.2002).
If the trustee abandons such a claim either willingly or is ordered to do so an individual creditor may pursue such a claim for his own benefit, not derivatively is described above. Collier on Bankruptcy, P. 548.02 (citing Blumenberg v. Yihye, 263 B.R. 704 (Bankr.E.D.N.Y.2001)). If such a fraudulent conveyance claim is property of the estate but abandoned under § 554 then the right to pursue it reverts back to the pre-bankruptcy creditor who originally held the claim. Id.
. The Plaintiff argues that the Debtors did not produce necessary documents in the bankruptcy and the adversary proceeding. [Adversary Dkt. 95 at p. 9], These arguments are belied by the Plaintiff's failure to subpoena or even attempt to contact Bonnie Brae or the Pilgrim entities to obtain the documents, the Plaintiff’s failure to file any motion to compel against the Debtors, Mr. Okal's testimony that he was receiving documents from the Debtors continuously from May 2010 through October 2010 when he was substituted as counsel for the Plaintiff, and Michael O'Neill's unrebutted testimony that the Debtors diligently searched for and produced boxes of documents that were requested. [See Debtors’ FOF and COL; TR at 90:14-91:12, 104:2-14, 106:16-107:11, 113:10-14, 115:8-117:2, 117:21-23, 220:18-221:16, 235:14-236:14, 237:9-238:18; DX 44; Trial Stip. at ¶ 59]. Moreover, the Plaintiff's argument that the Debtors were attempting to conceal the loss of assets by not turning over requested documents is without merit. Disclosures in the Second Amended SFA, and documents filed with the Court and turned over in discovery substantiating the disclosures, demonstrate that the Debtors were not attempting to conceal Michael O’Neill's prebankruptcy loss of business ownership assets.
. The Plaintiff's Post-Trial Brief argues that the documents referenced in the Second Amended SFA were not provided until the Attachment to the Second Amended SFA was filed on July 26, 2010. [Adversary Dkt. 95 at p. 4]. However, the trial evidence established that the documents referenced in the Second Amended SFA were provided to counsel for the Plaintiff on May 27, 2010 (within a week of the filing of the Second Amended SFA). [TR ¶ 59; TR 259:8-260:25].
. The clear and undisputed explanation for the loss of assets in the Second Amended SFA, and substantiation of the losses through documents produced to the Plaintiff and filed with the Court, distinguishes the instant case from the caselaw cited by the Plaintiff in support of his objection to discharge under 11 U.S.C. § 727(a)(5) in which the explanations were not provided, vague and/or uncorroborated. See In re Stamat, 395 B.R. 59, 77 (Bankr.N.D.Ill.2008) (debtors unable to explain loss of cash removed from bank accounts); In re Hansen, 325 B.R. 746, 764 (Bankr.N.D.Ill.2005) (debtor unable to explain loss of proceeds from sale of house); In re Hasan, 245 B.R. 550, 555 (Bankr.N.D.Ill.2000) (debtor unable to explain loss of $125,000 in funds); In re Costello, 299 B.R. 882 (Bankr.N.D.Ill.2003) (debtor unable to explain loss of income and proceeds from transfer of assets); In re D’Agnese, 86 F.3d 732, 734-5 (7th Cir.1996) (debtor unable to explain depletion in assets).
. Under § 523(a)(2)(A) a discharge does not apply to any debt:
[f]or money ... to the extent obtained, by— false pretenses, a false representation or actual fraud, other than a statement respecting the debtor's or an insider’s financial condition.... [Emphasis supplied]
Section 523(a)(2)(B) excepts from discharge a debt for:
"money ... to the extent obtain by use of a statement in writing (1) that is materially false: (2) respecting the debtor’s ... financial condition: (3) on which the creditor to whom the debtor is liable for such money *344... reasonable relied; and that (4) the debt- or cause to be made or published with intent to deceive.” [Emphasis supplied] | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8494667/ | MEMORANDUM DECISION
JAMES M. MARLAR, Chief Judge.
Dean Rody and Soroya Mohammadpour (“Debtors”) claimed various items of personal property exempt under 11 U.S.C. § 522(d). The chapter 7 Trustee objected that the Debtors were required to claim the Arizona exemptions, which, he asserted, applied beyond state borders (ECF No. 30). It was undisputed that Debtors, who had moved to Massachusetts prepetition, met the domiciliary requirements of the Bankruptcy Code for application of the Arizona exemptions. Debtors responded, however, that Arizona’s “opt-out” statute for use of the state exemptions was restricted to residents of Arizona. Thus, because they were not Arizona residents on the petition date, they maintained they were entitled to use the federal exemptions pursuant to the default rule of 11 U.S.C. § 522(b)(3). The contested matter was heard and taken under advisement. The Court now renders its decision overruling the Trustee’s objection.
I. Jurisdiction
The Court has jurisdiction over this core matter under 28 U.S.C. § 1334; see also 28 U.S.C. § 157(b)(2)(B). Venue is proper in this district under 28 U.S.C. § 1408.
II. Facts and Procedure
Debtors resided in Arizona from 2000 to May 16, 2011. On May 17, 2011, they moved permanently to Massachusetts and *386were residing there on the petition date. On June 21, 2011, Debtors filed a joint chapter 7 petition in Arizona.
On Amended Schedule C, Debtors claimed various items of personal property exempt pursuant to 11 U.S.C. § 522(d). Debtors used the federal exemptions even though they met the domiciliary requirements for the Arizona exemptions in accordance § 522(b)(3), which provides:
(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 to 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 in 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;
If the effect of the domiciliary requirement under subparagraph (A) is to render the debtor ineligible for any exemption, the debtor may elect to exempt property that is specified under subsection (d).
Since Debtors had not been in Massachusetts for 730 days prior to filing bankruptcy, but had lived in Arizona for the 180 days immediately preceding the 730-day period (or a longer portion of such 180-day period than any other place), they met the domiciliary requirements for the Arizona exemption statutes.
As permitted by 11 U.S.C. § 522, Arizona has elected to “opt out” of the federal exemption scheme, such that Arizona debtors can only use the state exemptions. The opt-out statute, provides, in pertinent part:
[I]n accordance with 11 U.S.C. § 522(b), residents of this state are not entitled to the federal exemptions provided in 11 U.S.C. 522(d). Nothing in this section affects the exemptions provided to residents of this state by the constitution or statutes of this state.
A.R.S. § 33-1133(B) (emphasis supplied.)
Debtors believed they were ineligible for the Arizona exemptions because they were residents of Massachusetts on the petition date. Given the “plain language” of A.R.S. § 33-1133(B), Debtors followed the default rule in the “hanging paragraph” of § 522(b)(3), cited above, which states: “[I]f the effect of the domiciliary requirement ... is to render the debtor ineligible for any exemption, the debtor may elect to exempt property that is specified under subsection (d)” of § 522. 11 U.S.C. § 522(b)(3).
The Trustee filed a timely objection to the claimed exemptions (ECF No. 30) solely on the grounds that Debtors were required to claim the Arizona exemptions. Debtors filed a response in opposition (ECF No. 32), maintaining that, as nonresidents, they were not eligible to use the Arizona exemptions.
The Trustee replied that Debtors’ “strained reading” of A.R.S. § 33-1133(B) “would defeat the federal bankruptcy exemption scheme that preserves to individual states the right to opt out of the federal exemptions and require the use of the state’s exemption laws.” Trustee’s Reply at 1:20-23 (ECF No. 33). The Trustee contended that the Arizona exemptions were available to the nonresident Debtors because (1) A.R.S. § 33-1133(B) did not ex*387plicitly prohibit their use by nonresidents, and (2) opt-out state statutes have extraterritorial application, citing In re Arrol, 170 F.3d 934 (9th Cir.1999) (interpreting California law).
Debtors’ sur-reply (ECF No. 34) was also filed. A hearing took place at which the Court considered the arguments and pleadings, and took the matter under advisement.
III. Issues
1. Whether Arizona’s exemption scheme is only applicable to resident debtors.
2. Whether a determination as to the extraterritorial effect of Arizona’s personal property exemptions is necessary to decide this matter.
3. Whether the Debtors correctly concluded that they could use the federal exemptions because there were no state exemptions available to them.
IV. Discussion
The commencement of a bankruptcy case creates an estate comprised of all legal and equitable interests in property (including potentially exempt property) of the debtor. 11 U.S.C. § 541. A debtor is entitled to exempt certain assets from the bankruptcy estate. 11 U.S.C. § 522. In general, exemption laws are to be construed liberally in favor of debtors. See Arrol 170 F.3d at 937.
Because we are a mobile society, Congress enacted a statute which would determine which exemption law would apply to debtors whose domicile has changed near the time of the filing of the petition. The main purpose of this legislation was to prevent opportunistic bankruptcy filings by debtors simply to take advantage of lenient state exemption laws. W.H. Brown, L. Ahern & N. Frass MacLean, Bankr.Exempt. Manual § 4.6 (2011 Thomson Reuters/Westlaw).
This case, however, does not involve forum shopping by Debtors or the so-called “mansion loophole,” “by which wealthy individuals could shield millions of dollars from creditors by filing bankruptcy after converting nonexempt assets into expensive and exempt homesteads in one of the handful of states that have unlimited homestead exemptions....” In re Greene, 583 F.3d 614, 619 (9th Cir.2009) (citation omitted). Debtors are simply among the growing number of peripatetic debtors who moved to another state and then found themselves subject to the expanded domiciliary rules. See generally, L. Bar-tell, “The Peripatetic Debtor: Choice of Law and Choice of Exemptions,” 22 Emory Bankr.Dev. J. 401 (Spring 2006).
Since 2005, § 522(b)(3)(A), as amended, has provided a look-back period of 730 days for use of a state’s exemptions—a debtor must have been domiciled for that period of time in the state immediately preceding the bankruptcy filing, or else the exemptions of the state where the debtor was domiciled for 180 days or the greater part of 180 days prior to the 730 days would apply. The amendment was a departure from the bankruptcy venue requirements, and courts now must construe exemption laws of other states. See In re Jevne, 387 B.R. 301, 303 (Bankr.S.D.Fla. 2008). Congress presumably contemplated the effect of state laws which might restrict their applicability to residents or to in-state property, potentially leaving debtors without any exemptions. That is why it included the default language or hanging paragraph in § 522(b)(3) as a fail-safe mechanism. As cited above, this provision states in relevant part: “[I]f the effect of the domiciliary requirement ... is to render the debtor ineligible for any exemption, the debtor may elect to exempt *388property that is specified under subsection (d)” of § 522.11 U.S.C. § 522(b)(3).1
Arizona has opted out of the federal bankruptcy exemption scheme only with respect to Arizona residents. The opt-out statute, provides, in pertinent part:
[I]n accordance with 11 U.S.C. § 522(b), residents of this state are not entitled to the federal exemptions provided in 11 U.S.C. 522(d). Nothing in this section affects the exemptions provided to residents of this state by the constitution or statutes of this state.
A.R.S. § 33-1133(B) (emphasis supplied.)
“A.R.S. § 33-1133(B) clearly states that Arizona debtors are only entitled to the exemptions set forth in the Constitution or Statutes of Arizona.” In re Hoffpauir, 125 B.R. 269, 271 (Bankr.D.Ariz.1990). Thus, Arizona residents may not use the federal bankruptcy exemptions. In addition, the statute states that the exemptions are “provided to residents.” Courts must apply the plain meaning of the statute and may not read into a statute an exemption that is not there. Id. The Trustee’s suggestion that this statute does not expressly prohibit a nonresident from utilizing the Arizona exemptions is contrary to the plain meaning of the opt-out for residents.
According to a leading treatise, Debtors’ approach was the correct one. A debtor’s election to exempt property under § 522(d)
may arise if the exemption law of the debtor’s domicile requires that the debt- or reside within the state to claim exemption rights or if the state law does not permit an exemption to be taken on property located outside the state.
4 Collier on Bankruptcy ¶ 522.06, p. 522-39 (16th ed. 2011) (emphasis added).
Confusingly, the courts have focused on one or the other—either residency restrictions or extraterritorial effect (particularly for homesteads)—and have reached divergent results. Nevertheless, Debtors’ case law presents a majority view which this Court finds compelling.
Debtors cite numerous cases from states in other circuits with similar facts and statutes containing a residency restriction. This line of cases holds that debtors may claim the federal exemptions' because they are not residents of the opt-out states whose opt-out statutes prohibit only their residents from using the federal exemptions. See In re Camp, 631 F.3d 757, 760 (5th Cir.2011) (listing cases).2
*389In Camp, the Fifth Circuit Court of Appeals held that the Florida opt-out statute, by its own terms, neither applied to nonresident debtors nor barred nonresident debtors from claiming the federal exemptions if they remained eligible to use them. Id. The court therefore avoided a discussion of thornier, “corollary” questions dealing with the effect of the savings clause of § 522(b)(3) when a state restricts the extraterritorial application of its exemption scheme, and preemption. Id. at 761 n. 3.
This line of cases was adopted as the “state-specific” view by the court in In re Fernandez, 2011 WL 3423373 (W.D.Tex. Aug. 5, 2011), which is “that a state’s exemption laws may be used by out-of-state debtors for out-of-state property to the extent that each state’s exemption law permits.” Id. at *11. The District Court examined the applicable Nevada homestead statute and held that it would reach property in Texas. Id. at *27.
The Trustee relies on Fernandez and has framed his objection in terms of the extraterritorial effect of Arizona’s personal property exemptions upon those assets in Massachusetts. Fernandez’s facts are distinguishable from ours, however. There, the debtor was seeking to use the Nevada homestead exemption for his current residence in Texas. Thus, the District Court expressly did not address the effect of Nevada’s opt-out statute and any residency requirement. Id. at *22 n. 5. Instead, the corollary question addressed by the District Court was whether Nevada’s homestead exemption law, consisting of its Constitution, its homestead exemption statute and relevant case law, would permit a nonresident debtor to claim an exemption in a home that was located in a state other than Nevada. The District Court concluded it would. Id. at *28.
Also, central to the Trustee’s argument is the seminal Ninth Circuit case of In re Arrol, 170 F.3d 934, 937 (9th Cir.1999). In Arrol, the Ninth Circuit held that California law, although silent on the subject, would allow the extraterritorial application of its homestead exemption so that a debt- or, who was currently residing in Michigan but who met the § 522(b)(3)(A) domiciliary requirements for applying California’s exemptions, could protect his Michigan residence.
Arrol was decided pre-BAPCPA, when there was no default provision allowing use of the federal exemptions if a debtor did not qualify for the applicable state’s exemptions. The Ninth Circuit Court of Appeals was concerned that the debtor would be left with no way to preserve his need for basic housing. Id. at 936. Nor did Arrol’s state-specific interpretation address the issue of any residency requirement in the California opt-out statute.
On our facts, however, the first hurdle for the Court is to determine whether Arizona’s opt-out statute applies to nonresident debtors. It plainly does not. Nor are Debtors attempting to use Arizona’s personal property exemptions; in contrast, the debtors in Fernandez and Arrol claimed exemptions under state law. There is no controversy before the Court with regards to the extraterritoriality of Arizona’s personal property exemptions, as if Debtors had claimed exemptions under state law. Thus, this Court shall not reach the corollary issue of whether the Arizona personal property exemptions have extraterritorial effect.
That being said, the Court must discuss certain case law which holds that, even if the domiciliary state’s opt-out statute is limited to residents, before the debtor can *390utilize the federal exemptions, which are only available in case the debtor is ineligible for “any exemption,” the state exemption statute must not be extraterritorial. 11 U.S.C. § 522(b)(8)(A); see In re Beckwith, 448 B.R. 757 (Bankr.S.D.Ohio 2011); In re Cole, 2011 WL 3207369 (Bankr.S.D.Ind. July 26, 2011).
Beckwith applied Florida opt-out law, which mirrors the Arizona opt-out statute. Florida Statutes § 222.20 provided:
In accordance with the provision of s. 522(b) of the Bankruptcy Code of 1978 (11 U.S.C. 522(b)), residents of this state shall not be entitled to the federal exemptions provided in s. 522(d) of the Bankruptcy Code of 1978 (11 U.S.C. s. 522(d)). Nothing herein shall affect the exemptions given to residents of this state by the State Constitution and the Florida Statutes.
Fla. Stat. § 222.20 (2010). The court did not stop there, however. “The question then becomes,” the Beckwith court stated, “are Florida’s exemptions available only to its residents or are the exemptions given extraterritorial application?” 448 B.R. at 762. After looking at the exemption statutes and finding that they did not contain any language limiting them to residents of Florida, the court nonetheless determined that the majority of prior case law, including courts construing Florida law, had “upheld state residency requirements as a condition to invoking the state’s exemptions.” Id. at 762.
In Cole, the bankruptcy court cited Beckwith, but merely examined the Georgia opt-out statute to determine that it was limited to those persons who are domiciled in Georgia on the petition date. It held that an opt-out statute limiting use of the exemption to individuals domiciled in Georgia effectively limits the use of the exemption to property within that state and has no extraterritorial effect. 2011 WL 3207369 at *2. Therefore, both Beckwith and Cole allowed the debtors to claim the federal exemptions under the default provision.
As in Cole, Arizona’s opt-out statute is also an “exemption” statute that limits the availability of the state’s exemption scheme to its residents. See also Camp, 631 F.3d at 761; Battle, 366 B.R. at 636-37. Moreover, neither party to this dispute has presented any Arizona authority for the extraterritorial effect of its personal property exemptions. Even assuming that A.R.S. § 33-1125 has extraterritorial effect, the exemption is limited to Arizona residents.
As an illustration, in In re Jarski, 301 B.R. 342 (Bankr.D.Ariz.2003), a debtor resided in a home in Arizona, filed bankruptcy in Arizona, and also owned a residence in California. This being a lien avoidance case, the court did not adjudicate which state’s exemption laws actually applied, but it nonetheless opined that Arizona’s homestead exemption statute “expressly contemplates that a debtor might have more than one residence that could qualify for the exemption because it creates a procedure for the debtor to choose which to claim as exempt.” Id. at 346; A.R.S. § 33-1102(A). The Jarski court also stated that § 522(b)(3)(A) (formerly § 522(b)(2)(A)) “determines whose law governs the exemptions, but not whether the property claimed exempt must exist in that same state.” Id. (emphasis added).
While the logic of Jarski and Arrol could require the Court to review the extraterritorial effect of Arizona’s personal property exemption in the event that Arizona law was “applicable,” 11 U.S.C. § 522(b)(3)(A), here, Arizona law is not applicable. Arizona’s opt-out statute limits the state exemptions to residents of Arizona.
*391Therefore, Debtors were free to utilize the § 522(d) exemptions pursuant to the default clause. In addition, the Court concludes that an examination of the extraterritorial effect of the specific personal property exemption statutes is unnecessary for resolving this matter.
Finally, the Trustee’s objection also raises aspects of a minority view in the case law, which holds that federal law preempts any state limitations that would conflict with the federal choice of law in § 522(b)(3)(A). See In re Garrett, 435 B.R. 434 (Bankr.S.D.Tex.2010) (holding that Bankruptcy Code provision that required debtors to look to North Carolina exemption law preempted provision of North Carolina law providing that its exemption laws would not have extraterritorial effect). Furthermore, the Ninth Circuit, in Arrol, asserted the supremacy of the federal choice of law statute, but ultimately ruled according to its interpretation of California law. 170 F.3d at 936.
This Court is persuaded by the many legal analyses and opinions which have concluded that the preemption doctrine does not neatly fit this area where Congress has explicitly allowed the states to opt out of the federal exemptions—the opposite of preemption.3
In addition, it is well established law in the Ninth Circuit that where state exemption laws condition or limit the exempt status of property in ways that are more or less generous than the federal exemptions, such conditions or limitations must be respected. In re Konnoff, 356 B.R. 201, 205-06 (9th Cir. BAP 2006) (citing In re Golden, 789 F.2d 698, 700 (9th Cir.1986) and Owen, 500 U.S. at 308, 111 S.Ct. 1833). Ultimately, attempting to prevent potentially unfair or absurd results in the application of § 522(b)(3)(A) by ignoring unambiguous state law is not the role of the bankruptcy courts.
V. Conclusion
Arizona’s opt-out exemption statute renders the nonresident Debtors ineligible for the state exemptions but does not prohibit them from utilizing the federal exemptions pursuant to § 522(b)(3) and (d). Therefore, Debtors’ federal exemption claims are valid and the Trustee’s objection is overruled. A separate order will be entered.
. There is little legislative history regarding this paragraph except that it was carried forward from an earlier House bill whose Conference Report explained that “if the effect of [the new 730 day domiciliary rule] is to render the debtor ineligible for any exemption, the debtor may elect to exempt property of the kind described in the federal exemption notwithstanding state opt out.” H. Rep. No. 107-617 Conference Report to Accompany H.R. 333 Bankruptcy Abuse Prevention and Consumer Protection Act of 2002, at 58-59 (July 25, 2002). The language was apparently included after a legislative affairs liaison at the Department of Justice sent a letter to a House member pointing out that the proposed domiciliary requirement might not be effective depending on how state exemption laws are applied. See In re Fernandez, 445 B.R. 790, 816 & n. 42 (Bankr.W.D.Tex.2011), rev’d on other grounds, In re Fernandez, 2011 WL 3423373 (W.D.Tex. Aug. 5, 2011).
. These and other cases include: In re Cole, 2011 WL 3207369 at *2 (Bankr.S.D.Ind. July 26, 2011); In re Beckwith, 448 B.R. 757 (Bankr.S.D.Ohio 2011); In re Chandler, 362 B.R. 723 (Bankr.N.D.W.Va.2007); In re Battle, 366 B.R. 635 (Bankr.W.D.Tex.2006); In re Underwood, 342 B.R. 358 (Bankr.N.D.Fla.2006); In re Jewell, 347 B.R. 120 (Bankr.W.D.N.Y.2006); In re Volk, 26 B.R. 457 (Bankr.D.S.D.1983); In re Walley, 9 B.R. 55 (Bankr.S.D.Ala.1981); cf. In re Nickerson, 375 B.R. 869 (Bankr.W.D.Mo.2007) (Kansas per*389sonal property exemption statute restricted to residents).
. As Judge Leif Clark points out in Fernandez, 445 B.R. at 807-15, if Congress had intended to preempt state restrictions, then § 522(b)(3)(A) would have stated that it applies to any property that "would be exempt”—i.e., an artificial application—instead of any property that "is exempt." There is precedent for disregarding an "element of reality” in order to avoid a judicial lien pursuant to § 522(f). See Owen v. Owen, 500 U.S. 305, 312-13, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991). See also T. Tarvin, "Bankruptcy, Relocation, and the Debtor's Dilemma: Preserving Your Homestead Exemption Versus Accepting the New Job Out of State,” 43 Loy. U. Chi. L.J. 141, 203 (Fall 2011) (calling for a "statutory change” to correct for the "arbitrary imposition of a look-back period” while accomplishing the goal of preventing "relocation gaming”). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495302/ | *195Decision Determining Debts and Finding Debts Nondischargeable
GUY R. HUMPHREY, Bankruptcy Judge.
I. Introduction
This proceeding is about a debtor who entered into an arrangement with a relative concerning the purchase and use of two commercial trucks, in combination with her debtor spouse who repaired trucks for the same relative in his own repair garage, and what happened when the business venture failed. The legal issues include whether the debtors’ conduct in obtaining the titles to the two trucks through use of the Ohio unclaimed motor vehicle statute and the subsequent disposition of those vehicles gives rise to a non-dischargeable debt. The plaintiff asserts that the conduct of the debtors constituted false misrepresentations or false pretenses which makes the asserted debt nondis-chargeable under 11 U.S.C. § 523(a)(2)(A);1 and in the alternative, the embezzlement of the motor vehicles makes the debt nondischargeable under § 523(a)(4). The court finds that the debtors’ conduct gives rise to nondischargeable debts under § 523(a)(4).
II. Issues for Determination by the Court
The court must address the following issues: a) does this court have the authority subsequent to Stem v. Marshall2 to determine Lawson’s state law fraud and embezzlement claims which underlie his allegation that the Conleys owe him a non-dischargeable debt and, if so, can the court also liquidate such claims through finding damages and entering judgment?; b) if the court has the authority to determine Lawson’s state law claims, did the Conleys engage in conduct giving rise to liability under state law and, if so, what damages were incurred by Lawson?; and c) if the Conleys engaged in conduct that under state law gives rise to a debt owed by the Conleys to Lawson, is that debt nondis-chargeable under § 523(a)(2) or (4)?
III.Procedural Background, Evidence Presented at the Trial, and Findings of Fact
A. Procedural Background
James Conley and Betty Conley (“Betty” and collectively the “Conleys”) filed a joint Chapter 7 petition on January 28, 2010 and received a discharge on July 15, 2011.3 However, Lowell Lawson (“Lawson”) filed a complaint against the Conleys to determine the dischargeability of a disputed debt pursuant to § 523(a)(2) and (4) (doc. 1) and the Conleys answered (doc. 2). The court conducted a trial on July 22 and 29, 2011, the parties filed posttrial memo-randa (docs. 84, 85 & 92), and the court took the matter under advisement. This decision constitutes the court’s findings of fact and conclusions of law pursuant to Federal Rule of Bankruptcy Procedure 7052.
On March 24, 2012, prior to the court reaching its decision, Lawson filed a motion to re-open the trial to admit “newly discovered evidence” and also sought an *196order of contempt and sanctions against the Conleys (doc. 96). After briefing and a hearing, the court denied the motion (docs. 110 and 111).4
B. Evidence Presented at the Trial 1. Lawson’s Purchase of Volvo Tractors from Clear Choice and the Formation of the Agreement between Lawson and Betty Conley
Lawson ran a small trucking company which did business as “Lawson Trucking,” through which he hauled freight for brokers for a fee. Lawson testified that his company would typically haul 10-12 loads each week. Tr. 94. April Lawson, Lawson’s wife, testified that as of January 2009 Lawson had two trucks, only one of which was operating. Tr. 177.
Betty and Lawson are relatives and have known each other for decades. In January 2009 Lawson told Betty that he needed money to pay for the insurance for his trucking operation or his insurance would be cancelled Tr. 382. In response, Betty gave him $1,000 to pay for the insurance, food and gasoline.
On April 8, 2009 Clear Choice Leasing, LLC (“Clear Choice”) sold Lawson seven Volvo commercial truck tractors — six 1998 models and one 1993 model. Clear Choice provided seller financing for this sale through a $30,000 promissory note signed by Lawson payable to Clear Choice. The certificates of title were transferred to Lawson with a lien noted on each title in favor of Clear Choice, with the vehicle identification numbers (“VIN”). The vehicles were a 1998 Volvo VIN# 4VGWDAJH9WN748726 (the “8726 Tractor”); a 1998 Volvo # 4VGWDAJH5WN748805 (the “8805 Tractor”); a 1998 Volvo # 4VGWDAJH6WN748800 (the “8800 Tractor”); a 1998 Volvo # 4VGWDAJH0WN748811 (the “8811 Tractor”) a 1998 Volvo # 4VGWDAJH8WN748815 (the “8815 Tractor”); a 1998 Volvo VIN# 4VG7DEJHXWN750349 and a 1993 Volvo VIN# 4VIWDB JF2PN659726.
The sole member of Clear Choice is Stephen M. Jordan. Jordan testified that two of the seven trucks were purchased later, in July 2009. In June 2009 Lawson executed an additional promissory note in the amount of $6,000 and Clear Choice took a lien on an additional tractor — another 1998 Volvo: VIN # 4VGWDAJhlwn748798. Although the modification of the original secured loan transaction was not entirely clear, Lawson held title to all the vehicles sold by Clear Choice. The purchase price for each tractor was $6,000. While some principal was paid over time, Lawson continued to owe Clear Choice most of the principal balance on the two promissory notes at the time of trial.
In April or May 2009 Betty, Lawson and Marcia Ledbetter, Lawson’s office manager, met at Betty’s residence to discuss Betty having her own truck terminal, using some of the trucks that Lawson had purchased from Clear Choice and Betty operating under Lawson Trucking’s regulatory authority to haul loads. Tr. 92. On May 13, 2009 Betty gave Lawson $3,000 toward an ownership interest in Lawson Trucking, although the specifics of that interest were never defined by either party (Exh. C; Tr. 142, 175, 210-11, 264, 281, 389 & 446). The purpose of this investment was to form a joint venture with Lawson to permit Betty to use Lawson’s licensing authority. Some of the $3,000 was used to pay insurance on the trucks.
*197Originally Lawson offered Betty five of the trucks acquired from Clear Choice on the condition that she made the loan payments owed to Clear Choice on those trucks. However, Lawson later decided that he wanted to keep three of those trucks, so they agreed that she would only purchase tvro trucks.
Ultimately Lawson and Betty agreed Betty would lease, with a purchase option, two of the 1998 Volvo tractors. The only document memorializing the agreement did not include any VIN numbers identifying which of the Volvo tractors Betty was acquiring. The lease payment by Betty on the two trucks was $1,100 each month [$550 per truck (Tr. 173-74) ], which would satisfy the obligation that Lawson had to Clear Choice on those tractors. In addition, she was responsible for all repairs and one-half of the insurance premiums on those two tractors. She was to pay Lawson $25 for each haul she received, but could otherwise keep any funds collected from any load hauled. The parties agreed to an “open door” policy, meaning that Betty was to allow Lawson (or one of his employees) to review all the paperwork for hauls. This policy enabled Lawson to comply with regulatory requirements and to have proper tax information. Under the parties’ agreement, they would operate this business under the name “Lawson Trucking/All-In Transportation.” Betty testified this name was chosen because she paid Lawson all the funds she had and was “all-in.”
Lawson told Betty she could choose which of the Volvo tractors she would acquire. While she was not an expert on the condition of trucks, her husband, James Conley, had years of experience as a mechanic who repaired commercial tractors. Based on his recommendations, Betty chose two trucks out of the five available. Tr. 386-87. However, as will be discussed, the testimony was inconsistent as to which two tractors were to be used and purchased by Betty.
While the arrangement between Betty and Lawson was reduced to writing, the parties disagreed over which writing was the correct recitation of the agreement and whether Betty Conley ever signed the typed agreement. See Exhs. 14, 409;5 15, 454-55; 17, 512-13; 23, 623-24; and Exh. C and Tr. 96-103;124-39;147-49; 273-91; 318-38; 350; 383; 389-95; 398; 401; 410; 411-12; 414; 415; 432; and 446-47. Regardless, the parties reached agreement over the terms previously noted and the disputes concerning which form of the agreement is the correct one and whether Betty actually signed one of them is not material to the court’s determinations.6 The material terms of the agreement were: 1) Betty was to purchase two Volvo tractors from Lawson by making the payments owed to Clear Choice on those trucks; 2) the purchase price and value of those two trucks was $6,000 each (Tr. 392); 3) Betty was authorized to use Lawson’s regulatory authority under the name “All-In Transportation;” 4) Betty was to pay Lawson $25 for each load she hauled; and 5) Betty was responsible for all fuel, repairs and insurance. ,
2. Termination of the Agreement
The venture between Betty and Lawson quickly began to veer off course. The *198parties began to argue about the amounts that Betty owed to Lawson and the amounts that Lawson owed to James Conley dba Port Diesel for repairs made to Lawson’s trucks; Betty’s desire to setoff amounts that Lawson owed to James Conley for truck repairs against amounts she owed to Lawson; Betty’s involvement in trying to collect on behalf of James Conley dba Port Diesel and difficulties in communication of information concerning loads which Betty hauled using Lawson’s regulatory authority.
A central source of conflict between the parties during the three months of this business relationship was access to records. Ledbetter, April Lawson and Lawson testified that access to appropriate documentation concerning the loads Betty hauled under Lawson’s authority was essential to maintenance of the arrangement. This point was made clear to Betty at the outset of the negotiations, but communications with Betty proved difficult and the Lawson representatives struggled to obtain the records they needed.
Betty disputed that any communication problems were her fault. She testified that, after the first loads, Lawson insisted she come to his house to provide him with the paperwork. Betty testified that due to her asthma she could not breathe in Lawson’s house because the Lawsons had 15 dogs. Tr. 395. The parties did, with some difficulty, communicate about many issues by phone and fax (Tr. 396), but Betty was not always open and forthcoming in her communication with Lawson.
The venture between Betty and Lawson began to unravel in late July 2009. On July 29th April Lawson sent a letter to Betty stating “Betty Conley All-in Transportation” owed “Lowell Trucking/All In Transportation” $2,920 which included the July and August truck payments, reimbursement for a certain load and other expenses (Exh. 17, 510).
The dispute reached an impasse on August 4, 2009. The evidence did not reveal the exact sequence of events that day, but reflects that the following transpired between Betty, Lawson and his employees:
a) Through three separate written notices dated June 4, 2009 but sent by Betty on August 4, 2009, Betty, on behalf of Port Diesel, demanded the following sums from Lawson for repairs asserted to have been made on Volvo tractors purchased by Lawson from Clear Choice and for additional storage charges: $4,775 for the 8800 Tractor; $3,670 for the 8815 Tractor; and $5,015 for the 8726 Tractor (Exh. 17, 527-29). April Lawson testified that Lawson probably would have received those demands on August 5th or 6th.
b) Also on August 4th, Ledbetter and Betty had a heated discussion. Led-better stated that Betty was discussing funds owed to her husband (dba Port Diesel) for repairs and Ledbet-ter told her those repairs were completely separate from the business arrangement between Lawson and Betty.
c) Ledbetter also sent a note to Betty on that day stating in part that communication needed to improve and “[w]e absolutely can not keep doing things the way its been going.” (Exh. 17, 519).
d) Following the conversation between Betty and Ledbetter, and also on August 4, 2009, Betty faxed a letter to Lawson stating their contract was “void” due to a “breech [sic] of contract” by Lawson. Betty stated she was owed $10,210, which included $1,600 for insurance she paid, $3,000 paid “to buy half of authority, (com*199pany)” and $2,700 for loads that Betty Conley claims were cancelled due to Lawson “telling lies.” (Exh. 15, 438). Betty also sent a hand-written note (Exh. 17, 520) listing her view of funds owed to her under the business arrangement.
e) In response to Betty’s letter, April Lawson sent a letter to Betty which stated in part that “[James Conley] labor with Lowell has nothing to do with the business with you and him. Its ridiculous [sic] that it keeps getting brought up like that. [James Conley] will be paid all moneys owed when Lowell gets his truck. That is not a problem. Keep him out of this.” (Exh. 17, 507).
Concluding this exchange of letters, notices, and conversations, on August 7, 2009 April Lawson faxed a letter to Betty telling her to “cease and desist” all operations and to return all the equipment (Exh. 17, 511). The letter stated Betty was in breach for failing to make certain payments, including for insurance and truck tags, and for failing to follow the “rules” of the parties’ agreement.
3. Betty Conley’s Collection Efforts Made on Behalf of Port Diesel
About the time that the business relationship between Betty and Lawson began its skid in late July or early August, Betty made a concerted effort to collect monies on behalf of her husband for repairs made to Volvo tractors which Lawson purchased from Clear Choice. James Conley repaired commercial trucks under the name “Port Diesel,” “Port Diesel Service,” and “Port Diesel Truck Service.”7 These efforts included telephone conversations between Betty and Lawson’s employees and one conversation between Betty and Jordan, written demands sent to Lawson, and the successful transfer of vehicle titles to three tractors from Lawson to “Port Diesel.”
The exact sequence of all these events is not clear, but it is clear that disputes arose *200between Lawson and Betty relating to whether Betty owed Lawson money under their business arrangement; whether Lawson owed James Conley dba Port Diesel for repairs made to Lawson’s trucks (See, e.g. Tr. 118-121,174, 370, 896, 398-99 & 460 and Exhs. 15 & 17); and the manner in which any sums asserted to be due to either party could be collected. Betty advised Lawson, through his employees, that James Conley would allow Betty to setoff amounts owed to him for his repairs made to Lawson’s trucks against amounts she owed to Lawson. Conversely, Lawson directly and through Ledbetter, made it clear that he would not agree to a set-off of debts he owed to James Conley against amounts Betty owed to him (Tr. 106, 285; Exh. 17, 507). These disputes resulted in written demands and notices being exchanged asserting breaches and termination of the contract between Betty and Lawson.8
Having made no progress in collecting the sums that she felt were owed to her husband, Betty sent two written demands on his behalf dated September 30, 2009 addressed to “Lowell D. Lawson, Clear Choice leasing, DBA Lawson Trucking” and mailed to Clear Choice’s business address. One letter attempted to collect $4,775 from Lawson or Clear Choice for repairs asserted to have been made by Port Diesel on the 8800 Tractor (Exh. 15, ■ 442). The other letter sought to collect $3,670 for repairs which were asserted to have been made by Port Diesel to the 8815 Tractor (Exh. 15, 441). These writings stated that Lawson had authorized these repairs and that the bills needed to be paid within 14 days “to avoid further action.”
Upon receiving the written demands from Betty, Jordan called Betty and advised her that a creditor with a lien on trucks as collateral is not the owner of the trucks and therefore is not responsible for repairs. Tr. 35-36. Referencing this comment, Betty stated that “he was talking language that’s, I guess it’s over my head.” (Tr. 407). Jordan testified that Betty advised him during this phone conversation that she sent the letters so that he would “call Lowell and demand he pay her/Port Diesel” and if the invoices were not paid within 14 days; that “she was going to court and get a judgment on both Lowell and CCL — Clear Choice Leasing — ... and force sale of these trucks.... ” Jordan responded “... that’s okay since Clear Choice Leasing is first lien holder, I get paid off first and she gets the balance after Clear Choice Leasing pays off’ and requested more detail and documentation on the repairs made, including receipts for parts purchased and installed on the trucks. Betty refused to provide him with any such documentation and she told him that “Possession is 90% of the law.” Tr. 36-38; Exh. 14, 401-02. Jordan made contemporaneous notes of this conversa*201tion and Betty did not dispute his recollection. See Exh. 14, 401-02.
4. Transfer of Volvo Tractor Titles to Port Diesel and Lawson’s Recovery of Tractors from the Conleys
Having not received satisfaction from her written demands and telephone conversations with Lawson’s representatives and Jordan, Betty set upon a course to obtain for James Conley dba Port Diesel titles to three of the Volvo tractors that Lawson purchased from Clear Choice and which were in the possession of the Con-leys- — the 8726 Tractor driven by Richard Weber, the 8800 Tractor and the 8815 Tractor.
The first step taken to obtain title to those tractors was to secure an Ohio vendor’s license in the name of Port Diesel because the state would not allow transfer of the titles into the name of Port Diesel without a vendor’s license. Tr. 201, 406 & 451. In a document dated August 26, 2009, James Conley, through the trade name “Port Diesel Truck Service” applied for a vendor’s license for work beginning on May 1, 2009. The document was signed by the Conleys’ daughter for James Conley (as the sole owner of Port Diesel) using James Conley’s social security number (Tr. 144-46 & 193-94; Exh. 20, 559; Exh. 24, 643).
The Conleys pursued the transfer of the titles to the 8800 Tractor, the 8815 Tractor and the 8726 Tractor from Lawson to Port Diesel. On October 16, 2009 Betty completed and filed with the Greene County, Ohio Common Pleas Court unclaimed motor vehicle affidavits on behalf of James Conley (dba Port Diesel) for those three tractors. She also signed and submitted applications for certificates of title transferring the titles for those three tractors from Lawson to Port Diesel. See Exhs. 25B, C and D.9 As a result, titles for those tractors were transferred from Lawson to Port Diesel.
However, Lawson recovered the 8726 Tractor from Richard Weber, one of Betty Conley’s drivers, at a truck stop prior to the Conleys being able to dispose of it. Tr. 160. Subsequently, Lawson obtained the title to that tractor from Robert Young, who had received it from Betty Conley as payment of monies he was due. Tr. 160 & 217.
Leonard Smith, one of the mechanics who also repaired trucks at James Conley’s Port Diesel garage, purchased the 8800 Tractor and 8815 Tractor, with the proceeds being split between the mechanics that performed the repairs on Lawson’s tractors. Tr. 457-58. See also Tr. 190-91 (indicating tractors were sold for parts).
5. Siyniñcance of the Dispute of Which Tractors Betty Was Acquiring and Which Tractors Were Recovered by Lawson
It was Betty’s responsibility to repair and maintain the trucks which she was acquiring from Lawson. If the 8800, 8815 or 8726 Tractor was a tractor which Betty was acquiring from Lawson, the repairs and maintenance to that truck were her responsibility, not Lawson’s. See Tr. 297, 376, 398; Exhs. 14, 409; 15, 454-55; 17, 512-13; 23, 623-24; and Exh. C. Under those circumstances, the cost of those repairs or maintenance could not be set off against amounts that Betty owed to Lawson (assuming that such a setoff would otherwise be appropriate) and no arguable basis would exist for the Conleys’ self-help in the form of the transfer of title to those *202tractors and subsequent sale to Leonard Smith.
The two tractors which Betty chose to acquire from Lawson’s small fleet of tractors were never identified in writing by VIN number (or in any other manner) and the parties’ testimony conflicted over which tractors she was acquiring. Richard Weber testified that the tractor he drove was the 8726 Tractor. Robert Young also confirmed that the 8726 Tractor was the tractor which Weber drove for Betty and the logs maintained by Weber for regulatory purposes identified that tractor as the 8726 Tractor. See Tr. 215-217 & 222 and Exh. 19. April Lawson, Lawson and Led-better testified that this tractor was one of the two tractors that Betty was acquiring (Tr. 112, 161, 261, & 288-284). However, in his affidavit, Lawson stated that the 8800 Tractor and the 8815 Tractor were the tractors that Betty Conley was acquiring. Exh. 15, ¶¶ 4, 6, 7 & 8. Lawson and April Lawson both testified that the 8800 Tractor was one of the tractors being acquired by Betty. Tr. 157,164, 288-284. The Lawsons both testified that the 8815 Tractor was the tractor which was to remain a Lawson tractor, but which the Con-leys permitted to be parked at the Con-leys’ Gallimore Road property because zoning laws and local ordinances prevented the Lawsons from parking it at their property. Tr. 159,167, & 299.
Betty testified unconvincingly that the 8805 Tractor and the 8811 Tractor were the tractors which she was acquiring:
Q. Mrs. Conley, what were the two tractors that you were purchasing from Mr. Lawson?
A. Okay, some of them, Mr. Jordan’s VIN’s here out of the county, my eyes are bad. But, okay, the truck 815, that would be Lawson’s and the 800 would be Lawson’s and the 726. So mine would be the last three VIN’s, 811 and 805.
Q. 811 and 805?
A. Yeah, them would have been my VIN’s, probably....
Tr. 443^44.10 Betty also testified that both of her trucks were “repossessed” by Lawson and that neither of the two trucks she was acquiring from Lawson constituted any of the trucks for which she prepared and filed unclaimed motor vehicle affidavits on behalf of James Conley dba Port Diesel and for which she transferred titles to Port Diesel (Tr. 399-400). She stated that when her trucks were repossessed by Lawson, James Conley had two trucks inside at Port Diesel and one truck already repaired and parked outside the garage, all of which were Lawson’s tractors that he drove or had towed to James’s garage for repairs. Tr. 401, 445. It was Betty’s testimony that the 8726 Tractor was the tractor that had already been repaired for Lawson and left outside the garage and “the next day it was gone.” See Tr. 445. She further denied that she attempted to collect funds on behalf of Port Diesel for the tractors for which she was responsible, stating that: “I didn’t even show Lowell Lawson anything that I owed on my two trucks because I owed it to [James Conley].” Tr., p. 402. James Conley testified similarly. Tr. 453.
Also clouding the issue of whether the tractors transferred by the Conleys into Port Diesel’s name were the tractors *203which Betty was acquiring or were other tractors acquired by Lawson from Clear Choice was evidence reflecting that James Conley did repair work on one or more of the other tractors which Lawson acquired from Clear Choice. James Conley testified that all of the tractors which Lawson acquired from Clear Choice made it to his repair garage at one time or another. Tr. 450-454. Betty testified that James Conley worked on Lawson’s tractors. Tr. 392-93. Ledbetter testified that James Conley did work on at least one other tractor that Betty was not acquiring. Tr. 130-31. Lawson testified that James Conley did work on his trucks, including those that he purchased from Clear Choice. Tr. 299-300; 356-57 (“When I, when we first started I had him work on them several times and I paid him.”).
Perhaps the only consistent testimony as to the repair of the Lawson tractors was that prior to the disputes that arose relating to the business arrangement between Betty Conley and Lawson, Lawson took trucks to James Conley to be repaired on a number of occasions and never encountered a bump in the relationship. Tr. 299-303 (Lowell Lawson testimony concerning the history of his truck repair payments and financial arrangements with James Conley); Tr. 408-09 (Betty Conley testimony concerning the history of repair work performed by James Conley for Lawson); and Tr. 456-57 (James Conley: ‘Yeah, pretty much he always paid me up but it just seemed we got into this deal and it just stopped.... ”).
C. Findings of Fact
Based upon the evidence presented and the court’s observation of the witnesses, the court makes the following findings:
1.Ledbetter’s and April Lawson’s testimony was wholly credible. While Lawson became emotional and agitated at times, impairing the effectiveness of his testimony during those times, the court nevertheless finds that his testimony was credible. The court finds that Jordan’s testimony was wholly credible.
2. Weber’s and Young’s testimony that Weber drove the 8726 Tractor for Betty was credible. The regulatory logs (Exh. 19) support that testimony and Weber did not have any reason to have falsified those logs. Accordingly, the court finds that the 8726 Tractor was driven by Weber for Betty and was one of the tractors which Betty was acquiring from Lawson.
3. Despite Betty being contractually responsible for the repairs on the 8726 Tractor, Betty submitted an invoice to Lawson and Clear Choice asserting that they owed Port Diesel for repairs to that tractor and then transferred the title to that tractor into Port Diesel’s name. The Conleys gave the title to that tractor to Young.
4. Other than the self-serving testimony of Betty, there was no evidence that both of her trucks were repossessed or recovered by Lawson, including when and how any other tractor which Betty was acquiring from Lawson was recovered by him. The testimony of Ledbetter that only one such tractor was recovered by Lawson was consistent with the testimony of the Lawsons. The only truck that Betty was acquiring from Lawson that was recovered by Lawson was the 8726 Tractor.
5. One of the other tractors that the Conleys obtained title to through the unclaimed vehicle affidavits was a tractor which Betty was acquiring from Lawson, for which she was responsible for the repairs and maintenance, and for which the Conleys *204wrongfully invoiced Lawson. All the credible evidence established that Lawson recovered only one of the two trucks which Betty was acquiring from Lawson and for which she was responsible for the repairs. No credible evidence was introduced that Lawson recovered both of the tractors which Betty was acquiring from him and credible evidence was provided that he only recovered one of the two tractors which she possessed under her agreement with Lawson. The court concludes that one of the two remaining tractors which the Conleys transferred to Port Diesel’s name was a tractor which Betty was acquiring from Lawson and for which she was responsible for the repairs. Based upon the Lawsons’ and Ledbetter’s testimony, the court finds that was the 8800 Tractor.
6. The Lawsons credibly testified that they parked a third tractor at the Conleys’ property due to zoning or other such issues at their property. The Conleys never refuted this testimony. The other vehicle transferred by the Conleys into Port Diesel’s name was a tractor parked by Lawson at the Conleys’ property with the Con-leys’ consent and was not driven or towed there for repairs. Based upon the Lawsons’ and Ledbetter’s testimony, the court finds that this was the 8815 Tractor.
7. The invoices prepared by Betty for James Conley dba Port Diesel are suspect for the following reasons:
a.There were no signed work orders from Lawson authorizing the work to be done on the specific tractors. The Conleys provided no supporting documents for the invoices, such as invoices for parts purchased.
b. The invoices which Betty prepared for James Conley dba Port Diesel for the 8800 Tractor (Exh. 25B) and for the 8815 Tractor (Exh. 25D) were prepared on August 5, 2009, after Lawson (through April Lawson) sent a letter on July 29, 2009 itemizing amounts which Lawson sought from Betty based upon their business arrangement (Exh. 17, 510) and after-wards, on August 4, 2009 Betty sent a letter to Lawson stating that the “contract between Lawson trucking and All-In transportation (betty conley) is now void due to breech [sic] of contract by Lowell Lawson.” Thus, the invoices were not prepared by James Conley contemporaneously with the alleged work being done. Rather, they were prepared by Betty after the business arrangement between Lawson and Betty ended and Lawson sought money from her under their business arrangement. The court finds that the invoices sent by Betty were an attempt to deflect her obligations to Lawson.
c. The invoices include storage charges from the time that the work was allegedly ordered (June 16, 2009 for the 8800 Tractor (Exh. 25B) and July 4, 2009 for the 8815 Tractor (Exh. 25D)) until the work was allegedly completed on August 5, 2009 on both tractors. The storage charges during the time that the Tractors were being repaired was unjustified.
d. While the invoice for the 8800 Tractor contains references to “3-Tires, Transmission Repair, Motor Repair, exhust [sic] replaced,” the invoice for the 8815 has no itemization at all other than “owner wants truck tow to shop and do whatever repairs needed to have road ready!” See Exhs. 25B and 25D.
*2058. Consistent testimony established that, prior to the disputes at issue, Lawson always paid James Conley for repairs made to his trucks.
9. Lawson refused to allow Betty to set off the obligations that the Conleys asserted that Lawson owed to James Conley dba Port Diesel against the amounts owed by Betty Conley to Lawson.11 The Conleys reacted by transferring titles to the 8800, 8815 and 8726 Tractors into Port Diesel’s name. Betty never refuted that she told Jordan that “possession was 90% of the law” or that she told Lawson she would “own these trucks before it’s over with.” Tr. 286-87.
10. While most of the conduct involved in the transferring of the titles to the 8800, 8815 and 8726 Tractors, including preparing the Port Diesel invoices, collection notices and the unclaimed vehicle affidavits, was taken by Betty, the evidence establishes that James Conley suggested that course of action and consented to the taking of that action as the owner of Port Diesel. See Betty testimony at Tr. 401, referencing a statement made by James Conley: “Well, fax them something saying that they owe this money.” In addition, the vendor’s license and unclaimed motor vehicle affidavits were all completed on behalf of Port Diesel and James Conley has never disavowed those acts on behalf of Port Diesel, his trade name. The evidence established that James Conley ratified those acts.
IV. Legal Conclusions
A.Jurisdiction
This court has subject matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1834. This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I). Venue is proper pursuant to 28 U.S.C. § 1409(a).
B. Burden of Proof
The plaintiff must establish the elements of his nondischargeability claims by a preponderance of the evidence. Grogan v. Garner, 498 U.S. 279, 287-88, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). Further, because exceptions to discharge are limits on a debtor’s ability to obtain a “fresh start” in bankruptcy, they are to be narrowly construed. Simmons Capital Advisors, Ltd. v. Backinski (In re Bachinski), 393 B.R. 522, 532-33 (Bankr.S.D.Ohio 2008), citing Rembert v. AT & T Universal Card Servs., Inc. (In re Rembert), 141 F.3d 277, 281 (6th Cir.1998).
C. Constitutional Authority to Enter Judgment on Lawson’s Underlying Claim
In order for a creditor to establish that his debt owed by the debtor is nondis-chargeable under any § 523(a) exception to discharge, a debt must be owed by the debtor to the creditor. Steed v. Shapiro (In re Shapiro), 180 B.R. 37, 38 (Bankr.E.D.N.Y.1995); Spinnenweber v. Moran (In re Moran), 152 B.R. 493, 495 (Bankr.S.D.Ohio 1993). In many cases a debt owed by the debtor to a creditor will have been liquidated prior to the filing of the debtor’s bankruptcy. In other cases the debtor does not dispute that a debt is owed, but rather only whether that debt meets one of the bases for nondischarge-ability. However, Lawson requests this court to do both: to enter a judgment in *206his favor on an unliquidated debt and also to determine that any such debt is nondis-chargeable.
Prior to the Supreme Court’s recent decision in Stem v. Marshall, bankruptcy courts frequently adjudicated and entered judgment on an underlying debt in reaching a determination that a debt is nondis-chargeable. 131 S.Ct. 2594 (2011). The Sixth Circuit, prior to Stern v. Marshall, held that bankruptcy courts may liquidate and enter judgment on the debts in non-dischargeability actions. Longo v. McLaren (In re McLaren), 3 F.3d 958, 965-66 (6th Cir.1993). Stem involved a state law counterclaim for tortious interference filed by a debtor against a creditor who filed a proof of claim for defamation. The court found such a claim was a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(C). Stern, 131 S.Ct. at 2604. Nevertheless, Stem held that a bankruptcy court “lacked constitutional authority to enter final judgment upon a state law counterclaim that is not resolved in the process of ruling upon a creditor’s proof of claim.” Stern, 131 S.Ct. at 2620. The majority opinion of Chief Justice Roberts stated “[w]e do not think the removal of counterclaims such as [the debtor’s] from core bankruptcy jurisdiction meaningfully changes the division of labor in the current statute; we agree with the United States that the question presented here is a ‘narrow' one.” Id. Despite the self-described narrowness of the majority’s holding, the analysis in the Stem decision has given rise to questions as to whether bankruptcy courts may constitutionally enter final judgments adjudicating a debt based upon state law. See Yellow Sign, Inc. v. Freeway Foods, Inc. (In re Freeway Foods of Greensboro, Inc.), 466 B.R. 750 (Bankr.M.D.N.C.2012) (“Since [Stern] many litigants and courts have struggled to understand [] Stem’s reasoning and apply its holding.”).
In light of the Stem decision, this court must assess whether it has the constitutional authority to enter a final judgment on Lawson’s state law claims as part of determining the dischargeability of the debt. Reported decisions after Stem have found that bankruptcy courts have the constitutional authority to enter final judgment upon a debt based upon state law within a dischargeability adversary proceeding. See Dragisic v. Boricich (In re Boricich), 464 B.R. 335 (Bankr.N.D.Ill.2011) (“[T]his action contrasts with Stem in being an action directly under and defined by the Bankruptcy Code to determine nondischargeability rather than being independent of bankruptcy law.”); Deitz v. Ford (In re Deitz), 469 B.R. 11, 20-24 (9th Cir. BAP 2012) (bankruptcy courts have the constitutional authority to enter final judgment within a discharge-ability proceeding). The court is not aware of any post-Siem decision determining bankruptcy courts may not enter final judgment upon a state law cause of action within a dischargeability adversary proceeding.
This court is also mindful that binding circuit precedent, such as McClaren, cannot be lightly determined to be overturned based upon a broad interpretation of a Supreme Court decision. See Farooqi v. Carroll (In re Carroll), 464 B.R. 293, 313 (Bankr.N.D.Tex.2011) (decision followed Fifth Circuit precedent, Morrison v. Western Builders of Amarillo, Inc. (In re Morrison), 555 F.3d 473, 478-80 (5th Cir.2009), and concluding bankruptcy courts have the constitutional authority to liquidate state law claims within a dischargeability adversary proceeding); Deitz, 469 B.R. at 23 (noting that “overturning a long-standing [circuit] precedent is never to be done lightly.”). See also Cooper v. MRM Inv. Co., 367 F.3d 493, 507 (6th Cir.2004) (“Under the law-of-the-circuit doctrine, only the Court sitting en *207banc may overrule published circuit precedent, absent an intervening Supreme Court decision or a change in applicable law.”). Particularly in light of the majority’s admonition in Stem that the decision be interpreted narrowly and the McClaren precedent directly addressing this specific question, the court finds it has the constitutional authority to enter a final judgment liquidating this debt under Ohio law.
D. Analysis of Lawson’s State Law Claim to Establish a Debt Based upon Conversion
In order to establish the nondis-chargeabihty of a debt, the creditor must first show the existence of a debt under state law. Steed v. Shapiro (In re Shapiro), 180 B.R. 37, 38 (Bankr.E.D.N.Y.1995); Spinnenweber v. Moran (In re Moran), 152 B.R. 493, 495 (Bankr.S.D.Ohio 1993). Since Lawson’s claims are unliquidated, the court will liquidate any such debt and determine the dischargeability of the debt. While the existence of the debt is determined through the application of state law, determination of the dischargeability of any such debt must be determined under the nondischargeability provisions of § 523(a). Garner, 498 U.S. at 284, 111 S.Ct. 654; First American Title Ins. Co. v. Pazdzierz (In re Pazdzierz), 459 B.R. 254, 259 (E.D.Mich.2011).
Ohio recognizes a civil cause of action for conversion. See Complaint (doc. 1, ¶ 17) (alleging the Conleys “converted ... property for their own use”). Conversion under Ohio law is the “wrongful exercise of dominion over property in exclusion of the right of the owner, or withholding it from his possession under a claim inconsistent with his rights.” Fenix Enterprises, Inc. v. M & M Mortgage Corp., 624 F.Supp.2d 834, 843 (S.D.Ohio 2009). See also Landskroner v. Landskroner, 154 Ohio App.3d 471, 797 N.E.2d 1002, 1012 (2003) (conversion can only be of identifiable, tangible personal property). The elements of conversion are: (1) plaintiffs ownership or right to possession of the property at the time of the conversion; (2) defendant’s conversion by a wrongful act or disposition of plaintiffs property rights; and (3) damages. Fenix, 624 F.Supp.2d at 843. If the defendant originally acquired possession of the property lawfully, but retains that property in contravention to the plaintiffs rights in that property, then ordinarily a demand and refusal are required to prove conversion. Id.
The Conleys disregarded Lawson’s ownership interest in the 8800 Tractor and the 8815 Tractor, and, as more fully described in the dischargeability section, converted those tractors by deliberately misusing Ohio law and damaged Lawson by depriving him of two tractors. Although these trucks were originally held by the Conleys lawfully, the retention of them became unlawful when the business venture ended and the Conleys had an obligation to return the vehicles.
Having found that Lawson established a debt for conversion, the court must determine the amount of the debt. The undisputed evidence established that the value of each of the tractors converted was $6,000. Accordingly, the court finds the damages in favor of Lawson are $6,000 against Betty relating to her conversion of the 8800 Tractor and $6,000 against James Conley relating to his conversion of the 8815 Tractor.12
E. Lawson’s Request for Attorney Fees and Punitive Damages
Lawson also perfunctorily requested attorney fees through the prayer *208of his complaint and punitive damages through his post-trial brief. The court is denying all such relief. First, he has not advised under what circumstances this court may award punitive damages, attorney fees or any other special or extraordinary relief and how this case qualifies. The court is not obligated to research and construct the legal arguments open to parties particularly when they are represented by legal counsel. See United States v. Holm, 326 F.3d 872, 877 (7th Cir.2003). Because Lawson’s request is undeveloped without supporting legal citations or evidence, it is waived and the court declines to address it. See Allen v. Astrue, 2011 WL 3325841, at *11 (N.D.Ill. Aug. 1, 2011). Further, Bankruptcy Rule 7008(b) requires that attorney fees be pled as a separate count, which Lawson did not do. Finally, no evidence was presented concerning Lawson’s attorney fees or an appropriate amount for punitive damages. Finally, even if Lawson would otherwise qualify for the award of punitive damages, the court finds that the award of $6,000 each in compensatory damages against the Conleys is sufficient to deter them from future conduct.
In the next sections, the court will address Lawson’s theories of dischargeability as pleaded in his complaint.
F. Count Three — False Misrepresentation Under 11 U.S.C. § 523(a)(2)(A) 13
Count Three of Lawson’s complaint alleges that the Conleys made false representations, which coupled with Lawson’s detrimental reliance, constituted a fraudulent misrepresentation. Section 523(a)(2)(A) provides, in relevant part, that: “(a) a discharge under section 727 ... of this title does not discharge an individual debtor from any debt ... for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by ... a false representation. ...” 11 U.S.C. § 523(a)(2)(A). To establish the nondischargeability of a claim for fraudulent misrepresentation under § 523(a)(2)(A), the following elements must be established: “1) the debtor obtained money through a material misrepresentation that, at the time, the debtor knew was false or made with gross recklessness as to its truth; (2) the debtor intended to deceive the creditor; (3) the creditor relied on the false misrepresentation; and (4) its reliance was the proximate cause of loss.” Rembert, 141 F.3d at 280-81. The reliance necessary to establish nondischargeability for a fraudulent misrepresentation is “justifiable reliance.” Field v. Mans, 516 U.S. 59, 74-75, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995).
Under the justifiable reliance standard, a party is “required to use his senses, and cannot recover if he blindly relies upon a misrepresentation the falsity of which would be patent to him if he had utilized his opportunity to make a cursory examination or investigation.” Id. at 71, 116 S.Ct. 437. However, a party generally is under no duty to do an investigation for *209justifiable reliance to be found even if such an investigation might have revealed the fraud. Willens v. Bones (In re Bones), 395 B.R. 407, 432 (Bankr.E.D.Mich.2008); Haney v. Copeland (In re Copeland), 291 B.R. 740, 767 (Bankr.E.D.Tenn.2003). In considering justifiable reliance, the court may consider the sophistication of the creditor and the parties’ past relationship. Liberty Savings Bank, FSB v. McClintic (In re McClintic), 383 B.R. 689, 694 (Bankr.S.D.Ohio 2008); Wilhelm v. Finnegan (In re Finnegan), 428 B.R. 449, 456 (Bankr.N.D.Ohio 2010), citing Eugene Parks Law Corp. Defined Benefit Plan v. Kirsh (In re Kirsh), 973 F.2d 1454, 1459 (9th Cir.1992).
Lawson specifically alleges the following as the misrepresentations:
Betty Conley ... entered into a business arrangement with Lowell Lawson by misrepresenting a desire for a partnership. Betty Conley explained that if Lowell Lawson would share his trucks and the information to run a trucking operation under his authority she would make payments on the trucks, share profits, records and make repairs. These terms were material and of the essence of any agreement serving as the basis of the business relationship between the Debtors and the Lawson Trucking. Without the misrepresentation Mr. Lawson would not have entertained the Conley’s business proposition or committed his trucks and personal business information.
Lawson post-trial brief, p. 15 (doc. 84). These asserted fraudulent misrepresentations concern future conduct, intention or expectation that Betty would make payments and perform under the agreement in the future. To warrant a finding of nondischargeability, a representation must be one of existing fact and not merely an expression of opinion, expectation, or declaration of intention. Smith v. Meyers (In re Schwartz & Meyers), 130 B.R. 416, 423 (Bankr.S.D.N.Y.1991); Bucl v. Hampton (In re Hampton), 2008 Bankr.LEXIS 1943, at *21-22 (Bankr.D. Kan. June 27, 2008), aff'd 2009 WL 612491, 2009 Bankr.Lexis 3327, 407 B.R. 443 (10th Cir. BAP March 11, 2009) (table decision).
The court finds that Betty entered into the business arrangement with Lawson and obtained the two tractors from Lawson with the intention of running a trucking operation for the parties’ mutual benefit and that James Conley’s initial involvement was only to assist Betty in selecting which tractors she would acquire from Lawson. Any wrongful conduct of the Conleys did not occur at the outset of the business arrangement. Lawson did not establish that the Con-leys made any representation at the outset of the business arrangement with an intention to not perform and the court finds based upon the evidence that Betty entered into the arrangement intending to perform her end of the bargain.
Lawson’s allegations regarding his § 523(a)(2)(A) fraudulent misrepresentation claim appear to be largely premised upon asserted misrepresentations made by the Conleys at the time of or prior to the time that Betty and Lawson reached agreement as to their venture. See Proposed Findings of Facts & Conclusions of Law, ¶¶ 5, 15 & 22. However, to the extent that Lawson has asserted that the Conleys made representations or otherwise took actions after he and Betty began performing under their business arrangement, including representations or other asserted fraudulent conduct relating to the conversion of the tractors, Lawson failed to prove the reliance necessary to prove that such conduct was a fraudulent misrepresentation under § 523(a)(2)(A).
*210G. Count Two — False Pretenses Under 11 U.S.C. § 523(a)(2)(A)
Lawson’s complaint also alleges that the Conleys “entered into the business agreement with the intent to deceive [Lawson] and retain possession of [Lawson’s] property” and that “[s]uch conduct constitutes false pretenses.” doc. 1, ¶20. Accordingly, an analysis of whether the Conleys engaged in a fraudulent scheme involving false pretenses is required. For dischargeability purposes, false pretenses is differentiated from false misrepresentation only in that it is not expressed, but implied based on conduct designed to give a false impression. James v. McCoy (In re McCoy), 114 B.R. 489, 498 (Bankr.S.D.Ohio 1990).
As explained, material misrepresentations of the Conleys concerned conduct subsequent to the parties entering the business arrangement. Lawson did not specifically rely on these misrepresentations later to take any specific action. The cause of action for false pretenses under § 523(a)(2)(A) was not proven.
H. Count One — Dischargeability for Embezzlement Under § 523(a)(4)
The first count of the Complaint alleges that “[a]fter acquiring [Lawson’s] tractors and other assets, [the Conleys] converted such property for their own use with the intent to embezzle from [Lawson]” and “[t]he embezzlement engaged in by [the Conleys] creates an exception to discharge pursuant to § 523(a)(4).” Complaint (doe. 1, ¶¶ 17 & 18). Accordingly, the court must determine if Lawson established that the Conleys embezzled his tractors within the meaning of § 523(a)(4), resulting in a nondischargeable debt.
For dischargeability purposes under § 523(a)(4), embezzlement is defined by federal common law as “the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come.” Brady v. McAllister (In re Brady), 101 F.3d 1165, 1172-73 (6th Cir.1996). “Embezzlement differs from larceny in that the debtor’s original acquisition of possession of the property was lawful.” Chapman v. Pomainville (In re Pomainville), 254 B.R. 699, 705 (Bankr.S.D.Ohio 2000). Embezzlement is proven by showing that: 1) the creditor entrusted his property to the debtor, 2) the debtor appropriated the property for a use other than that for which it was entrusted, and 3) the circumstances indicate fraud. Brady, 101 F.3d at 1173; Cash Am. Fin. Servs. v. Fox (In re Fox), 370 B.R. 104, 115-16 (6th Cir. BAP 2007). While embezzlement is more commonly observed in relation to money or funds, federal common law, which is applicable to determining dischargeability under § 523(a), recognizes that tangible personal property, including motor vehicles, may be embezzled. See General Motors Acceptance Corp. v. Cline, 2008 WL 2740777, 2008 U.S. Dist. LEXIS 109322 (N.D.Ohio 2008), aff'd after remand 431 B.R. 307, 2010 Bankr.Lexis 2562 (6th Cir. BAP Nov. 3, 2009) (embezzlement of automobiles); Hynes v. Needleman (In re Needleman), 204 B.R. 524 (Bankr.S.D.Ohio 1997) (embezzlement of partnership property from a car repair business).
To establish embezzlement under § 523(a)(4), Lawson needed to establish entrustment of the tractors to the Conleys, appropriation of the tractors by the Con-leys for a use other than for which they were entrusted and circumstances indicating fraud.
The court will first discuss the ownership and entrustment issues relating to the Ohio conversion claim and the § 523(a)(4) nondischargeability embezzlement claim. The undisputed evidence was that Lawson *211held title to and owned the 8726 Tractor, the 8800 Tractor and the 8815 Tractor prior to the Conleys having transferred title to those tractors to Port Diesel. The word “entrust” is defined as: “to give over (something) to another for care, protection, or performance.” The American Heritage College Dictionary 468 (4th ed. 2007). Based upon Lawson’s providing the 8800 Tractor to Betty under their business arrangement, Lawson entrusted that tractor to her and, that element is met as to the 8800 Tractor as to Betty Conley. Since Lawson did not entrust that tractor to James Conley, Lawson did not meet that element as to James Conley. On the other hand, Lawson entrusted the 8815 Tractor to James Conley. Lawson parked the 8815 Tractor at the Gallimore Road property with the Conleys’ consent because zoning or other laws or regulations prohibited them from parking it at his property. James Conley used the Gallimore Road property with its garage as his place of business to repair commercial vehicles. By parking the 8815 Tractor at that facility, Lawson entrusted it to James Conley, since the evidence showed that property was under James Conley’s ownership and control. No evidence was presented that Betty controlled that property. Thus, the court finds that Lawson entrusted the 8800 Tractor to Betty and the 8815 Tractor to James Conley.
The second element to establish embezzlement under § 523(a)(4) is the deprivation of Lawson’s ownership or possessory rights in the tractors or the appropriation of the tractors for a use other than that for which they were entrusted. The Conleys’ transfer of title to the 8800 Tractor and the 8815 Tractor and subsequent disposition of those tractors constituted the appropriation of those vehicles for purposes other than for which they were entrusted, which deprived Lawson of his ownership and possessory rights in those tractors. Further, Lawson made a demand for return of those tractors, which was refused. See Exh. 17, 511. With respect to the 8800 Tractor, Lawson entrusted the tractor to Betty for use in the joint business venture — not to be sold to Leonard Smith. With respect to the 8815 Tractor, Lawson entrusted the tractor to James Conley for parking and not for sale to Mr. Smith. Accordingly, the appropriation and deprivation elements under § 523(a)(4) embezzlement were met as to Betty Conley with respect to the 8800 Tractor and as to James Conley with respect to the 8815 Tractor.
The third and final element to establish embezzlement is circumstances indicating fraud. As noted, there was no fraudulent intent or scheme on the part of the Con-leys at the inception of the business arrangement entered into between Betty and Lawson to deprive Lawson of his tractors or other property. Betty and Lawson moved forward in the hope that the venture would be profitable for both of them. However, the court must determine whether the Conleys later conduct relating to the transfer of the titles to the three tractors and disposition of the 8800 Tractor and the 8815 Tractor amounted to circumstances indicating fraud. To make that determination, an understanding of Ohio’s unclaimed motor vehicle statute, which provided the procedure through which the Conleys’ transferred title to the 8726 Tractor, the 8800 Tractor and the 8815 Tractor to James Conley dba Port Diesel, is necessary.
I. Ohio Unclaimed Motor Vehicle Statute and the Conleys’ Taking of the Tractors Under that Statute
The Conleys sought to justify their conduct in transferring title to the three Lawson tractors and selling the two which Lawson did not recover under Ohio’s un*212claimed motor vehicle statute, Ohio Revised Code § 4505.101 (the “Unclaimed Motor Vehicle Statute”). Lawson alleges that:
In an attempt to gain lawful possession of Plaintiffs tractor/trailers, [the Con-leys], through their company, Port Diesel Truck Services, fabricated outstanding mechanics’ bills against [Lawson]. [Conleys], using these fabricated bills, filed a mechanics’ lien and unclaimed motor vehicle affidavit with the state in order to gain title on Plaintiffs tractor/trailers.
Complaint (doc. 1, ¶ 13). Accordingly, a discussion of the Unclaimed Motor Vehicle Statute is in order.14
Under the Unclaimed Motor Vehicle Statute the owner of a repair garage or storage facility (the “Applicant”) may obtain a certificate of title to a motor vehicle free and clear of liens if the following requirements are met:
1) The Applicant must be the owner of a repair garage or storage facility;
2) The value of the vehicle must be less than $2,500;15
3) The vehicle must remain unclaimed for at least 15 days following completion of the requested repair or the agreed term of storage;
4) The Applicant must send to the vehicle owner at the owner’s last known address by certified mail, return receipt requested, a written notice to remove the vehicle;
5) The Applicant must have received the signed receipt from the certified mail or have been notified that the delivery was not possible;
6) The Applicant must make a search of the records of the bureau of motor vehicles for liens on the title to the vehicle;
7) If there are liens on the title, the Applicant must notify the lienholder by certified mail, return receipt requested, stating where the vehicle is located and the value of the vehicle;
8) The vehicle must remain unclaimed by the owner and any lienholder for at least 15 days following the mailing of the notices to the owner and any lienholder;
9) The Applicant must execute an affidavit verifying that all of these requirements have been satisfied, which affidavit must contain the following:
a) the value of the motor vehicle as determined in accordance with stan*213dards fixed by the registrar of motor vehicles;
b) the length of time the vehicle has remained unclaimed;
c) the expenses incurred with the vehicle;
d) that a notice to remove the vehicle has been mailed to the titled owner by certified mail, return receipt requested; and
e) that a search of the records of the bureau of motor vehicles has been made for outstanding liens on the motor vehicle; and
10) Upon receipt of the certificate of title, the applicant must pay to the clerk of courts for deposit into the county general fund the value of the vehicle, as determined in accordance with standards fixed by the registrar of motor vehicles, less expenses incurred by the applicant.16
Ohio Revised Code § 4505.101.
The notices sent by Betty to- Lawson and Clear Choice regarding the 8800 and 8815 Tractors failed to comply with the Unclaimed Motor Vehicle Statute. When a statute requires that written notice be provided before certain action can be taken, the written notice should substantially comply with the requirements of the statute. Iliff v. Weymouth, 40 Ohio St. 101 (1883); Railway Co. v. Cronin, 38 Ohio St. 122 (1882). In Baker v. Kellogg, 29 Ohio St. 663 (1876), the Ohio Supreme Court held that when a statute requires that a surety give written notice to a creditor to commence suit, that notice must contain an unconditional demand to commence suit and language that the surety “wish” that the creditor proceed with an action against the debtor was not sufficient to comply with the statute. The court noted that: “In view of the fact that the statute provides for the release of a party from a fixed legal liability — from the payment of a debt which he justly owes — its requirements should be at least substantially, if not strictly and literally complied with.” Id. at 665. In JP Morgan Chase Bank, N.A. v. Carbone, 2008 WL 927777 (Ohio Ct.App. March 17, 2008), the court held that in order for a lien to trump an open-end mortgage holder’s lien, the holder of that lien must provide the holder of the open-end mortgage with all of the information listed in Ohio Revised Code § 5301.232(D) and that actual notice of its lien, without the written notice being sent, was not sufficient to give the lienholder priority over subsequent advances made by the open-end mortgage holder. Similarly, in Whitesides v. Mason, 47 Ohio App.2d 173, 352 N.E.2d 648 (1974), the decision held that a notice to commence suit upon a mechanic’s lien which described the wrong property and the wrong lien was not sufficient to void the mechanic’s hen even if the mechanic’s lien holder knew that the notice to commence suit intended to refer to the lien in question. Thus, the Ohio courts have required notices mandated by statute to at least substantially conform to the terms of the statute.
The notices sent to Lawson as the owner did not comply with Ohio Revised Code *214§ 4505.101. The notices dated June 4, 2009, signed by Betty on August 4, 2009 and sent to Lawson approximately August 4, 2009 failed to notify Lawson to remove the vehicles that were the subject of those letters. The notices are simple collection notices, stating: “THIS IS AN ATTEMPT TO COLLECT A DEPT (sic) ... there is an amount owed for ... for repairs[.][P]lease pay no later than 14 days to avoild (sic) further action.” See Exhs. 15 & 17. As noted by Lawson in his post-trial brief, these notices “were only demands for payment to Port Diesel without itemization or receipts for parts and no verification that Mr. Lawson authorized the repairs (Tr. 16-19) ... [and did not include] a notice of sale or transfer of title or any court proceeding relating thereto (Tr. 20-21; 306-07).” doc. 84, p. 10. While the letters demand that Lawson pay within 14 days to “avoid further action,” nowhere in these collection notices does it demand that or notify Lawson to remove the tractors, let alone notify him that the Conleys would be obtaining titles to the tractors if he did not pay the asserted charges. Further, the notices gave Lawson 14 days to pay, not the 15 days under the statute to remove the tractors.
These notices failed to give Lawson notice of the statutory procedure which the Conleys’ purportedly were following to obtain title to the Tractors. The Unclaimed Motor Vehicle Statute requires specific notice to the owner of the vehicle to remove the vehicle and that title to the vehicle will be sought by the repair garage or storage facility if the charges are not paid and the vehicle removed within 15 days of the mailing of the notice. This conclusion is supported by the motor vehicle registrar’s “Unclaimed Motor Vehicle Affidavit” completed by Betty to transfer titles to the three tractors to Port Diesel. These Affidavits contain the following notice printed in bold typeface:
IMPORTANT NOTICE TO CUSTODIAN*
The custodian hereby certifies compliance with all provisions of Section 4505.101 of the Ohio Revised Code. This includes notifying the owner, mortgagee or lien holder by Certified Mail (return receipt requested), of the repair/storage charges. Also, where the vehicle is located and that it must be claimed within fifteen (15) days from receipt of the notice “(has received the signed receipt from the certified mail or has been notified that the delivery was not possible)” or ownership will be forfeited and mortgage or lien shall be invalid. The custodian further certifies that the vehicle has remained unclaimed following notification and that a search of the Ohio Bureau of Motor Vehicles records has been made for outstanding liens on the vehicle before executing the unclaimed motor vehicle affidavit.
See Exhs. 25B & 25D. The collection notices sent by Betty to Lawson in August 2009 demanding that the owner “pay ... to avoid further action” do not suffice to constitute such a notice because they did not: a) notify Lawson that the vehicles needed to be claimed within 15 days; and b) that ownership would be forfeited if they were not claimed with fifteen days. If the notice had notified Lawson that the Conleys dba Port Diesel intended to transfer the titles to the 8800 Tractor and the 8815 Tractor, Lawson could have instituted a replevin action or other appropriate action in a court to secure a judicial determination of the parties’ rights. See Caulkins v. Justine, 1991 WL 43137 (Ohio Ct.App. March 27, 1991) (replevin action constitut*215ed a claim for vehicles when notice to remove cars sent pursuant to Ohio Revised Code § 4505.101). ■
For similar reasons, the notices to Clear Choice on the 8800 Tractor and the 8815 Tractor did not comply with the Unclaimed Motor Vehicle Statute. The statute specifically requires that the notice to the lienholder notify the lienholder of: a) the location of the vehicle; b) the value of the vehicle; and c) that if the vehicle is not removed within 15 days, the lien will be forfeited or invalid. The notices sent by Betty to Clear Choice in October 2009 failed to notify Clear Choice of these items. See Exhs. 14, 15 & 25B and 25D. Again, these notices only state:
NOTE: This is an attempt to collect a dept [sic]. On or about June 16, 2009 Mr. Lawson order truck repair on 1998 Volvo VIN # 4vGWDAJH6WN748800. There is a balance due ... as of Aug 5, 2009[.] Please no [sic] that there is a storage (daily) (20.00 per day) from Aug 5, 2009 to present. Please call Betty 937 486 5506 to settle this matter or please pay within 14 days of this notice to avoid further action.
In addition to not stating the location of the 8800 Tractor and the 8815 Tractor and their values, these notices also failed to notify Clear Choice to remove the Tractors and that the Conleys intended to obtain title to the Tractor if Clear Choice did not pay the asserted charges and remove the Tractor.17
The deficiencies with the notices Betty sent on behalf of James Conley dba Port Diesel were significantly more egregious than trivial technical missteps. These notices were the statutory procedures sanctioned by the state of Ohio and were used by the Conleys to deprive Lawson of his property rights in the tractors. Courts must carefully scrutinize such self-help or extrajudicial remedies to ensure that private parties are not improperly stripped of their rights and property interests through color of law. Substantial if not strict compliance with statutes that permit individuals and entities to take other persons’ property is necessary. Otherwise such procedures may be abused, resulting in deprivation of property interests without due process or fair notice. The notices sent by Betty were blatantly deficient because they failed to advise Lawson that his ownership interests (or Clear Choice that its lien rights) would be forfeited if the tractors were not claimed within 15 days^ — the exact purpose of the notice required by Ohio Revised Code § 4505.101.
Having determined that the notices sent under the Unclaimed Motor Vehicle Statute were deficient, the court will address whether there were circumstances indicating fraud to support nondischargeability under the embezzlement prong of § 523(a)(4) in relation to the Conleys’ transfer of the titles to the tractors and the disposition of the 8800 Tractor and the 8815 Tractor.
The circumstances are:
a) Lawson and James Conley never had a payment dispute concerning James Conley’s work on Lawson’s trucks until Lawson sought to collect from *216Betty under their business arrangement;
b) Betty’s unabashed intent was clear when she flouted to Jordan of Clear Choice that “possession was 90% of the law” and to Lawson that she was going to own the tractors;
c) The evidence established that the 8726 Tractor was one of the tractors which Betty was acquiring from Lawson and which Weber drove for her under Betty’s arrangement with Lawson. Betty was responsible for the repairs and maintenance. Despite that, the Conleys, through the name Port Diesel, transferred title of the 8726 Tractor to Port Diesel under the guise that Lawson owed James Conley for repairs.
d) The Port Diesel invoices were never prepared until the dispute between Betty and Lawson erupted in full force. The invoices lacked any signature or work order approved by Lawson, any supporting documentation and contained little itemization or description as to the work performed. In addition, the invoices included charges for storage from the time that the work was allegedly ordered.
e) While the Conleys repeatedly testified that three other men repaired trucks at the Port Diesel garage owned by James Conley, including work on the subject tractors, none of these other individuals testified to support this assertion.
f) Despite the conspicuous notice on the Unclaimed Motor Vehicle Affidavits, Betty on behalf of James Conley dba Port Diesel, certified that written notice was provided to Lawson (and Clear Choice) of: i) the repair and storage charges; ii) the location of the tractors and iii) that ownership of the tractors and Clear Choice’s liens would be forfeited if they were not claimed within 15 days. However, the only notices provided to Lawson (and Clear Choice) were hand-written collection notices stating the asserted repair and storage charges and demanding payment in 14 days “to avoid further action.” The notice did not specify that the tractors needed to be removed within 15 days or their ownership interests and lien rights would be forfeited. The certifications on the Unclaimed Motor Vehicle Affidavits were intentionally false and used to deprive Lawson of his property under the color of law. Without such false certifications, the Conleys (through the fictitious name “Port Diesel”) would not have been able to obtain title to the tractors and dispose of those tractors.
While the Conleys are not lawyers, they availed themselves of a statutory procedure, which, by itself, requires some degree of sophistication. If they were sophisticated enough to obtain a vendor’s license for James Conley dba Port Diesel as the first step to transfer the titles to the tractors into the name of Port Diesel and then to complete the Unclaimed Motor Vehicle Affidavits to transfer the titles to the three tractors, they were sophisticated enough to know that they were making false certifications to the State of Ohio through which they wrongfully deprived Lawson of his tractors under the color of state law. The transfer of these tractors proves circumstances indicating fraud under the third requirement to prove embezzlement.
V. Conclusion
The court awards Lawson judgment against Betty Conley in the amount of $6,000 under state law on account of her conversion of the 8800 Tractor and a sepa*217rate $6,000 judgment against James Conley under state law on account of his conversion of the 8815 Tractor and finds that the conversion of those tractors constitutes nondischargeable debts for embezzlement under 11 U.S.C. § 523(a)(4). The court is concurrently entering an order consistent with this decision. Interest shall accrue from the date of the entry of the judgment in accordance the federal judgment interest rate. See 28 U.S.C. § 1961.
IT IS SO ORDERED.
. Unless otherwise noted, all statutory references are to the Bankruptcy Code of 1978, as amended, 11 U.S.C. §§ 101-1532, cited hereinafter in this decision as ''§ _”.
. Stern v. Marshall, - U.S. --, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011).
.Although the Conleys are married and filed a joint bankruptcy petition, they have been living separate and apart for many years. At one point James Conley innocently denied that he was married to Betty. Tr. 191. However, despite their years of separation, they have been able to cooperate with one another on family and business matters.
. See Order Denying Plaintiffs Motion to Reopen Trial, Plaintiffs Motion to Find Defendants in Contempt, and All Requests for Sanctions (doc. 96) (doc. 111).
. Some of the exhibits were voluminous and individual bates stamped numbers within certain exhibits were referred to throughout the trial.
. Ledbetter testified that there were two signed copies of the agreement, but the Lawson Trucking copy was inadvertently left behind by she and Lawson at Betty's residence after Betty signed it (Tr. 102). Betty testified she would not sign the contract because she would not be his employee or agent (Tr. 390).
. The Conleys testified that Port Diesel was a trade name or "dba” for four men who repaired vehicles out of the Conley garage located at the Conleys’ Gallimore Road property— James Conley, Melvin Strickle, Clyde Slaven and Leonard Smith. Tr. 188,189-90, 193, 302, 403-04, 415-17. By contrast, the Law-sons testified that Port Diesel was "[James’] garage.” Tr. 160, 256-58 & 302. When the application for a vendor's license was filed with the State of Ohio, the Conleys' daughter signed James Conley’s name as "Owner” of Port Diesel. See Exh. 20, 559; Tr. 144-46 & 193-94. Betty testified that the reason that their daughter put James Conley as the owner of Port Diesel on the application was that “Lawson hired James to fix his trucks” and that had Lawson hired one of the other mechanics to repair his trucks, their daughter would have put that individual's name on the application. Tr. 422. However, there is a place on the Application for Vendor’s License to Make Taxable Sales to describe the ownership structure of the entity applying for the vendor’s license and the box "Sole owner” was checked, rather than partnership, association or any other form of ownership. Given the testimony of the Lawsons, the application for the Ohio vendor's license reflecting James Conley as the sole owner and containing his signature as the owner, Betty’s pursuit of collections for Port Diesel, Betty’s admission that Lawson hired James Conley to repair his trucks and the fact that the garage is located on Conleys' property, the court finds that Port Diesel was a trade name for James Conley. There was no evidence to the contrary except for the self-serving testimony of the Conleys, the veracity of which the court questions. Other mechanics used James Conley’s garage facility to repair vehicles for consideration, but there was no evidence that Port Diesel was incorporated or formed as a legal entity or that it was a partnership with four partners. Rather, the credible evidence established that Port Diesel was a trade name under which James Conley operated and that Lawson hired James Conley to repair his trucks, not any of the other individuals who apparently repaired vehicles in James Conley’s garage.
. Betty’s rendition of how the collection efforts on her part on behalf of James Conley dba Port Diesel transpired is as follows:
[W]hen I told [James Conley] that Lawson repo’d the trucks, he had two trucks sitting inside and he had one already road ready for Lawson and it was out the, outside the door. And he said, "Well, fax them something saying that they owe this money.” Or, at first he said, “Don't worry about it, I’ll take care of it.” And so was, he said he was going to call Lawson would he deduct some of the repair bills for my payments. So I don’t know if he got around to calling or not, so I called April, Lawson’s wife, and I said, "I think [James Conley] is going to let me deduct some of the labor that you guys owe for the payments.” And then that's when they sent me letters saying that what Jim's got to do has got nothing to do with you and all of that stuff started happening. And so I just faxed them a letter and told them had breached the contract and I want my money back.
Tr. 401.
. The actual Affidavit for the 8726 Tractor is not included in Exhibit 25C, but those documents reflect that the title to that tractor was transferred from Lawson to Port Diesel through an unclaimed vehicle affidavit.
. When the court asked Betty what the VIN numbers were for the tractors which she was to acquire from Lawson, the court finds that she answered by eliminating the VIN numbers pertaining to the tractors which the Con-leys transferred into Port Diesel's name and then equivocally suggested VIN numbers of tractors which the Conleys did not transfer to Port Diesel.
. Nor did the Conleys provide any legal authority that such a three party set-off under these circumstances is lawful.
. The explanation as to how the court arrived at $6,000 for one tractor converted by Betty and $6,000 for another tractor converted by James Conley is in the subsection addressing the nondischargeability of the debt.
. Lawson pleaded § 523(a)(4) in Count 3, but the reference to § 523(a)(4) is an obvious scrivener error because the elements cited in the allegations are those of a false representation count under § 523(a)(2)(A). The Conleys concede this point in their post-trial brief (doc. 92, p. 15). To the extent Lawson is raising fraud in a fiduciary capacity under § 523(a)(4), such a theory is fatally flawed because the Conleys were not fiduciaries with respect to Lawson and there was no express trust which pre-existed the dispute between the parties. See Commonwealth Land Title Co. v. Blaszak, 397 F.3d 386, 391-92 (6th Cir.2005).
. There is very little reported case law discussing this statute. In State Farm Mutual Auto. Ins. Co. v. Advanced Impounding and Recovery Services, Ltd., 165 Ohio App.3d 718, 848 N.E.2d 534 (2006), an Ohio appellate court held that the procedure provided by the Unclaimed Motor Vehicle Statute could not be used to obtain title to a stolen vehicle impounded by an impounding service when the insurance company that paid its insured for the stolen vehicle offered to pay for the costs incurred from the time of its being notified of the impoundment.
. While Ohio Revised Code § 4505.101 may appear to apply the $2,500 limit on the value of vehicles for which this procedure may be used to the gross value of the vehicle, the registrar of motor vehicles and the Ohio appellate courts allow the applicant's charges to be deducted from the NADA (National Automobile Dealers Association) or Red Book value in arriving at this $2,500 threshold. See the Unclaimed Motor Vehicle Affidavit form used by Betty, which appears to be the Ohio Bureau of Motor Vehicles' officially sanctioned form for transferring titles under this statute (Exhs. 25A, B, C, & D). Matthews v. Mark Heflin Enters., 2012 WL 2410625, 2012 Ohio App. LEXIS 2532 (Ohio Ct.App. June 27, 2012) and Comm Star Cmty. Star Credit Union v. Nickson, 2007 WL 4554226, 2007 Ohio App. LEXIS 6189 (Ohio Ct.App. Dec. 28, 2007).
. The statute does not provide a process for the vehicle owner or any lienholder to recover the excess funds when the value of the vehicle exceeds the repair and storage charges and, accordingly, those funds appear to be forfeited to the county. In this case, the Unclaimed Motor Vehicle Affidavit for the 8800 Tractor showed a net amount of $1,225 that would have been required to be paid into the county general fund at the time that the title was issued to Port Diesel and the Affidavit for the 8815 Tractor showed a net $830 to be paid into the county general fund upon issuance of the title, but no evidence was introduced as to whether such funds were paid into the county general fund.
. The court need not address whether Clear Choice would have had to pay the Conleys the asserted charges to obtain the Tractor since Clear Choice had a valid lien on the titles to the tractors, which trumps a mechanic's pos-sessory lien. See Commonwealth Loan Co. v. Berry, 2 Ohio St.2d 169, 207 N.E.2d 545 (1965); Thorp Credit, Inc. of Ohio v. Johnny’s Auto & Truck Towing, Inc., 9 Ohio App.3d 296, 459 N.E.2d 1313 (1983); In re Cox, 133 B.R. 198 (Bankr.N.D.Ohio 1991). Jordan, the principal of Clear Choice, raised this issue with Betty, but the Conleys chose to proceed with disposition of the tractors anyway. See Exh. 14,396 (¶ 11) & 401. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495303/ | MEMORANDUM DECISION
TIMOTHY A. BARNES, Bankruptcy Judge.
The matter before the court arises out of two motions: (1) the Motion for Relief from the Automatic Stay (the “Stay Relief Motion”) [Docket No. 18] of Entertainment Events, Inc. (“EEI ”) and (2) Debt- or’s Motion To Avoid Judicial Lien on Exempt Property and Recover Exempt Property (the “Lien Avoidance Motion ”) [Docket No. 21] of Victoria C. Quade (“Debtor”). The Stay Relief Motion and the Lien Avoidance Motion are referred to collectively herein as the “Motions ”.
This Memorandum Decision constitutes this court’s findings of fact and conclusions of law in accordance with Rule 7052 of the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules ”). Separate Orders will be entered pursuant to Bankruptcy Rule 9021.
*221JURISDICTION
The federal district courts have “original and exclusive jurisdiction” of all cases under title 11 of the United States Code (the “Bankruptcy Code ”). 28 U.S.C. § 1384(a). The federal district courts also have “original but not exclusive jurisdiction” of all civil proceedings arising under title 11 of the Bankruptcy Code, or arising in or related to cases under title 11. 28 U.S.C. § 1334(b). District courts may, however, refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).
A bankruptcy judge to whom a case has been referred may enter final judgment on any core proceeding arising under the Bankruptcy Code or arising in a case under title 11. 28 U.S.C. § 157(b)(1). A request for relief from stay under section 362(d) of the Bankruptcy Code arises in a case under title 11 and is specified as a core proceeding. 28 U.S.C. § 157(b)(2)(G); In re Mahurkar Double Lumen Hemodialysis Catheter Patent Litig., 140 B.R. 969, 976-77 (N.D.Ill.1992). A motion to avoid a judicial hen under section 522(f)(1) of the Bankruptcy Code arises in a case under title 11, and a determination of the validity, extent, or priority of liens is specified as a core proceeding. 28 U.S.C. § 157(b)(2)(E); In re Rosol, 114 B.R. 560, 562 (Bankr.N.D.Ill.1989).
Accordingly, final judgment is within the scope of the court’s authority.
PROCEDURAL HISTORY
In considering the Motions, the court has considered the arguments of the parties at the July 24, 2012 hearing and the August 29, 2012 hearing, and has reviewed and considered the Motions themselves, the various attached exhibits submitted in conjunction therewith, as well as:
(1) The Response to Debtor’s Motion To Avoid Judicial Lien on Exempt Property and Recover Exempt Property, and Creditor’s Objections to Claimed Exemption [Docket No. 22] (the “Response ”);
(2) The Debtor’s Reply to Entertainment Events Inc.’s Response to Debtor’s Motion To Avoid Judicial Lien on Exempt Property and Recover Exempt Property [Docket No. 23];
(3) The Debtor’s Response to Motion To Modify Stay Filed by Entertainment Events, Inc. [Docket No. 25];
(4) The court’s Order Setting Briefing Schedule [Docket No. 30];
(5) The Stipulated Statement of Procedural Facts [Docket No. 31];
(6) The Memorandum in Opposition to Debtor’s Lien Motion and in Support of Creditor’s Stay Motion [Docket No. 32];
(7) The Debtor’s Memorandum in Support of Debtor’s Motion To Avoid Judicial Liens and in Opposition to Motion to Modify Stay Filed by Entertainment Events, Inc. [Docket No. 33];
(8) The Memorandum in Opposition to Debtor’s Lien Motion and in Support of Creditor’s Stay Motion [Docket No. 34];
(9) The Complaint To Avoid and Recover Preferential Transfers of Exempt Property Pursuant to Section 522(h) [Docket No. 35] [Adv. Pro. 12-01295, Docket No. 1];
(10)The Debtor’s Memorandum in Reply to Entertainment Event Inc.’s Memorandum in Opposition to *222Debtor’s Lien Motion and In Support of Creditor’s Stay Motion [Docket No. 36]; and
(11) The Response to Debtor’s Memorandum in Support of Lien Motion and in Opposition to Stay Motion [Docket No. 37].
Though the foregoing is not an exhaustive list of the filings in the above-captioned adversary proceeding, the court has taken judicial notice of the contents of the docket in this matter. See Levine v. Egidi, No. 93C188, 1993 WL 69146, at *2 (N.D.Ill. March 8, 1993), In re Fin.Partners, 116 B.R. 629, 635 (Bankr.N.D.Ill.1989) (authorizing a bankruptcy court to take judicial notice of its own docket).
FACTUAL HISTORY
From the foregoing review and consideration, the court finds the following facts to be undisputed:
(1) EEI possesses against Debtor a judgment in the amount of $884,056.55 (the “Judgment ”), registered on September 29, 2011 with the Circuit Court of Cook County, Illinois (the “State Trial Court”).
(2) On October 4, 2011, EEI served third party citations (the “Onginal Third Party Citations ”) on Nuns4Fun Entertainment, Inc., Quade Productions, Ltd. and Quade/Donovan Entertainment, Inc. (the “Corporations ”), three corporations in which the Debtor was an officer, director and shareholder.
(3) On October 7, 2011, EEI recorded a memorandum of judgment (the “Memorandum of Judgment ”) with the Cook County Recorder of Deeds.
(4) On October 20, 2011, the Debtor answered the Original Third Party Citations as agent of the Corporations, certifying that none of the Corporations were holding any personal property or monies belonging to the Debtor, individually.
(5) On October 21, 2011, EEI issued an alias citation to discover assets (the “Alias Citation ”) to Debtor.
(6) On October 27, 2011, the examination on the Original Third Party Citations was continued.
(7) On November 2, 2011, the Alias Citation was served upon the Debt- or.
(8) On November 14, 2011, EEI issued a non-wage garnishment (the “Garnishment ”) to Merrill Lynch & Co. (“Merrill Lynch ”) that was served on Merrill Lynch that same day, with notice being mailed to the Debtor the following day.
(9) On November 17, 2011, the Debtor appeared in response to the Alias Citation with her counsel, Andre & Diokno. The Debtor was sworn and produced some, but not all, documents in the rider attached to the Alias Citation. The State Trial Court set a deadline for the Debtor to produce documents and continued the Debtor’s examination on the Original Third Party Citations.
(10) On November 17, 2011, an order was entered granting EEI a judicial lien on any proceeds that may become due and owing to the Debt- or in the lawsuit pending in the United States District Court for the Northern District of Illinois known as Maripat Donovan v. Victoria C. Quade, Case No. 05 C 3533 (the “District Court Lawsuit ”).
(11) On November 23, 2011, the Original Third Party Citations were again continued.
*223(12) On December 9, 2011, counsel for EEI received Merrill Lynch’s answer on the Garnishment revealing that Merrill Lynch was holding funds belonging to the Debtor.
(13) On December 14, 2011, EEI filed a motion for turnover requesting liquidation of the funds being administered by Merrill Lynch (the “ML Turnover Motion ”) and scheduled the ML Turnover Motion for presentation on January 12, 2012.
(14) On December 22, 2011, the Debtor produced the additional documents requested in the attachment to the Alias Citation.
(15) On December 28, 2011, the Debtor appeared for the continued examination on the Original Third Party Citations.
(16) On December 28, 2011, EEI issued to and served on the Debtor as Trustee of the Victoria Quade Revocable Trust dated July 17, 1997 (the “Trust”) an additional third party citation (the “Second Third Party Citation ” and together with the Original Third Party Citations, the “Citations ”). The Debtor was the settlor, beneficiary and trustee of the Trust.
(17) On January 4, 2012, the Debtor, as trustee, answered the Second Third Party Citation served on the Trust, certifying that the Trust was not holding any personal property or monies belonging to the Debtor, individually.
(18) On January 9, 2012, EEI filed its Second Motion for Turnover of the assets in the Quade Trust (the “Trust Turnover Motion” and together with the ML Turnover Motion, the “Turnover Motions ”).
(19) On January 12, 2012, the Citations were continued and the State Trial Court set a briefing schedule on the Turnover Motions.
(20) On February 8, 2012, the Debtor filed her response to the ML Turnover Motion wherein the Debtor argued that her Roth IRA and Individual IRA were exempt.
(21) On February 22, 2012, EEI filed its reply to Debtor’s response to ML Turnover Motion wherein EEI argued that the Debtor had waived her right to claim exemptions.
(22) On February 23, 2012, the Citations were again continued.
(23) On March 27, 2012, the State Trial Court heard arguments on the Turnover Motions and all the pending Citations were continued.
(24) On April 5, 2012, EEI filed a Motion for Rule To Show Cause and Sanctions against the Debtor.
(25) On April 5, 2012, the Debtor filed an Emergency Motion To Supplement her Response to the ML Turnover Motion, a Motion for Citation Hearing To Declare Exempt Assets and a Claim and Declaration of Exemptions.
(26) On April 11, 2012, EEI filed its Notice of Third Party Claim in the District Court Lawsuit.
(27) On April 12, 2012, the State Trial Court ordered, inter alia, that the Debtor was to turn over and assign to EEI the judgment that had been entered in her favor in the District Court Lawsuit.
(28) On April 17, 2012, EEI filed a Motion To Intervene in Post Judgment Proceedings in the District Court Lawsuit (the “Motion To Intervene ”).
(29) On April 19, 2012, United States Magistrate Judge Nan R. Nolan *224granted EEI’s Motion To Intervene.
(30) On May 1, 2012, the Citations were continued.
(31) On June 14, 2012, the Citations were again continued.
(32) On June 21, 2012, the State Trial Court issued an order granting the Turnover Motions. A copy of the order was served on Merrill Lynch that same day, but Merrill Lynch responded that it needed an order with more specific instructions.
(33) Accordingly, on June 22, 2012, EEI noticed a Motion for Supplemental Turnover Order and on June 25, 2012, the State Trial Court entered said supplemental turnover order (the “Supplemental Turnover Order”).
(34) On June 25, 2012, the Debtor filed a Notice of Appeal to the Illinois First District Appellate Court (the “State Appellate Court ”).
(35) On June 25, 2012, the Debtor also filed an Emergency Motion To Stay Enforcement in the State Trial Court, which was denied. Later that same day, the Debtor filed an emergency Motion To Stay Enforcement in the State Appellate Court.
(36) On June 27, 2012, the Debtor filed an Emergency Motion to Supplement her Motion To Stay Enforcement in the State Appellate Court.
(37) On June 28, 2012, the State Appellate Court denied the Debtor’s Motion To Stay Enforcement.
(38) On June 28, 2012, EEI served Merrill Lynch with a copy of the Supplemental Turnover Order.
(39) On June 28, 2012, at a hearing on the Motion for Rule To Show Cause and Sanctions, the State Trial Court ordered the Debtor to produce all requested documents by July 9, 2012, and appear for the continued examination on the Citations by July 12, 2012. The matter of sanctions was reserved for future consideration.
(40) On July 2, 2012, EEI filed its Third Motion for Turnover directed at copyrights owned by the Debtor and royalties flowing therefrom.
(41) On July 3, 2012 (the “Petition Date ”), the Debtor commenced the above-captioned proceedings by filing a Chapter 7 bankruptcy petition.
(42) On July 19, 2012, at the hearing on EEI’s Third Motion for Turnover, EEI’s counsel informed the State Trial Court of the Debtor’s bankruptcy filing, and the proceedings pending in the State Trial Court were stayed pending further orders in this court.
(43) Due to the filing of the Debtor’s bankruptcy petition, the proceeds of the Merrill Lynch accounts were not turned over to EEI. The proceeds of the Merrill Lynch accounts remain in the possession of Merrill Lynch pending further order of this court.
DISCUSSION
Before the court are crossing Motions from the Debtor and EEI based on the foregoing facts. The Debtor seeks avoidance under section 522(f) of the Bankruptcy Code. EEI seeks relief from stay under section 362 of the Bankruptcy Code, and defends against the Debtor’s request, in part, based on sections 541 and 553 of the Bankruptcy Code.
The parties have raised a myriad of arguments both for and against the relief sought in the Motions. The court has, *225perhaps, compounded the complexity of this matter by combining the two related but ultimately different Motions into a single briefing schedule and combined Hearing. The already complex issues appear even more complex as a result.
For that reason, it is appropriate and, in fact, necessary to step back and view the issues from a simpler perspective. In that regard, the appropriate starting point for both of the Motions is a consideration of what constitutes property of the Debtor’s bankruptcy estate.
A. Property of the Estate under Section 5U1 of the Bankruptcy Code
The determination of what is or is not property of a debtor’s bankruptcy estate is controlled by section 541 of the Bankruptcy Code. Section 541 states, in pertinent part, that:
(a) The commencement of a case under section SOI, 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 ....
11 U.S.C. § 541(a)(1).
The estate created under section 541 of the Bankruptcy Code is the foundation upon which a debtor’s bankruptcy case is built. For that reason, section 541 is given broad interpretation. Maxwell v. Megliola (In re marchFIRST, Inc.), 288 B.R. 526, 530 (Bankr.N.D.Ill.2002) (Schwartz, J.), aff'd, 293 B.R. 443 (N.D.Ill.2003); see also In re Jones, 768 F.2d 923, 926-27 (7th Cir.1985). Unless expressly excepted, every conceivable interest of the debtor, whether legal or equitable, liquidated or contingent, regardless of the extent of the interest, becomes property of the estate. In re Yonikus, 996 F.2d 866, 869 (7th Cir.1993).
The limitations are, of course, rather self-evident. To the extent that a debtor once had an interest in property but, as of the commencement of the bankruptcy case, no longer does, that interest does not become property of the estate. In re Rasberry, 264 B.R. 495, 499 (Bankr.N.D.Ill.2001) (Squires, J.). For example, contractual rights that have expired by their own terms or been terminated pre-petition and are not subject to revival and property interests that have been indefeasibly transferred prepetition do not become property of the debtor’s estate. Paloian v. Grupo Serla S.A. de C.V., 433 B.R. 19, 35-37 (N.D.Ill.2010).
Each of the foregoing examples, however, has within it an inherent condition. With respect to the contractual rights, courts have held that an estate does include the prepetition rights of a debtor to revive contract rights to the extent the debtor could have, under applicable non-bankruptcy law, challenged the expiration or termination of the contractual rights. Thus, the right of challenge and the resulting contingent rights of revival of the contract become property of the estate. Velo Holdings Inc. v. Paymentech, LLC (In re Velo Holdings Inc.), 475 B.R. 367, 386-88 (Bankr.S.D.N.Y.2012). With respect to transfers of property interests, property not indefeasibly divested from the debtor also becomes property of the bankruptcy estate to the extent of the debtor’s right to undo the transfer. Dally v. Bank One, Chicago, N.A. (In re Dally), 202 B.R. 724, 727-28 (Bankr.N.D.Ill.1996) (Schmetterer, J.).
There are essentially two ways in which the latter case may occur. First, as is the case with contract rights, the debtor may retain nonbankruptcy law rights to chai-*226lenge and undo the transfer. Such rights and the resulting contingent rights in the property become property of the estate. Yonikus, 996 F.2d at 869. Second, bankruptcy law may create a right to avoid the transferred interest or the transfer itself. See, e.g., 11 U.S.C. §§ 522(f), 547, 548 & 550.
Thus, if a debtor has a right to avoid a prepetition lien or transfer of property, the debtor’s bankruptcy estate includes a contingent interest in that property to the extent of that right, and absent additional factors, includes an interest in the subject property post avoidance to the same extent as such interest would have become property of the estate on the petition date had the lien never attached or the transfer never had taken place.
B. The Property at Issue in the Instant Matter
It is worth noting, as it informs the later discussion, that what is at issue in both the Stay Relief Motion and the Lien Avoidance Motion is primarily the Debtor’s personal property.1 Certain of the personal property is held in the Debtor’s Merrill Lynch accounts (the “Merrill Lynch Accounts ”), as follows:
Amount Scheduled
Type of Account Asserted by EEI Amount
Case Management Account $1.45 N/A
Roth Retirement Account (“Roth IRA ”) $28.24 $28.00
Individual Retirement Account(“7RA ”) $194,494.28 $199,000.00
The rest is, generally, all of the personal property of the Debtor. As scheduled in the Debtor’s schedule B and excluding those values scheduled as unknown, that personal property is valued at $939,218.01. This amount includes the amounts in the Merrill Lynch Accounts, as set forth above.
C. EEI’s Liens on Property of the Estate
As grounds for the Stay Relief Motion, EEI has contented — among other things— that certain of the property of the estate is subject to liens in favor of EEI as a result of the actions taken by EEI prior to the Petition Date. The court agrees.
There appears to be no real dispute regarding this fact, and even if there were, the law is clear that the service of the Citations and the Garnishment gave rise to a judicial lien in favor of EEI in the subject personal property.
(1) The Citations
It is a matter of established law that a judgment, in and of itself, does not elevate the debt within the judgment to a secured status. In re Johnson, 215 B.R. 381, 384 (Bankr.N.D.Ill.1997) (Squires, J.). Something more is needed. Id.
In the first instance, that something more was the service of the Citations. More specifically, as noted above, the parties are in agreement that the Original Third Party Citations were served on October 4, 2011, the Alias Citation was served on October 21, 2011, and the Second Third Party Citation was served on December 28, 2011. The Debtor has not challenged the validity of the Citations or their service and the court, therefore, presumes that they were valid and served in accordance with applicable law.
*227Under Illinois law, proper service of a citation to discover assets does amount in a security interest in the subject property. In re Dean, 80 B.R. 932, 934 (Bankr.N.D.Ill.1987) (Squires, J.); accord In re Swartz, 18 F.3d 413, 417 (7th Cir.1994); Johnson, 215 B.R. at 384. As Judge Wedoff has stated:
Section 2-1402 of the Illinois Code of Civil Procedure sets forth procedures that a judgment creditor may follow in seeking satisfaction of a judgment. A creditor may commence these procedures by serving a citation to discover assets on either the judgment debtor or a third party holding property of the judgment debtor. 735 Ill. Comp. Stat. 5/2-1402(a) (2010). When a judgment creditor serves a citation to discover assets on a third party, a notice of that citation must also be sent to the judgment debtor. Id. at 5/2-1402(b). The citation notice must include a date on which the citation will be heard and must let the judgment debtor know that he or she has the right to assert statutory exemptions in certain income or assets. Id. .... The judgment becomes a Hen on nonexempt property upon the service of a citation. Id. at 5/2-1402(m).
In re Alanis, Case No. 12 B 07465, 2012 Westlaw 1565355, at *2 (Bankr.N.D.Ill. May 2, 2012) (Wedoff, J.).
The Illinois statute makes clear that the foregoing lien (i) arises on the date the citation is served, (ii) “binds nonexempt personal property, including money, choses in action, and the effects of the judgment debtor,” both in a debtor’s possession in control and in the possession and control of a third party (the latter when the citation is directed against the third party), and (iii) is inclusive of after-acquired property. 735 Ill. Comp. Stat. 5/2—1402(m).
It is clear, therefore, that the service of the Citations did in fact result in liens against the personal property of the Debtor, whether in possession of the Debt- or, the Corporations or the Trust.
(2) The Garnishment
As was the case with the Citations, the question regarding the Garnishment is a fairly straightforward one.
The parties agree that the Garnishment was served by EEI on Merrill Lynch on November 14, 2011. This service occurred outside of the 90-day window preceding the Debtor’s Petition Date. The Debtor has not challenged the validity of the Garnishment or its service and the court therefore presumes that the Garnishment was valid and served in accordance with applicable law.
Under Illinois law, proper service of a garnishment order does give rise to a lien, which attaches to the garnishee’s property at the time of service. 735 Ill. Comp. Stat. 5/12-707(a) states that: “The judgment or balance due thereon becomes a hen on the indebtedness and other property held by the garnishee at the time of service of garnishment summons and remains a lien thereon pending the garnishment proceeding.” See In re Bill Cullen Electrical Contr., 156 B.R. 235, 237 (Bankr.N.D.Ill.1993) (Katz, J.); accord Ealy v. Ford Motor Credit Co. (In re Ealy), 355 B.R. 685, 688 (Bankr.N.D.Ill.2006) (Hollis, J.). Such hen is perfected at the time of service. Prior v. Farm Bureau Oil Co. (In re Prior), 176 B.R. 485, 495 (Bankr.S.D.Ill.1995).
It is clear, therefore, that the service of the Garnishment did in fact result in a hen against the personal property of the Debt- or in the Merrill Lynch Accounts.
D. EEPs Claim of Ownership
The parties do not appear to be in agreement, however, as to whether any *228actions of EEI resulted in the Debtor having lost its interest in certain of its property prior to the Petition Date, thus preventing such property from becoming property of the bankruptcy estate. 11 U.S.C. § 541; Rasberry, 264 B.R. at 499.
In this regard, EEI makes two contentions: That the entry of and service on Merrill Lynch of the Turnover Order effected a transfer to EEI of the Debtor’s prepetition interests in the property in Merrill Lynch’s possession; and that EEI’s set off of royalties received by EEI on behalf of the Debtor against the obligation memorialized in the Judgment resulted in those royalties no longer being assets of the bankruptcy estate. The court will consider each in turn.
(1) The Turnover Order
As noted above, the service of the Citations and the Garnishment unquestionably resulted in a Hen against the subject property. The effect of the entry and service of the Turnover Order, however, is not as clear. No Illinois statute addresses “the effect that the entry of a turnover order has on the ownership of the property, and there appears to be no state or federal court decision addressing this question.” In re Alanis, 2012 Westlaw 1565355, at *2.
EEI relies on the case of Busey Bank v. Salyards, 304 Ill.App.3d 214, 238 Ill.Dec. 197, 711 N.E.2d 10 (4th Dist.1999), for the proposition that a turnover order is a transfer divesting the debtor of any interest in the property. The Busey Bank case does indeed discuss this issue, but in a roundabout way. While the state court appears to adopt a position that “when the turnover order was entered ..., the [debt- or] no longer had an interest in the [property],” id. at 220, 238 Ill.Dec. 197, 711 N.E.2d 10, its discussion is in fact based on bankruptcy law, not on Illinois state law. Id.; see Taylor v. Millikin Nat’l Bank (In re Dean), 80 B.R. 932, 934 (Bankr.C.D.Ill.1987) (adopting the reasoning of Nealis without comment); Nealis v. Ford Motor Credit Co. (In re Nealis), 52 B.R. 329, 333 (Bankr.N.D.Ill.1985) (Hertz, J.) (discussing how a wage deduction order, which was not in existence in the matter before it, might divest a debtor of its interest in the subject property).
Thus Busey Bank does not constitute good law on this issue, as the precedent upon which it relies is neither on point nor based on Illinois law.
The discussion of this issue in Alanis is, however, directly on point and persuasive. In Alanis, Judge Wedoff finds the citation lien and turnover order situation akin to that of a statutory tax lien and seizure order. In re Alanis, 2012 Westlaw 1565355, at *2-3. Applying the Supreme Court’s reasoning in United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983), he reasons that, as with a tax seizure, the turnover order simply effects a change in possession. In re Alanis, 2012 Westlaw 1565355, at *3. Presumably once newly possessed property is set off against the debt secured by the tax lien, then a true divestiture would then occur.
In addition, Judge Wedoff examines Barnhill v. Johnson, 503 U.S. 393, 112 S.Ct. 1386, 118 L.Ed.2d 39 (1992), wherein the Supreme Court found that the date a check is honored, rather than the date a check is tendered, is the date an actual transfer occurs. In re Alanis, 2012 Westlaw 1565355, at *3. He concludes, therefore, that “[l]ike a check, the state court turnover order directed payment of the funds in [debtor’s] bank accounts to [judgment creditor], but until that order was served on the bank and the bank complied with the order, thus ‘charging’ the accounts, the funds in the accounts continued to belong to [debtor] and became property *229of her bankruptcy estate upon the filing of her bankruptcy case.” Id.
This court finds Judge Wedoffs reasoning to be compelling, especially in light of the lack of clear direction from the Illinois state courts. The facts in this matter make clear that, despite the service of the Turnover Order on Merrill Lynch, the funds in question continue in the custodianship of Merrill Lynch. As with a check that is never cleared, a turnover order for which no prepetition turnover was in fact effectuated does not constitute a transfer for the purposes of defeating the application of section 541 of the Bankruptcy Code.
The court therefore rejects EEI’s contention with respect to the effect of the Turnover Order. The Debtor’s ownership rights in its property in the possession of Merrill Lynch continued on the Petition Date and that property became property of the Debtor’s bankruptcy estate, subject to the liens discussed above.
(2) Setoff
Unlike the foregoing issue, the law with respect to prepetition setoff is clear. EEI argues that funds received by EEI as a result of royalty payments owed to Debtor but collected by EEI have been set off against the Judgment, and thus “never became the property of [the Debtor], and are not property of the bankruptcy estate.”
To the extent that a creditor sets off a prepetition debt against a prepetition obligation prior to the bankruptcy case having been commenced, such setoff does in fact effectuate a transfer that prevents the subject property from becoming property of the estate — except to the extent that such setoff may be a transfer avoidable under chapter 5 of the Bankruptcy Code. In re Abbott, Case No. 12-01166-8-SWH, 2012 Westlaw 2576469, at *1-2 (Bankr.E.D.N.C.2012) (“If there was a valid setoff prior to bankruptcy, the property never becomes property of the estate.”). There is no real point of contention with respect to this.
The court notes, however, that either through intention or inadvertence, EEI’s argument with respect to the setoff of royalty payments fails to specify that the setoff took place prepetition. Response, at pp. 5-6. If it is EEI’s contention that it has received postpetition royalties owed to Debtor and has set them off against the prepetition Judgment, thus preventing such royalties from becoming property of the bankruptcy estate, EEI is clearly mistaken.
While the Bankruptcy Code preserves the right of setoff, 11 U.S.C. § 553, the express provisions of the automatic stay (discussed below) make clear that no postpetition setoff is permissible without relief from stay. 11 U.S.C. § 362(a)(7). Because no relief from stay has been granted with respect to this matter, no postpetition setoff should have occurred. Had such setoff occurred without relief from stay, the act would be potentially sanctionable under section 362(k) of the Bankruptcy Code. 11 U.S.C. § 362(k). Further, such an act would be void as a matter of law. In re Garofalo’s Finer Foods, Inc., 186 B.R. 414, 436 (N.D.Ill.1995) (“Violations of the automatic stay are void and without effect.”).
As a result, the court agrees with EEI that — subject to any applicable right of avoidance under chapter 5 of the Bankruptcy Code — royalties which were set off prepetition against the Judgment did not become property of the bankruptcy estate. The court rejects, however, any contention that a postpetition setoff has had a similar result. Any postpetition royalties in the *230possession of EEI remain property of the Debtor’s bankruptcy estate.
E. EEI’s Request for Relief from Stay
With that established, it is possible now to turn to EEI’s Stay Relief Motion. EEI has requested relief from the automatic stay pursuant to section 362(d) of the Bankruptcy Code, so that it may continue its collection actions with respect to the Judgment, including enforcing the liens and/or other interests created by way of the Citations, Garnishment and Turnover Order. Such enforcement includes but is not limited to the continued setoff of amounts owed to EEI under the Judgment against royalties collected by EEI on the Debtor’s behalf.
It is without question that the automatic stay is one of the most essential protections afforded property of the bankruptcy estate. Section 362 reads, in pertinent part, as follows:
(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 debtor that was or could have been commenced before the commencement of the case under this title, or to recover a claim against the debtor that arose before the commencement of the case under this title;
(2) the enforcement, against the debt- or or against property of the estate, of a judgment obtained before the commencement of the case under this title;
(3) any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate;
(4) .any act to create, perfect, or enforce any lien against property of the estate;
(5) any act to create, perfect, or enforce against property of the debtor any lien to the extent that such lien secures a claim that arose before the commencement of the case under this tide;
(6) any act to collect, assess, or recover a claim against the debtor that arose before the commencement of the case under this tide; [and]
(7) the setoff of any debt owing to the debtor that arose before the commencement of the case under this tide against any claim against the debtor....
11 U.S.C. § 362(a)(l)-(7).
Each of the aforementioned subsections of section 362(a) are clearly implicated by EEI’s intended conduct. For that reason, EEI has requested pursuant to section 362(d) of the Bankruptcy Code that it be afforded relief from said stay.
Section 362(d) reads, in pertinent part, as follows:
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—
(A) the debtor does not have an equity in such property; and
(B) such property is not necessary to an effective reorganization....
*23111 U.S.C. § 362(d)(1) & (2). “Hearings to determine whether the stay should be lifted are meant to be summary in character. The statute requires that the bankruptcy court’s action be quick.” In re Vitreous Steel Prods. Co., 911 F.2d 1223, 1232 (7th Cir.1990).
The burdens with respect to the Stay Relief Motion are clearly established by the Bankruptcy Code. As stated in section 362(g),
[i]n any hearing under subsection (d) or (e) of this section concerning relief from the stay of any act under subsection (a) of this section—
(1) the party requesting such relief has the burden of proof on the issue of the debtor’s equity in property; and
(2) the party opposing such relief has the burden of proof on all other issues.
11 U.S.C. § 362(g)(1) & (2). Irrespective, however, of the burdens set forth in section 362(g), as the moving party, EEI bears “the burden of showing the existence, the validity, and the perfection of its secured claim against the Property.” In re Pelham Enters., Inc., 376 B.R. 684, 689 (Bankr.N.D.Ill.2007) (Squires, J.).
As the court has rejected EEI’s arguments with respect to the effect of the Turnover Order and any postpetition set-off, what remains before the court in this regard is fairly straightforward. EEI argues that, by operation of the Citations, Garnishment and Turnover Order, the Debtor has no equity in the subject property. EEI argues the Debtor’s lack of equity is grounds for relief from stay under section 362(d)(2) of the Bankruptcy Code. EEI also contends that because this is a chapter 7 bankruptcy, lack of equity is the only grounds it need show. The court agrees.
EEI is a judgment creditor in the amount of $884,056.55. Said judgment was rendered on September 29, 2011, more than one year from the date of this Memorandum Decision. In Illinois, the rate of interest on judgments is set forth by statute to be 9%. 735 Ill. Comp. Stat. 5/2-1303 (“Judgments recovered in any court shall draw interest at the rate of 9% per annum from the date of the judgment until satisfied .... ”); Schultz v. Lakewood Elec. Corp., 362 Ill.App.3d 716, 298 Ill.Dec. 894, 841 N.E.2d 37 (1st Dist.2005) (finding the statutory rate of judgment interest in Illinois to be constitutional).
EEI is correct that because this is a chapter 7 case, there will be no reorganization, and therefore lack of equity is all EEI need show. Vitreous Steel, 911 F.2d at 1232 (“Because this is a liquidation under Chapter 7, there will be no reorganization. The only question faced by the bankruptcy court, then, was whether the debtor had equity in the property.”); accord! In re McGaughey, 24 F.3d 904, 906 (7th Cir.1994).
Assuming no reduction in principal, therefore, and one year of judgment interest at the statutory rate, the balance presently owed on the Judgment is in excess of $963,621.64. The Debtor has scheduled on its schedule B of personal property in these cases personal property in a total estimated value of $939,218.01. Schedule B contains the contents of the Merrill Lynch Accounts, certain of the royalties at issue (including royalties noted to be withheld by EEI), and a variety of items of “Unknown” value. Also included are a contingent recovery in a malpractice lawsuit, the judgment in the District Court Lawsuit and the Debtor’s beneficial interest in a self-settled trust.
Ignoring for the moment the Debtor’s claimed exemptions, given the validity of the liens created by the service of the *232Citations and the Garnishment and that the Judgment exceeds the Debtor’s own scheduled values of personal property, it appears to the court that the Debtor has no equity in its personal property. Vitreous Steel Prods. Co., 911 F.2d at 1232 (“[T]he only issue properly before the court on the motion to lift the automatic stay was whether Vitreous had any equity in the real estate. To answer that question, the court had to determine (1) the value of the real estate and (2) the amount of money owed the Bank. If the debt was greater than or equal to the value of the realty, then the stay was properly lifted.”); In re Moore, 450 B.R. 849, 850-51 (Bankr.N.D.Ind.2011) (“Equity in this sense focuses on whether the property in question has value in excess of the amounts due • on account of the liens against it and any claimed exemption, so that its sale by the trustee would generate money for the payment of unsecured claims.”). After excluding certain exempt property (as discussed below), the lack of equity in the personal property only becomes more evident.
However, as correctly noted by the Debtor, EEI has not provided the court with a specific accounting of funds that it has collected by way of royalties or other assets and offset against the Judgment. This court’s calculation of the balance of the Judgment is, as a result, less than certain. The lack of specificity by EEI creates a conflict between its burden as the movant, 11 U.S.C. § 362(g)(1) & (2); Pelham Enters., 376 B.R. at 689, and the fact that relief from stay hearings are intended to be summary in nature. Vitreous Steel, 911 F.2d at 1232.
For that reason, while it is clear that EEI does in fact have the status of judgment lien creditor in the personal property in question and, in that capacity and subject to the court’s determination of the Lien Avoidance Motion, appears to be entitled to relief from stay, the court will condition any grant of stay relief in this matter on EEI providing the Debtor and the court with an accounting of the present balance owed on the Judgment and a list, with as much specificity as is practicable under the circumstances, of the identification and estimated value of the personal property it seeks to pursue.
THE LIEN AVOIDANCE MOTION
As noted above, the determination on relief from stay requests is normally summary in nature. Vitreous Steel, 911 F.2d at 1232. As such, the question of whether a movant’s liens are subject to avoidance is not ordinarily a consideration. Vitreous Steel, 911 F.2d at 1234 (“The possible avoidability of a transfer to a creditor under § 547 is not part of the inquiry a court is required to conduct on a motion to lift the stay....”).
However, whether by design or by coincidence, the Stay Relief Motion and the Lien Avoidance Motion were presented to the court at the same time, and as a result, the court finds that consideration of the Lien Avoidance Motion in the context of the Stay Relief Motion is inevitable, as one calls into question the other. Accord Reconstruction Fin. Corp. v. Lustron Corp. (In re Lustron Corp.), 184 F.2d 789, 795-96 (7th Cir.1950), cert. denied 340 U.S. 946, 71 S.Ct. 531, 95 L.Ed. 682 (1951) (finding that under the Bankruptcy Act, the injunc-tive powers of bankruptcy were properly employed to halt proceedings with respect to liens, the validity of which was called into question by concerns of preference).
The questions the court must answer in this regard are fairly basic: Does the Debtor have the right to claim as exempt certain property as to which the State *233Trial Court has previously found the Debt- or had waived its exemption? If it does, may the Debtor avoid EEI’s hens in such property? If each of the foregoing questions are answered in the affirmative, stay relief is inappropriate as to those assets as EEI’s hen will be avoided (to the extent of the avoidance), thus defeating EEI’s grounds for the request. Moore, 450 B.R. at 850-51. The court will consider each issue in turn.
A. The Debtor’s Right to Bankruptcy Exemptions
Section 522(b) of the Bankruptcy Code provides for a set of federal exemptions applicable to all debtors in states that have not “opted out” of the federal exemption scheme. 11 U.S.C. § 522(b)(1); In re Fishman, 241 B.R. 568, 571 (Bankr.N.D.Ill.1999) (Wedoff, J.). Illinois, however, is one of those states that has chosen instead to provide for exemptions under state law, as authorized under section 522(b)(2). 11 U.S.C. § 522(b)(1); 735 Ill. Comp. Stat. 5/12-1201; Clark v. Chicago Municipal Employees Credit Union, 119 F.3d 540, 543 (7th Cir.1997); Fishman, 241 B.R. at 571-72. Thus, only Illinois exemptions are available to Illinois debtors.
(1) The Debtor’s Claim of Exemptions Against Its Personal Property
Bankruptcy Rule 4003 provides that a debtor may claim property as exempt under section 522 of the Bankruptcy Code by indicating the claimed exemption on the Debtor’s schedule of assets filed with the court per FRBP 1007. See Fed. R. Bank. P. 4003(a); Fed. R. Bank. P. 1007(b)(1)(A).
In this case, the Debtor has claimed certain property as exempt, as follows:
Description/Illmois Statutes Value of Exemption Value of Property
Homestead $15,000.00 $350,000.00
735 Ill. Comp. Stat. 5/12-901
Checking account $87.00 $87.00
35 Ill. Comp. Stat. 5/12-1001(b)
Household goods and furnishings $1,000.00 $1,000.00
735 Ill. Comp. Stat. 5/12-1001(b)
Books, pictures, etc. $100.00 $100.00
735 Ill. Comp. Stat. 5/12-1001(b)
Wearing apparel $500.00 $500.00
735 Ill. Comp. Stat. 5/12-1001(a)
Furs and Jewelry $250.00 $250.00
735 Ill. Comp. Stat. 5/12-1001(b)
Firearms, sports, photographic & hobby equip. $100.00 $100.00
735 Ill. Comp. Stat. 5/12-1001(b)
Merrill Lynch IRA 100% $199,000.00
735 Ill. Comp. Stat. 5/12-1006
Merrill Lynch Roth IRA 100% $28.00
735 Ill. Comp. Stat. 5/12-1006
Defined benefit pensions 100% $1,238.00/mo.
35 Ill. Comp. Stat. 5/12-1006
EEI royalties receivable $1,963.00 $42,024.00
735 Ill. Comp. Stat. 5/12 — 1001 (b)
AutomobUe $2,325.00 $2,325.00
735 Ill. Comp. Stat. 5/12-1001(c)
Misc. personal property $500.00 $500.00
735 Ill. Comp. Stat. 5/12-1001(b)
TOTAL: $222,091.00
*234(2) EEI’s Challenge to Certain Exemptions
Bankruptcy Rule 4003 provides that objections may be made to a Debtor’s claims of exemptions within 30 days of the conclusion of the meeting of creditors held under section 341(a) of the Bankruptcy Code. Fed. R. Bank. P. 4003(b)(1). Should no objection asserted within the time frame set forth in Bankruptcy Rule 4003(b) be successful, a debtor’s claim of exemptions is deemed valid. 11 U.S.C. § 622(0 (“[ujnless a party in interest objects, the property claimed as exempt on such list is exempt.”); In re Hice, 223 B.R. 155, 157 (Bankr.N.D.Ill.1998) (Squires, J.).
Here, while no party — including EEI — has filed an objection to the Debt- or’s claims of exemptions, the time for bringing such objections has not passed as the section 341(a) meeting has not yet been concluded. While the Debtor’s unob-jected to exemptions are facially valid, therefore, they are not unassailably so. Thus the court must further consider EEI’s challenge to the Debtor’s invocation of section 522(f) based on EEI’s argument that the claimed exemptions are inappropriate. Lustron, 184 F.2d at 795-96; Schoonover v. Karr, 285 B.R. 695, 698-99 (S.D.Ill.2002).
Specifically, EEI has, in response to the Lien Avoidance Motion, challenged (a) the Debtor’s homestead exemption of $15,000.00, (b) the Debtor’s claim of exemption as against the Merrill Lynch Accounts and (c) the Debtor’s wild card exemption of $1,963.00 as against EEI royalties receivable. Response, p. 6.
As to the first challenge, the court quite frankly sees no basis in law under which EEI can claim a lien in the Debtor’s real property, and EEI has done little to help the court in this regard. EEI does not request relief from stay as to the Debtor’s homestead in the Stay Relief Motion. In fact, nothing in EEI’s pleadings, other than the specific challenge noted above, stands for the proposition that EEI has anything other than a claim as against personal property. In addition, nothing in the Illinois statutes pertaining to citation and garnishment liens appears to give rise to an interest in real property, and nothing in the Turnover Order appears to address the Debtor’s real property.
In Illinois, to claim an interest in real property that is enforceable as to third parties, a creditor must record that interest in accordance with applicable law. 765 Ill. Comp. Stat. 5/28-31; Johnson, 215 B.R. at 384. Judgment liens are no different. Johnson, 215 B.R. at 384; United Community Bank v. Prairie State Bank & Trust, 2012 Ill.App.4th 110973, 361 Ill.Dec. 839, 972 N.E.2d 324 (4th Dist.2012). EEI has presented no evidence of having done anything of the sort with respect to the Debtor’s homestead, and it is not the court’s responsibility to craft an argument for EEI that it has not seen fit to make. United States v. Lanzotti, 205 F.3d 951, 957 (7th Cir.2000) (“It is not this court’s responsibility to research and construct the parties’ arguments.”). For that reason, EEI’s challenge to the Debtor’s homestead exemption must fail.
As to the second challenge, the basis of EEI’s argument in this regard is that the State Trial Court ruled, prior to the Petition Date, that the Debtor had failed to timely assert its state law exemptions in response to the Citations, and thus waived those exemptions.
EEI is asking, in essence, that this court treat the State Trial Court determination in this regard as binding, presumably either as a matter of res judicata or by *235application of the Rooker-Feldman doctrine. Rooker v. Fid. Trust Co., 263 U.S. 413, 416, 44 S.Ct. 149, 68 L.Ed. 362 (1923); D.C. Court of Appeals v. Feldman, 460 U.S. 462, 476, 103 S.Ct. 1303, 75 L.Ed.2d 206 (1983) (together holding that federal courts do not have subject-matter jurisdiction to review state court decisions). With respect to either basis, EEI’s argument must fail. The court here is not acting to overturn, set aside or otherwise interfere with the State Trial Court’s orders. The State Trial Court’s determination that the Debtor waived its exemptions in the context of the Citations remains the law. The resulting liens against the Debtor’s assets — including assets to which liens would ordinarily not attach such as the IRA and the Roth IRA — remain.
The questions put to this court are different ones. May a debtor, as a matter of bankruptcy law, claim exemptions in those assets and, as a result, avoid any judicial liens that impair the exemptions? The answer is clearly yes. Does a debtor waive its bankruptcy exemptions by unintentional prepetition conduct? The answer is clearly no.
This is not an issue of first impression in this district. Judge Hollis has considered whether a failure to claim funds as exempt in a state court proceeding resulted in a debtor’s waiver of that right in a subsequent bankruptcy, and concluded that a prepetition waiver “has no bearing on whether [the debtor] waived his exemption in this bankruptcy proceeding.” Crowell v. Porayko (In re Porayko), 443 B.R. 419, 426 (Bankr.N.D.Ill.2010) (Hollis, J.). Judge Cox considered whether res judica-ta or the Rooker-Feldman doctrine barred a debtor’s claim of bankruptcy exemptions, and concluded:
In spite of the applicability of res ju-dicata and the Rooker-Feldman doctrine to other issues, the Court may address the merits of this argument because it raises the issue of the chapter 7 debtor’s right under the U.S. Bankruptcy Code to claim exemptions and to use the avoidance provision for Hens impairing exemptions, see 11 U.S.C. § 522 (West 2003); 735 Ill. Comp. Stat. Ann. 5/12-1001 (b) (West 2003), and these § 522 issues could not have been litigated until Watkins sought protection under the Code.
In re Watkins, 298 B.R. 342, 351 (Bankr.N.D.Ill.2003) (Cox, J.).2
This court agrees.
Finally, as to the wild card exemption, the reasoning with respect to the Merrill Lynch accounts applies here as well. However, the preceding discussion was simplified by the court’s earlier rejection of EEI’s argument that the Debtor’s interest in the subject property has been entirely divested. With respect to the accounts receivable which are subject to the wild card exemption, a finer distinction need be drawn.
As noted above, to the extent that EEI validly and properly set off the obligations under the Judgment against the *236royalties owed to the Debtor prior to the Petition Date, such a transaction did divest the Debtor of its interest in the royalties. Abbott, 2012 Westlaw 2576469, at *1-2. There is no lien to avoid, and no estate property in which an exemption may be claimed. To the extent, however, that EEI holds royalties that were collected after the Petition Date, such royalties may not have been set off against the Judgment, 11 U.S.C. § 362(a)(7), or if, in violation of the stay, such setoff was attempted, the setoff is void. Garofalo’s Finer Foods, 186 B.R. at 436. The result in either case is the same: Any postpetition royalties collected by EEI are property of the bankruptcy estate. The Debtor may claim an exemption in such property.
As noted above, EEI’s failure to actually account for the current balance of the Judgment is problematic and causes the court difficulty in this regard. Until such time as EEI makes such an accounting, the court cannot determine if EEI holds estate property against which the Debtor’s valid wild card exemption can be applied.
B. Lien Avoidance under Section 522(f) of the Bankruptcy Code
Section 522 of the Bankruptcy Code states, in pertinent part, that:
(f)(1) Notwithstanding any waiver of exemptions but subject to paragraph (3), the debtor may avoid the fixing of a lien on an interest in property to the extent that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is—
(A) a judicial lien, other than a judicial lien that secures a debt of the kind that is specified in section 523(a)(5)....
11 U.S.C. § 522(f)(1).3
By its express terms, section 522(f) applies to liens and the fixing thereof, and not to other transfers of interests in property. See, e.g., Johnson v. Ford Motor Credit Co. (In re Johnson), 53 B.R. 919, 924 (Bankr.N.D.Ill.1985) (Ginsberg, J.) (finding that the transfer avoidance powers under section 547 are independent remedies to the lien avoidance powers under section 522(f)).4 Specifically, section 522(f)(1)(A) applies to judicial Hens, which are defined in the Bankruptcy Code as liens “obtained by judgment, levy, sequestration, or other legal or equitable process or proceeding.” 11 U.S.C. § 101(36).
*237The definition of judicial liens contained in the Bankruptcy Code is not limited to those liens arising out of a judgment alone, and courts have liberally construed judicial hens to include liens of a wide variety. See, e.g., Skinner v. First Union Nat’l Bank (In re Skinner), 213 B.R. 335, 341 (Bankr.W.D.Tenn.1997) (an execution hen arising out of a sheriffs levy of execution is a “judicial hen” and may be avoided). Thus a debtor may under section 522(f) avoid the fixing of a judicial hen in property to the extent that the hen impairs the debtor’s exemption, but may not avoid other transfers of interests relying on section 522(f) of the Bankruptcy Code alone.
To be clear, there is no question— despite EEI’s limited arguments to the contrary-that citation hens and garnishment Hens are, in fact, judicial Hens within the meaning of the Bankruptcy Code in general and section 522(f) specifically. 11 U.S.C. § 101(36); Bryant v. General Elec. Credit Corp. (In re Bryant), 58 B.R. 144, 146 (N.D.Ill.1986) (“The [wage] garnishment is a judicial Hen according to Illinois law”); Johnson, 215 B.R. at 384 (non-wage garnishment and citation Hens are of a type of Hen available to judgment creditors); In re Weatherspoon, 101 B.R. 533, 536 (Bankr.N.D.Ill.1989) (BarHant, J.) (“All cases that have addressed the matter are in accord that Hens under the citation or wage deduction statutes are judicial liens.”); Johnson v. Ford Motor Credit Co., 53 B.R. at 922 (“A [wage] garnishment Hen is a judicial Hen”); Einoder v. Mount Greenwood Bank (In re Einoder), 55 B.R. 319, 324 (Bankr.N.D.Ill.1985) (Ginsberg, J.) (“Illinois law clearly expresses the view that the initiation of a citation proceeding creates a judicial Hen....”); Foluke v. Peoples Gas Light & Coke Co. (In re Foluke), 38 B.R. 298, 301 (Bankr.N.D.Ill.1984) (Hertz, J.) (judicial Hen is created by issuance of a citation to discover assets).
Because the court has already ruled that the Debtor’s exemptions are, for these purposes valid, the Debtor has established its prima facie case for avoidance of the citation and garnishment Hens under section 522(f) of the Bankruptcy Code.5
CONCLUSION
For the foregoing reasons, the court concludes that the Debtor’s Lien Avoidance Motion can and should be granted and EEI’s objections thereto overruled. The court further concludes that the Stay Relief Motion will be granted in part, as follows:
(1) EEI will be granted relief from stay as against (a) those assets in which the Debtor has not claimed an exemption and in which EEI asserts a judicial lien and
(b) those assets in which the Debtor has claimed an exemption to the extent of the value of such assets exceeding the claimed exemptions;
*238(2) No order granting EEI relief from stay shall be entered by the court until such time as EEI files with the court an accounting of the balance of the Judgment, showing (a) all funds applied as against the Judgment, the date of that application and the source of the funds, (b) all interest accrued on the Judgment, and (c) all royalties with respect to Debtor collected by EEI on and after the Petition Date; and
(3) The Debtor’s objections to the Stay Relief Motion insofar as it seeks relief against assets claimed exempt by the Debtor, to the extent of the claimed exemption, are sustained. Otherwise the Debtor’s objections are overruled.
Separate orders will be issued concurrent with this Memorandum Decision.
. As discussed below, EEI does make certain arguments pertaining to the Debtor's real property and homestead exemption with respect thereto. No evidence supporting an interest in the real property is provided, however.
. The court is aware that other courts have ruled differently. See, e.g., In re Dalip, 194 B.R. 597, 603-04 (Bankr.N.D.Ill.1996) (Schmetterer, J.) (finding an Illinois agreed order waiving a homestead exemption to be res judicata on a bankruptcy determination of exemptions). The court finds Dalip to be distinguishable. The order in Dalip was agreed to by the Debtor, and was determined by the bankruptcy court to be a ruling on the merits of the Debtor's exemption. Nothing in the court’s ruling today reaches such a set of facts. The State Trial Court order here ruled only that the Debtor had waived its rights involuntarily by failing to follow proper procedure. Such a ruling is not a decision on the merits for the purposes of res judicata in this context. The bankruptcy procedures for claiming exemptions are clear, and the Debt- or has complied with those procedures.
. The exception in paragraph (3) relates to the voluntary waiver of exemptions in relation to nonpossessory, nonpurchase-money security interests in the implements, professional books, or tools of the trade of the debtor, which exception is not apparently at issue here. See 11 U.S.C. § 522(f)(3). Also not at issue here are liens arising in relation to domestic support obligations, the other express exception of § 522(f)(1)(A). See 11 U.S.C. § 523(a)(5).
. Because setoff is a transfer and not the fixing of lien, and is therefore beyond the scope of § 522(f), the court does not consider here whether EEI’s prepetition setoff of received royalties is avoidable under § 522(f) of the Bankruptcy Code. The court does not also consider whether any such transfers during the 90 days preceding the Petition Date are avoidable as preferences, see 11 U.S.C. §§ 522(h) & 547, or under any other theory of avoidance despite the Debtor’s suggestion in its pleadings that preference avoidance may be sought but that for procedural reasons, it has not included the Lien Avoidance Motion. EEI has not squarely addressed § 522(h) in its filings, nor has it addressed the underlying sections such as § 547’s power of preference avoidance. Thus while it is clear from the agreed facts that a number of salient acts occurred within the 90 days preceding the Petition Date, it is unclear and not properly before the court whether a cause of action in preference exists, and such a determination is beyond the scope of a relief from stay proceeding. Vitreous Steel, 911 F.2d at 1234.
. Because, as noted above, the time period within which objections may be brought to the Debtor’s exemptions has not expired, and because EEI has raised only limited reasons under which it challenges the Debtor’s exemptions, it should be made clear that the court’s ruling with respect to the matter at bar does not constitute a ruling in general as to the validity of the Debtor’s claim of exemptions. The court has answered the limited questions before it with respect to the party who posed them, nothing further. EEI did, however, have the opportunity to raise any and all issues it had with the Debtor’s claim of exemptions on the subject property in the context of this matter. Such challenges having a common core of operative facts with an objection to the Debtor’s exemption in general, no further objection in this regard from EEI would be appropriate. In re Energy Coop., Inc., 814 F.2d 1226, 1231 (7th Cir.1987). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495306/ | MEMORANDUM DECISION ON THE PLAINTIFFS’ MOTION FOR SUMMARY JUDGMENT
SUSAN V. KELLEY, Bankruptcy Judge.
Kevin and Margaret Gerard filed this adversary proceeding contending that a state court judgment in their favor against Kevin’s brother, Michael Gerard, is not dischargeable in Michael’s bankruptcy. Kevin and Margaret filed a Motion for Summary Judgment that Michael opposed. After briefing and oral argument, the Court issues this Memorandum Decision.
Facts
This dispute involves a parcel of vacant land on Lake Michigan in the Town of Grafton, Ozaukee County, Wisconsin that the parties refer to as “Lot 3.” In August 2007, Michael made an offer on Lot 3, but was unable or unwilling to complete the purchase on his own. Michael asked for Kevin’s assistance, and they sought financing from TCF Bank. TCF Bank requested a written business plan for the purchase and development of Lot 3, and Michael and Kevin arranged for their father, an attorney, to draft an Agreement. Under the Agreement dated October 12, 2007 (the “October Agreement”), Kevin and his wife Margaret would fund the down payment, obtain a mortgage for the balance of the purchase price, and take title to Lot 3. Michael would make all of the payments on the mortgage, real estate taxes, and a construction loan for construction of a single family residence. Upon completion of construction, Kevin and Margaret would deed Lot 3 to Michael, in exchange for Michael’s payment of their out-of-pocket costs relating to the purchase and an agreed-upon interest rate.
TCF Bank declined to complete the financing. According to Kevin, Michael agreed to destroy the October Agreement, and the parties entered into a new oral agreement. Under the oral agreement, Michael would assign the purchase contract to Kevin and Margaret who would purchase Lot 3 and hold it for one year. Michael would pay all the expenses for the year, and then Michael would purchase *268Lot 3 from Kevin and Margaret. Kevin and Margaret obtained financing from Ozaukee Bank in the form of a one-year note for $456,000 with interest at 5.995% per annum, and purchased Lot 3 on November 16, 2007. Michael contributed $5,250 to purchase Lot 3 and paid the holding costs between November 2007 and September 2008.
When Michael decided to get married, Kevin concluded that Michael was no longer interested in purchasing Lot 3, and Kevin decided to sell the property. In September 2008, Kevin sent e-mails and a letter to Michael offering to pay Michael $54,049.10 to reimburse Michael for all of the expenses Michael had paid. In a September 24, 2008 letter, Kevin told Michael not to tamper with Kevin’s “For Sale” signs. Michael did not accept Kevin’s offer, but on September 26, 2008 recorded a “Memorandum of Interest” with the Ozau-kee County Register of Deeds. The Memorandum of Interest states that Kevin and Margaret acquired title to Lot 3 for convenience only and that they hold title for the benefit of Michael. The Memorandum provides that “a copy of pertinent portion of the Contract is attached hereto as Exhibit A.” Exhibit A consists of the October Agreement. Michael claims that by recording the Memorandum of Interest, he was merely putting potential purchasers on notice of his equitable ownership interest in Lot 3. Kevin learned of the Memorandum of Interest in 2009 when a potential buyer searched the land records and found it. Kevin maintains that Michael never told him about the recording of the Memorandum of Interest, and that the parties’ oral agreement supersedes the October Agreement.
On October 23, 2009, Kevin and Margaret sued Michael in the Ozaukee County Circuit Court to quiet title on Lot 3. They asserted claims for slander of title and breach of contract. Michael appeared and defended himself in the Ozaukee County action. After a two-day trial, the twelve-person jury returned a verdict against Michael. In the slander of title portion of the Special Verdict, the jury concluded that Michael caused the recording of the Memorandum of Interest, and that he knew or should have known that the contents, or part of the contents, of the Memorandum were false, a sham, or frivolous. The jury also found that Michael did not have reasonable grounds for believing the truth of the Memorandum’s contents and that the recording of the Memorandum deprived Kevin and Margaret of a market that would have been available to them if the Memorandum had not been recorded. As to the breach of contract claim, the jury found that Michael had an agreement with Kevin and Margaret to purchase Lot 3 from Kevin and Margaret and to reimburse their out-of-pocket costs, and that Michael breached that agreement. The jury determined that Kevin and Margaret suffered damages in the amount of $280,000, but the jury did not allocate the damages between the slander of title and breach of contract claims. The jury was not asked in the Special Verdict to award punitive damages to Kevin and Margaret, and it did not do so.
In Motions after the Verdict, the Court assessed $1,000 of punitive damages against Michael under Wis. Stat. § 706.13(1) and entered an Interlocutory Judgment on the Verdict on December 9, 2011 in the amount of $281,000. Kevin and Margaret filed a Motion to determine that the damages awarded by the jury were recoverable on the slander of title claim; Michael opposed this Motion. The filing of Michael’s Chapter 11 petition stayed a hearing to determine whether Kevin and Margaret were entitled to an additional award of attorneys’ fees.
*269Kevin and Margaret filed this adversary proceeding on April 30, 2012 and sought a determination that Michael’s debt to Kevin and Margaret is nondischargeable under § 523(a)(6) of the Bankruptcy Code. That section provides that a discharge does not include a debt for “willful and malicious injury by the debtor to another entity or to the property of another entity.” Kevin and Margaret filed a Motion for Summary Judgment, contending that the verdict in the Ozaukee County action should be given preclusive effect. Michael objected.
Analysis
Only a bankruptcy court can grant a discharge, and the bankruptcy court therefore has exclusive jurisdiction to determine the dischargeability of a debt based on fraud, willful and malicious conduct and the like. 11 U.S.C. § 523(c); Stoll v. Conway, 148 B.R. 881, 883 (Bankr.E.D.Wis.1992). Although state court judgments on questions of fraud, willfulness, malice, and other issues may not bind a bankruptcy court in a dischargeability action, under certain conditions debtors will be collaterally estopped from re-litigating factual determinations made in connection with such judgments in the bankruptcy court. See, e.g., Reeves v. Davis (In re Davis), 638 F.3d 549 (7th Cir.2011) (factual finding that contract included a term was binding on bankruptcy court, but state court litigation did not include finding of debtor’s intent). The Supreme Court has explained that: “Issue preclusion generally refers to the effect of a prior judgment in foreclosing successive litigation of an issue of fact or law actually litigated and resolved in a valid court determination essential to the prior judgment, whether or not the issue arises on the same or a different claim.” New Hampshire v. Maine, 532 U.S. 742, 748-49, 121 S.Ct. 1808, 149 L.Ed.2d 968 (2001). In determining whether to give a Wisconsin state court judgment preclusive effect, this Court must apply Wisconsin law. Worldwide Prosthetic Supply, Inc. v. Mikulsky (In re Mikulsky), 301 B.R. 726, 728 (Bankr.E.D.Wis.2003). Mikulsky listed Wisconsin’s four elements of issue preclusion: “(1) The prior judgment must be valid and final on its merits. (2) There must be an identity of issues. (3) There must be an identity or privity of parties. (4) The issues in the prior action must have been actually litigated and necessarily determined.” Id. at 728-29. “The party asserting the doctrine has the burden of proving that all of the threshold requirements have been met.... To meet this burden, the moving party must have pinpointed the exact issues litigated in the prior action and introduced a record revealing the controlling facts.” Honkanen v. Hopper (In re Honkanen), 446 B.R. 373, 382 (9th Cir. BAP 2011) (explaining further that “Reasonable doubts about what was decided in the prior action should be resolved against the party seeking to assert preclusion”). There is no dispute that the judgment in the Ozaukee County action is final and that the parties are identical, but Michael challenges Kevin and Margaret’s claim that the issues are identical.
Michael argues that whether he acted willfully and maliciously was not at issue in the Ozaukee County action, and that the jury did not decide that he acted willfully and maliciously. He is correct that neither the Amended Complaint nor the jury’s Special Verdict used the terms “willful” or “malicious,” but the labels are not a prerequisite to apply collateral estop-pel. See Ball v. A.O. Smith Corp., 451 F.3d 66, 70 (2d Cir.2006) (“Although Judge Melancon’s opinion did not use the terms ‘malicious’ or ‘malice,’ his decision to award sanctions under § 1927 was affirmed by the Fifth Circuit, which has adopted standards for such an award requiring findings *270that are the equivalent of findings of malice.”); Mikulsky, 301 B.R. at 729 (rejecting debtor’s claim that jury verdict on misappropriation of trade secrets did not satisfy elements when jury answered “yes” to question of whether debtor’s conduct was “outrageous”). If the facts found by the jury in the Ozaukee County action establish that Michael’s actions were “willful and malicious” within the meaning of § 523(a)(6), then Michael will be precluded from challenging those findings in this adversary proceeding. See Ball, supra; see also Klingman v. Levinson, 831 F.2d 1292, 1296 (7th Cir.1987) (because the consent agreement resolved the same issues that would be litigated in the bankruptcy case, collateral estoppel applied).
The Supreme Court defined “willful” as an act done with the actual intent to cause injury, as opposed to an act done intentionally that causes injury. Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 140 L.Ed.2d 90 (1998). “[T]he (a)(6) formulation triggers in the lawyer’s mind the category ‘intentional torts,’ as distinguished from negligent or reckless torts. Intentional torts generally require that the actor intend ‘the consequences of an act,’ not simply the ‘act itself.’ ” Id. The Seventh Circuit recently recognized that not all intentional torts meet the standard. Jendusa-Nicolai v. Larsen, 677 F.3d 320, 322 (7th Cir.2012) (citing Williams v. International Brotherhood of Electrical Workers Local 520, 337 F.3d 504, 508 (5th Cir.2003)) (knowing breach of contract); Miller v. J.D. Abrams Inc. (In re Miller), 156 F.3d 598, 603-04 (5th Cir.1998) (misappropriation of proprietary information); Wheeler v. Laudani, 783 F.2d 610, 615 (6th Cir.1986) (libel). The cases cited by the Larsen court are instructive: both Williams and Miller focus on the requirement that the debtor was not found to have been substantially certain that the debtor’s conduct would injure the creditor. Wheeler examined the jury instructions and found that the libel verdict could have been based on the debtor’s recklessness; the Sixth Circuit remanded the case for a determination of whether the jury verdict and judgment encompassed a finding that the debtor acted intentionally. After Geiger and Larsen, proof of willfulness requires: (1) an intentional or deliberate act; (2) that is either intended to cause injury or substantially certain to cause injury; (3) to a person or property. While it is a close case, the Court concludes that the jury in the Ozaukee County action made findings that satisfied these required elements.
In making this determination, the Court reviewed the entire trial transcript, jury instructions, Special Verdict, post-trial Motions, and orders and judgments entered by the Ozaukee County Circuit Court. Kevin claimed that after TCF Bank rejected the financing for Lot 3, the October Agreement was null and void and was supposed to be torn up. Kevin testified at length about the oral agreement that replaced the October Agreement, under which Kevin and Margaret would take over the purchase of Lot 3, but Michael would buy Lot 3 back within one year. According to Kevin, when Michael decided to marry Nancey, it was apparent that Michael no longer was interested in purchasing Lot 3, so Kevin decided to sell it. Kevin testified that Michael did not agree to the sale because he wanted more money than Kevin offered. When Kevin hired a realtor to market the property, the Memorandum of Interest was discovered, buyers were put off, and the Ozaukee County action ensued.
Michael testified that he was always interested in buying Lot 3, that the misunderstanding involved Kevin and Margaret’s failure to apply for a construction *271loan, and that Nancey would have moved to Grafton. He stated that the primary purpose for recording the Memorandum of Interest was to protect his equity interest in the property after Kevin sent him nasty e-mails and started tearing up Michael’s cheeks and returning them. Michael admitted under cross-examination that regardless of how low Kevin reduced the price, nobody would make an offer on the property because of the Memorandum of Interest that Michael recorded against the title. Kevin and Michael’s accountings differed significantly as to the amounts paid by Michael and credited by Kevin.
In answer to Special Verdict question 1, whether Michael caused the recording of the Memorandum of Interest against Lot 3 with the Register of Deeds, the jury responded “Yes.” This answer shows that Michael committed an intentional act by recording the Memorandum. The more difficult issue is whether the jury considered whether Michael recorded the Memorandum with the intent to cause harm or substantial certainty that it would cause harm. The jury answered ‘Yes” to questions 2 and 7, which asked whether Michael knew or should have known that the contents or part of the contents of the Memorandum were false, a sham, or frivolous, and whether Kevin and Margaret were deprived of a market for Lot 3 that would have been available to them if the Memorandum had not been recorded. In providing these answers, the jury would have considered the jury instructions, explaining that questions 1 through 8 asked the jury to decide if Michael violated Wisconsin’s slander of title statute. The jury instructions quoted the pertinent portion of Wis. Stat. § 706.13(1) as follows:
Any person who submits for ... recording, any lien, claim of lien, ... or any other instrument relating to a security interest in or the title to real or personal property, and who knows or should have known that the contents or any part of the contents of the instrument are false, a sham or frivolous, is liable in tort to any person interested in the property whose title is thereby impaired, for punitive damages of $1,000 plus any actual damages caused by the filing, entering or recording.
The instructions stated that if the evidence established that Michael’s recording of the Memorandum was a material cause of Kevin and Margaret’s being deprived of a market for Lot 3, then the jury should answer “yes” to question 7. In this context, after considering the conflicting testimony, by answering “Yes” to questions 2 and 7, it is apparent that the jury did consider Michael’s knowledge and intent in recording the Memorandum. The answer to question 2 confirms that Michael intended to cause injury by knowingly filing a “false, sham or frivolous” document in violation of the statute, and the answer to question 7 demonstrates that the jury found that Michael’s calculated act was a direct and material cause of Kevin and Margaret’s injury.
Moreover, the jury said “No” to question 3 — whether Michael had a reasonable ground for believing the truth of the contents of the Memorandum of Interest. The jury instruction related to this question is significant:
Under certain circumstances, a person may have a conditional privilege to publish statements concerning a title to real estate. However, the privilege does not protect a person if abused. For the conditional privilege defense to a slander of title claim to apply, Michael Gerard must have had a reasonable ground for believing the truth of the contents of the memorandum, and the contents of the memorandum must have been reasonably calculated to accomplish a privilege *272(sic) purpose. In this case Michael Gerard claims the contents of the memorandum are conditionally privileged because he claims an interest in Lot 3 to protect. An abuse of Michael Gerard’s privilege occurred if he at the time of filing the memorandum or any time thereafter knew that any of the contents were false or filed the memorandum in reckless disregard as to the truth or falsity of the contents of the memorandum.
After considering this instruction, the jury’s rejection of Michael’s claim of privilege negates his claim that he filed the Memorandum of Interest to protect his ownership interest or innocent third parties. The jury concluded that he intentionally recorded the Memorandum knowing that the contents were false. In addition to supporting the “willfulness” prong of § 523(a)(6), rejection of the privilege satisfies the “maliciousness” standard. In Estate of Sustache v. Mathews (In re Mathews), 433 B.R. 732, 735 (Bankr.E.D.Wis.2010), this Court noted that: “The Seventh Circuit Court of Appeals has stated that malice involves acting in ‘conscious disregard of one’s duties or without just cause or excuse.’ In re Thirtyacre, 36 F.3d 697, 700 (7th Cir.1994) (citing Wheeler v. Laudani, 783 F.2d 610, 615 (6th Cir.1986)).” Mathews involved the assertion of a self-defense claim in a § 523(a)(6) action and held that a valid self-defense claim negated the element of malice. In this case, the jury could have accepted Michael’s version of events and afforded him the privilege of recording the Memorandum of Interest to protect his equitable interest in Lot 3, but the jury expressly rejected application of the privilege. The jury’s rejection of the privilege equates to a finding that Michael recorded the Memorandum of Interest without just cause or excuse. Therefore, the jury in the Ozaukee County action considered and found the requisite elements of malice, and Michael should be precluded from claiming that he is not bound by the jury’s findings in this adversary proceeding.
Michael claims that the jury could have found him liable for slander of title if an immaterial portion of the Memorandum of Interest was found to be false, a sham, or frivolous. That may be true, but review of the transcript and post-trial motions dispels the notion that the jury did so. Kevin testified that the October Agreement was null and void and was supposed to be torn up. Michael testified that in order to protect an innocent purchaser from buying the property subject to Michael’s unrecorded equitable interest, Michael obtained a copy of the October Agreement from his father (who had drafted it a year earlier and still had a copy) and recorded it as the “contract.” Nothing in the record suggests that the jury concluded that Michael was liable on a “technicality” such as failure to attach an Exhibit. Instead, the transcript, jury instructions, and Special Verdict show that the jury considered the Memorandum of Interest and the parties’ conflicting testimony concerning Michael’s motivations for recording it, and found the facts as alleged by Kevin and Margaret, not Michael.
Michael argues that Kevin and Margaret’s Motion for Summary Judgment should be denied because the jury did not apportion its award between the breach of contract and slander of title claims. The Court accepts Kevin and Margaret’s response to this argument. In their post-trial motion for judgment on the verdict, they contended that the jury’s findings “are sufficient to support the full damages amount of $280,000 for slander of title.” The Ozaukee County Circuit Court granted Kevin and Margaret’s motion arguing that the damages were indivisible, *273and that judgment should be recognized here.
Finally, Michael contends that Kevin provided perjured testimony about TCF Bank’s rejection of the financing. The transcript shows that Michael raised questions about the alleged rejection of the financing during the trial, and Michael also raised the questionable testimony in his post-trial Motion. Unless and until the Ozaukee County Circuit Court or a Wisconsin appellate court accepts Michael’s arguments about the allegedly perjured testimony, those arguments do not create a disputed issue of fact here.
Conclusion
Although Michael’s assertions about the jury’s conclusions have some merit, and the Court commends the efforts of both counsel, the Court holds that the findings of the jury correspond to the elements of a willful and malicious injury under § 523(a)(6) of the Bankruptcy Code. The Court will therefore grant Kevin and Margaret’s Motion for Summary Judgment. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495307/ | KRESSEL, Chief Judge.
Mark Troy Turpén appeals from a May 29, 2012 bankruptcy court1 order sustaining the trustee’s Objection to Debtor’s Claim of Exemptions and granting the trustee’s Motion to Compel Turnover. The bankruptcy court ruled that Turpen’s claimed exemption of $1,050.00 for three unrelated children ($350.00 each) living in his house did not fall within the ambit of Missouri Revised Statute § 513.440 and that an amount to be calculated and agreed upon by the parties based on the sustained objection was property of the estate and must be turned over to the trustee, Norman E. Rouse. We affirm.
BACKGROUND
Turpén is single and lives with his two minor children, an unrelated woman, and the woman’s three minor children. He filed a voluntary chapter 7 petition on October 12, 2011. Turpén filed amended schedules B and C on February 20, 2012. The amended schedule B listed a 2011 tax refund of $8,491.00, and the amended schedule C listed claimed exemptions in that refund totaling $3,600.00: $600.00 under § 513.430.1(3) and $3,000.00 under § 513.440, $1,250.00 for Turpén as head of the family, and $350.00 each for his two minor children and the woman’s three minor children. The trustee objected to the $1,050.00 exemption for the woman’s three minor children on the basis that they are not related to the debtor; and requested an order compelling turnover of $4,072.98.2
A hearing was held on May 24, 2012 on both motions. The parties disputed whether § 513.440 allows the head of a family to claim exemptions for unrelated children. The bankruptcy court ruled that the language of § 513.440 is plain and unambiguous and held that to fall within the compass of the exemption, children must be related to the head of the family either biologically or by adoption.
JURISDICTION
We have jurisdiction over this appeal from the final order of the bankruptcy court. See 28 U.S.C. § 158(b).
STANDARD OF REVIEW
The interpretation of a statute is a question of law which we review de novo. Kolich v. Antioch Laurel Veterinary Hospital (In re Kolich), 328 F.3d 406, 408 (8th Cir.2003).
DISCUSSION
The sole issue on appeal is whether Mo. Rev.Stat. § 513.440 provides an exemption for children who are not related — either biologically or through adoption — to the head of a family. Section 513.440 states in pertinent part:
Each head of a family may select and hold, exempt from execution, any other property, real, personal or mixed, or debts and wages, not exceeding in value the amount of one thousand two hun*275dred fifty dollars plus three hundred fifty dollars for each of such person’s unmarried dependent children3 under the age of twenty-one years4 ...
Mo.Rev.Stat. § 513.440.
Plain and unambiguous
Turpen’s primary argument is that the word “children” as used in § 513.440 is ambiguous, demanding a broader interpretation of the statute. He asserts that the Merriam-Webster online dictionary provides four definitions for the word child and that because the definition “a son or daughter of human parents” is listed fourth numerically, prioritized below three other meanings, the statute does not plainly refer only to the children of the head of the family — but includes all children of the family.
Creative as it is, Turpen’s argument is unfounded. First, we doubt the Missouri legislature consulted this dictionary, or any other for that matter, as it crafted the statute. Plus, the Merriam-Webster’s Collegiate Dictionary explains in its “Explanatory Notes” that the enumerated definitions are “senses” of the word. See Merriam-Webster’s Collegiate Dictionary 20a (11th ed. 2007). The note goes on to say that “[t]he system of separating the various senses of a word by numerals ... is a lexical convenience. It reflects something of their semantic relationship, but it does not evaluate senses or set up a hierarchy of importance among them.” Id. In other words, the sense of the word child listed first is no more plain than the sense listed fourth.
Proper statutory analysis demands that we assume a statute says what it means and means what it says. Owner-Operator Independent Drivers Ass’n, Inc. v. Supervalu, Inc., 651 F.3d 857, 862 (8th Cir.2011). We begin our analysis with the plain language of the statute. Id. If the words of the statute are unambiguous, our inquiry is complete. Id. (citing Conn. Nat’l Bank v. Germain, 503 U.S. 249, 254, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992)). Here, the plain language of the statute— specifically the use of the possessive form of person — indicates that the plain meaning of children is “a son or daughter belonging to such person.” For that matter, any of the definitions listed by the debtor5, when combined with the possessive form of person, lead to a plain and ordinary meaning of “son or daughter belonging to such person”, e.g. “recently born person belonging to such person.” Or when stated in common parlance: a father’s child. We agree with the bankruptcy court. The language of § 513.440 plainly states that only a child belonging to the head of the family — by either blood or adoption — qualifies for the unmarried dependent child exemption.
In loco parentis
Turpén argues alternatively that the statute permits exemptions for children of which the head of the family is in loco parentis. The case Turpén cites is State v. Smith, 485 S.W.2d 461 (Mo.Ct.App.1972). Smith is a child abuse case analyzing the following statute:
*276If any mother or father of any infant child under the age of sixteen years, ... or any other person having the care and control6 of any such infant, shall unlawfully and purposely assault, beat, wound or injure such infant, whereby its life shall be endangered or its person or health shall have been or shall be likely to be injured, the person so offending shall, upon conviction, be punished ...
Mo.Rev.Stat. 559.3407
In Smith, the defendant was charged with beating his step-daughter. His defense was that he was neither the father nor a person with care and control over her. After analysis, the Smith court concluded that the language “ ‘any other person’ includes one standing in loco parentis to the child.” Smith, 485 S.W.2d at 467. Contrary to Turpen’s argument, the court in Smith was not interpreting the word “child” but rather the phrase “any other person having the care and control.” The statute at issue here contains no comparable language regarding “any other person with care and control of such infant.” Section 513.440 plainly states that $350.00 exemptions are available only for the head of the family’s unmarried dependent children. There is no additional phrase such as, “or for any other children of the family.” Section 559.340, although since repealed, demonstrates that the Missouri legislature understands how to draft a statute broad enough to include relationships outside of the traditional parental relationship. It chose not to do so when drafting § 513.440. We decline the debtor’s invitation to do it judicially.
CONCLUSION
For the reasons stated above, the order of the bankruptcy court is affirmed.
. The Honorable Jerry W. Venters, United States Bankruptcy Judge for the Western District of Missouri.
. We are confused by the trustee's math. An $8,491.00 refund minus $1,950.00 in valid § 513.440 claimed exemptions equals $6,541.00; minus another $600.00 in claimed exemptions under § 513.430.1(3) results in property of the estate of $5,941.00. Had the trustee not objected to the claimed exemptions for the woman’s children, subtracting the additional $1,050.00 would result in property of the estate equaling $4,891.00. By our calculations, if Turpén had simply turned over the requested $4,072.98 he would have retained more than he could properly exempt under Missouri's exemption statutes. Fortunately, it seems the parties have agreed on the amount that needs to be turned over to the trustee if his exemption objection is sustained.
. Emphasis added.
. The Missouri legislature adopted a change to the statute increasing the age of a child who qualifies for the exemption from under the age of 18 years to under the age of 21 years. The legislation was approved on July 14, 2012 and went in to effect 90 days later on October 12, 2012. The change is immaterial because the three children in question were ages 1, 3, and 5 as of March 23, 2012.
."an unborn or recently born person”; 2. “a young person especially between infancy and youth”; 3. “a youth of noble birth”; 4. "a son or daughter of human parents.”
. Emphasis Added.
. § 559.340 has since been repealed and partially replaced by § 568.050 which provides an even broader description of who can commit the act of endangering a child by removing the parental and care and control elements: “A person commits the crime of endangering the welfare of a child ... if [h]e or she with criminal negligence acts in a manner that creates a substantial risk to the life, body or health of a child less than seventeen years old.” Mo.Rev.Stat. 568.050. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495308/ | MEMORANDUM AND ORDER
THAD J. COLLINS, Bankruptcy Judge.
PW Enterprises, Inc. (PWE), an unsecured creditor of Debtor, Racing Services, Inc. (RSI), filed this adversary proceeding on February 2, 2006. PWE asserted various claims for relief, including disallowance of the State’s claim for unpaid taxes, denial of priority status for the State’s claim, equitable subordination of the State’s claim, and the avoidance and recovery of allegedly preferential and fraudulent transfers from RSI to the State. The Bankruptcy Court1 sustained the State’s Motion to Dismiss finding that PWE lacked standing to pursue its complaint *280and struck it from the record on August 7, 2006. After appeals to the Eighth Circuit Bankruptcy Appellate Panel (BAP) and the Eighth Circuit Court of Appeals, the bankruptcy court vacated its order striking the complaint on September 29, 2008, and granted PWE derivative standing to pursue its claims on November 5, 2008. The State filed an Answer on January 9, 2009, denying the allegations.
PWE filed a Motion for Summary Judgment on March 16, 2010, and the State filed a Cross Motion for Summary Judgment on April 15, 2010. The court granted summary judgment in favor of the State on PWE’s claim seeking disallowance of the State’s claim for unpaid taxes and denied summary judgment in all other respects. Both parties sought leave to appeal, and the BAP denied both requests. The case was tried December 12th through December 14th, 2011. It was extremely well-presented.
FINDINGS OF FACT
This case involves parimutuel wagering on horse races. Parimutuel wagering is a form of wagering in which bettors wager against other bettors and not against the “house.” RSI was a simulcast service provider in North Dakota. PWE was a high-volume bettor with accounts placed with RSI.
A. Parimutuel Horse Racing in North Dakota
In 1987, the North Dakota Legislature authorized parimutuel horse racing under N.D.C.C. § 53-06.2-10. At the time, the Legislature only authorized betting while attending a live race in North Dakota under the “certificate system”:
The certificate system allows a licensee to receive money from any person present at a race who desires to bet on any horse entered in that race. A person betting on a horse to win acquires an interest in the total money bet on all horses in the race, in proportion to the amount of money bet by that person, under rules adopted by the commission. The licensee shall receive such bets and for each bet shall issue a certificate to the bettor on which is at least shown the number of the race, the amount bet, and the number or name of the horse selected by the bettor. The commission may also adopt rules for place, show, quinel-la, combination, or other types of betting usually connected with racing.
1987 N.D. Sess. Laws, ch. 618, § 10. The Legislature also established the North Dakota Racing Commission as the administrative agency responsible for regulating racing under the certificate system and gave it authority to adopt administrative rules. 1987 N.D. Sess. Laws, ch. 618, §§ 2-5.
The Legislature also enacted a statute, N.D.C.C. § 53-06.2-11, to establish “takeouts” to be deducted from the parimutuel wagering pool for payments as revenue to the State, payments to bettors holding winning tickets, and use by the approved licensee for allowable expenses. 1987 N.D. Sess. Laws, ch. 618, § 11.
Revenue derived from parimutuel racing was directed to the general fund under the control of the State Treasurer, and to three special funds administered by the Racing Commission — North Dakota Breeders’ Fund, North Dakota Purse Fund, and North Dakota Promotion Fund. See N.D.C.C. § 53-06.2-11. The Racing Commission and the three special funds are Defendants in this case. The Breeders’ Fund was established to financially reward breeders or owners of North Dakota-bred horses with payment in accordance with rules approved by the Racing Commission. N.D.C.C. § 53-06.2-01(1). The Purse Fund was established to supplement *281and improve purses offered at racetracks within the state. N.D.C.C. § 53-06.2-01(10). The Promotion Fund was established to assist in improving and upgrading racetracks, promoting horse racing, and developing new racetracks as necessary and approved by the Racing Commission. N.D.C.C. § 53-06.2-01(12).
1. Off-Track Wagering and Simulcasting
In 1989, the Legislature enacted N.D.C.C. § 53-06.2-10.1, authorizing “off track” parimutuel wagering. See 1989 N.D. Sess. Laws, ch. 624, § 8. Off track parimutuel wagering allows bettors to wager on horse races both within and outside of North Dakota. Specifically, the legislation provided:
In addition to racing under the certificate system, as authorized by this chapter, and conducted upon the premises of a race track, off track parimutuel wagering may be conducted in accordance with the chapter and interim standards that need not comply with chapter 28-32, or rules adopted by the commission under this chapter. Any organization qualified under section 53-06.2-06 to conduct racing may make written application to the commission for the conduct of off track parimutuel wagering on races held at licensed race courses inside the state or race courses outside the state, or both.
1989 N.D. Sess. Laws, ch. 624, § 8; N.D.C.C. § 53-06.2-10.1.
In 1990, the Racing Commission adopted regulations for off track parimutuel wagering, also called “simulcasting,” of horse races.2 See N.D. Admin. Code § 69.5-01-11.The regulations distinguished “simulcast operator” from “simulcast service provider”:
12. “Simulcast operator” means an eligible organization licensed by the commission to offer, sell, case, redeem, or exchange parimutuel tickets on races being simulcast from a sending track.
13. “Simulcast service provider” means a person engaged in providing simulcasting services to a simulcast operator and establishing, operating, and maintaining the combined parimutuel pool, but does not include persons authorized by the federal communications commission to provide telephone service or space segment time on satellite transponders.
N.D. Admin. Code § 69.5-01-11-01 (1990).
RSI — the debtor in this case — was a simulcast service provider. Team Makers was a simulcast operator. All simulcast service providers and simulcast operators were required to be licensed by the Racing Commission. N.D. Admin. Code § 69.5-01-11-02(1). Before the Racing Commission could license a simulcast service provider (like RSI), it was required to review and approve the services to be provided by the applicant, including:
g. Written agreements between the applicant and all parties assisting in providing simulcast services.
i. The system of accounts to be utilized in the collection and distribution of revenues directly or indirectly related to the simulcast operation and the combined parimutuel pool.
N.D. Admin. Code § 69.5-01-11-03(2). Similarly, before the Racing Commission *282could license a simulcast operator (like Team Makers), it was required to review and approve a plan of operation submitted by the applicant, including:
d. The system of accounts to maintain a separate record of revenues collected by the simulcast facility, the distribution of such revenues, and the accounting of costs relative to the simulcast operation.
f. All written agreements or letters of consent between parties to the operation of the simulcast system, including a licensed service provider.
N.D. Admin. Code § 69.5-01-11-05(1). Simulcast operator and simulcast service providers licensees were subject to denial, suspension, or revocation of simulcast licenses for just cause, including the “[c]on-tinued failure or inability to meet financial obligations connected with the operation of any part of a simulcast system or simulcast site.” N.D. Admin. Code § 69.5-01-ll-09(g).
The Racing Commission established the duties and restrictions of simulcast service providers and simulcast operators. See N.D. Admin. Code §§ 69.5-01-11-04 and 69.5-01-11-06. A simulcast service provider (RSI) was prohibited from being a simulcast operator (Team Makers). N.D. Admin. Code § 69.5-01-11-04(3). The simulcast operator (Team Makers) was responsible for the payment of the state takeout, the Breeders’ Fund, and the Purse Fund provided by the Racing Commission. N.D. Admin. Code § 69.5-01-11-06(5).
2. Account Wagering
In 2001, the North Dakota Legislature authorized a new form of parimutuel wagering — “account wagering” — through amendment to N.D.C.C. § 53-06.2-10.1. Section 53-06.2-10.1 provides, in relevant part:
The certificate system also permits parimutuel wagering to be conducted through account wagering. As used in this section, “account wagering” means a form of parimutuel wagering in which an individual deposits money in an account and uses the account balance to pay for parimutuel wagers. An account wager made on an account established in this state may only be made through the licensed simulcast service provider approved by the attorney general and authorized by the commission to operate the simulcast parimutuel wagering system under the certificate system. The attorney general may not grant a license denied by the commission. An account wager may be made in person, by direct telephone communication, or through other electronic communication in accordance with rules adopted by the commission.
N.D.C.C. § 53-06.2-10.1.
B. Factual Background and Findings of Fact on This Particular Dispute
1. RSI — Team Makers Relationship
As stated, RSI was a simulcast service provider and Team Makers was a simulcast operator. In the Ruling on the State’s Motion for Summary Judgment dated December 22, 2010, Judge Hill explained the relationship between RSI and Team Makers:
RSI and Team Makers entered into a parimutuel wagering service agreement on January 1,1994, whereby Team Makers was responsible for collecting the net proceeds including “all breeders’ fund monies, purse fund monies, taxes, and all other monies retained from the gross parimutuel handle.” RSI, in turn, was responsible for performing an accounting of the net proceeds and for making *283the designated disbursements to the State. The following year, on January 10, 1995, RSI and Team Makers entered into another service agreement, whereby RSI would pay “[a]ll designated disbursements to authorized regulatory agencies.”
At its June 14, 1995, meeting, the commission adopted N.D.A.C. § 69.5-01-11-04.1, as an “interim emergency rule.” Section 69.5-01-11-04.1 designated the service provider, i.e., RSI, as the entity responsible for payment of “all pari-mutuel taxes, special fund contributions, and other funds due and owing the State of North Dakota as indicated in the certified report of its operations, required in this chapter, directly to the Racing Commission.” N.D. Admin. Code § 69.5-01-11-04.1(1). This interim rule shifted the duty of paying the taxes and other contributions from the simulcast operator to the service provider to conform with RSI’s established practice.
PW Enterprises, Inc. v. State of North Dakota (In re Racing Services, Inc.), 2010 WL 5376222, at *8 (Bankr.D.N.D. December 22, 2010). The interim emergency rule lapsed, and the legal responsibility to pay the taxes and fees shifted back to Team Makers. Id. However, this Court previously found there was “no statutory or regulatory prohibition against RSI paying the taxes and fees instead of the simulcast operator (Team Makers). In other words, RSI’s continued practice of handling this responsibility on behalf of the simulcast operator (Team Makers) was not in contravention of the law.” Id.
Under a July 17, 2000 agreement between RSI and Team Makers, RSI was responsible for making the “designated disbursements to authorized regulatory agencies.” The contract actually began on January 1, 2000, and continued for a two-year term. The contract automatically renewed for a like term on its anniversary date.
RSI and Team Makers were both licensed by the State and had to submit annual license renewal applications. RSI’s renewal applications stated that RSI was responsible for making the “designated disbursements to authorized regulatory agencies.” Team Makers’ applications similarly stated that RSI would “make the necessary distributions for simulcast operations.”
2. PWE and Parimutuel Wagering in North Dakota
William Wass is the chief operating officer of PWE. He testified that PWE began its parimutuel wagering operations in North Dakota in 1999. PWE, through its chief executive officer, Peter Wagner, entered into an agreement with RSI under which PWE was to receive certain incentives based on its projected high volume of wagering handle.3 This proved to be true.
During the first half of 2003, for example, PWE had at least three employees in North Dakota, and PWE leased space for its employees from RSI. PWE wagered on a daily basis. Although the average bet was under $50.00, PWE wagered $70 million in the first seven months of 2003. PWE had developed proprietary software for the purpose of wagering on horse races in the United States and Canada. Wass described the relationship between RSI and PWE as a customer-vendor relationship. PWE used the services of RSI as a licensed service provider in North Dakota for the purpose of placing wagers.
Wass testified that Susan Bala, RSI’s president and chief executive officer, asked *284Wagner to pledge a $225,000 certificate of deposit as security so that RSI could obtain a $450,000 letter of credit. On October 1, 1999, PWE’s executive director at the time, Tonye-Marie Castaneda, signed a Third Party Pledge Agreement with Norwest Bank for a $225,000 certifícate of deposit.
Bala and Wagner also had a relationship outside of that of PWE and RSI. In March 2001, Bala and Wagner formed a partnership, SBE, LLC, with the goal of purchasing a gaming company in Mexico with a race track and other real estate. Also, Wass is the Secretary and Treasurer of SBE. The partnership still exists but is not operating. SBE currently has approximately $800,000 in an account from the sale of real estate. Bala was removed from the management of SBE in July 2003 for reasons discussed further below. Bala’s only role in SBE now is as a 15% shareholder.
3. RSI and the Racing Commission
Paul Bowlinger became the director of the Racing Commission in September 2000. As director, Bowlinger oversaw the regulation of all aspects of horse racing in North Dakota. This included, among other tasks, implementing the applicable North Dakota Administrative Code sections, complying with Racing Commission rules, ensuring that tellers and parlors were licenced, and ensuring that RSI provided weekly handle reports to see that funds were appropriately collected. Bowl-inger considered himself an advocate for the players. He is a former player with a love of horse racing generally, and of handicapping specifically.
Bowlinger testified that the Racing Commission had audit oversight of RSI. RSI submitted weekly statements and an independent contractor, Roger Thompson, audited the weekly reports and reported to the Racing Commission. At the end of each month, Bowlinger made sure the correct amounts were collected. The North Dakota Auditor’s Office audited the Racing Commission every two years.
On September 14, 2001, Arleen McKay, RSI’s controller, sent a letter to Bowlinger and the members of the Racing Commission. The letter explained that as a consequence of the events of 9/11, a majority of racetracks had been closed. The letter noted this affected all aspects of wagering operations and reconciliations. RSI asked for a 30-day extension for the parimutuel and special funds payments and a waiver of interest and penalties.
The Racing Commission met on October 17, 2001, and considered RSI’s request. At the meeting, Bala stated that many of the racetracks were still closed which resulted in the interruption of all business operations. RSI had receivables of half a million dollars, but reconciliations had become slow. When asked whether payments would be late for the foreseeable future, Bala informed the Racing Commission that it would be hard to predict but she would keep them informed. The Racing Commission voted unanimously to waive all penalties and interest due for the amounts RSI owed the State and the Racing Commission for the August payment, which was due by September 30, 2001. The Racing Commission announced this issue would be considered on a month-to-month basis if necessary.
Bowlinger testified that RSI continued to be delinquent by two to three months on the special fund payments until 2003, but the Racing Commission approved of RSI paying these fund payments late. Bowl-inger brought the issue up to the Racing Commission “every so often,” and the Racing Commission kept allowing extensions. The Racing Commission believed that as long as RSI was fairly current, there was *285not a problem. Further, no complaints were lodged against RSI. The Racing Commission did not want to take the business down as long as RSI kept making its payments.
Bowlinger testified he had suspicions about RSI in January 2003. In performing his auditing functions, Bowlinger received information from at least one racetrack that it was reporting a handle from North Dakota that was greater than what RSI reported to the Racing Commission. He did not say what he did, if anything, based on these suspicions.
Bowlinger received a call from an RSI employee, Michael Cichy, and his attorney in April 2003. Cichy wanted to talk to Bowlinger immediately about improprieties at RSI. Bowlinger organized a telephonic meeting for the following day with Cichy, Bowlinger, and the Racing Commission’s counsel. Cichy said that RSI was operating an unlicensed wagering site. As a consequence of that meeting, Bowlinger called the Attorney General’s office. The following morning, the Attorney General and representatives from the Federal Bureau of Investigation, Internal Revenue Service, and Department of Justice were in Bowlinger’s office.
4. RSI’s Mounting Troubles and PWE Stops Wagering
The FBI eventually raided the RSI site.4 At that point, Bowlinger was directed by the United States Attorney and the North Dakota Attorney General to refer any communications to the Attorney General’s Office.
On June 5, 2003, RSI sent the Racing Commission amended handle reports to account for the wagering from the unlicensed “stealth” site. On July 18, 2003, Bowlinger sent Bala a letter stating that RSI was current on general fund payments but delinquent on the three special fund payments. The letter told her he was advising the Racing Commission to take action on RSI’s license unless the issue of nonpayment was addressed immediately. Bowlinger sent another letter to RSI on August 11, 2003, stating the Racing Commission had not received payments for the general fund or the special funds since July 2, 2003. He requested a complete set of RSI’s financial records.
Wass testified that PWE stopped wagering through RSI in North Dakota at the end of July 2003. PWE stopped because of the federal investigation and the information being reported by the media. On July 31, 2003, PWE made a demand for the $2,248,301.11 it believed was in its account with RSI.5
Daniel Crothers was local counsel for PWE. He testified that by the end of July 2003, news articles were reporting on RSI’s financial difficulties. PWE was becoming critically concerned about RSI’s nonpayment of PWE. Press reports also showed the State had monetary issues with RSI.
5. Conversations Between PWE and the State About What to Do
From July to September 2003, Crothers had conversations with the State on PWE’s behalf. They discussed two issues: the substantial amount of money RSI owed *286to PWE for past wagers and whether PWE would return to wagering in North Dakota.
On August 5, 2003, Crothers had a conversation with Assistant Attorney General Sandi Tabor about what the State was doing to stabilize RSI. Crothers told Tabor that PWE would not return to wagering in North Dakota without stability. During one of his conversations with the State, Crothers said PWE supported the appointment of a receiver for RSI.
On August 12, 2003, Wass had a similar telephone conversation with Bowlinger. Wass told him that PWE was no longer wagering in North Dakota, that PWE might consider coming back to North Dakota if there was a more transparent service provider, and that PWE was owed a “bunch of money” including a Certificate of Deposit with Wells Fargo. Bowlinger was cordial, and expressed concern the State was also owed a “bunch of money.” Bowl-inger told him that the State had made a demand on RSI for payment by August 15, and if RSI did not comply, action might be taken against RSI’s license at the August 20, 2003 Racing Commission meeting. Bowlinger said he would let Wass know the results and Tabor would call Crothers.
Wass called Bowlinger back on August 13, 2003, to tell him the total amount RSI owed PWE was $2,248,000.00. Bowlinger told Wass an auditor was in place at RSI.
On August 18, 2003, a conference call took place with representatives of PWE and the State. The participants on the call included Attorney General Wayne Ste-nehjem, Assistant Attorney General Doug Bahr, Special Assistant Attorney General Roger Minch, Tabor, Bowlinger, Crothers, Wass, Martin Foley,6 and Ed Reeser.7 Crothers testified that the purpose of the conference call was to make some progress on PWE’s unpaid account and to determine the right avenue to protect PWE’s interest. PWE had not been paid on its account for months. Its efforts to recover what it was owed had been fruitless. The press continued to report that RSI was having financial difficulties. PWE’s options were to file a lawsuit to seek a writ of attachment or insist on the appointment of a receiver.
The State also laid out its position. The State said that it had received $1.5 million that day from RSI but was still owed $5 million. The State was also considering filing a lawsuit against RSI and its stockholders, but was more interested in stabilizing RSI through the appointment of a receiver. The goal was to get both the State and the players, including PWE, paid the money they were owed. The State also wanted PWE to return to wagering in North Dakota. PWE said RSI needed to be more stable before that would happen.
In the end, the plan was to move forward with a receiver in place. Crothers understood that neither the State nor PWE would take any action to interrupt RSI’s business operations. Wass thought the State would take action and the receiver would “right the ship.” He thought they were on the path to success, meaning the players would get paid without bleeding RSI to death. He admitted he was concerned when he heard the State had just received $1.5 million from RSI, because it would mean less money available to pay PWE. He still thought, however, RSI would be able to cover the amount PWE was owed. He did not know RSI’s financial condition, but said he had no indication that RSI could not pay.
*287Wass testified that PWE did not file a lawsuit against RSI because they knew it would end horse racing in North Dakota because all other bettors would “jump ship.” Rather, PWE put faith in the State to work the problem out so that PWE would get paid. He did not think the State would come in and take everything— which is what he claims ultimately happened.
The Racing Commission prepared an audit report dated August 18, 2003. It states that RSI’s total unreported handle from the unlicensed “stealth” site from October 2002 through April 2003 was $98,975,620.00. It showed $8,066,282.04 due to the Racing Commission for underpaid taxes and arrears.
6. Appointment of a Receiver
Wass worked with the State to prepare an affidavit to attach to the application for a receiver. It stated, among other things, that PWE had demanded payment in the amount of $2,248,201.11 on July 31, 2003, and RSI failed to pay. He signed the affidavit on August 20, 2003.
On August 21, 2003, the State filed a complaint against RSI seeking a judgment for $6,329,463.06 plus interest, an injunction preventing RSI from dissipating any of its assets, and the appointment of a receiver or monitor. RSI stipulated to the appointment of a receiver on the same date. The state court appointed Wayne Drewes as RSI’s receiver.
Drewes testified that upon his appointment, the Attorney General told him that he was in charge and that the State wanted to see RSI’s business continue. The Attorney General did not tell Drewes how to treat the State’s tax claims or the players’ claims. Drewes’ duties included determining whether RSI was a viable business and to keep it operating as a going concern. Drewes became familiar with RSI’s operations and practices and reviewed RSI’s financial information. He never saw anything suggesting that the State was involved in inequitable conduct toward RSI, its operations or its assets. He believed the State wanted RSI to continue operations and be successful. In his view, the State did not have any control over RSI. As receiver, only he had control.
Drewes and PWE had a cooperative relationship initially. That deteriorated by December 2003. PWE sent a letter to Drewes on December 4, 2003, saying that it was not satisfied with how Drewes was treating PWE. PWE received no response from Drewes. PWE filed a complaint against RSI on December 12, 2003.
PWE found out some time in December that the $225,000 certificate of deposit PWE had pledged to help RSI get a $450,000 Letter of Credit had been pulled and liquidated. He learned this from a newspaper article. Wass emailed Bowl-inger on December 23, 2003, asking about it. Bowlinger responded on December 30, 2003. He said the matter had been turned over to the Racing Commission’s counsel, Bill Peterson.
Wells Fargo8 sent PWE a letter dated January 22, 2004, stating Wells Fargo received a request to draw on the letter of credit on December 26, 2003. Wells Fargo attached a statement signed by Bowlinger requesting the draw because RSI had not fulfilled its obligations under state law and the Racing Commission’s rules. Wells Fargo’s letter pointed out the letter of credit had an expiration date of December 31, 2003, and it was therefore obligated to *288pay the request. As a consequence, Wells Fargo cashed and disbursed the $225,000 certificate of deposit PWE provided.
Bowlinger testified that the Racing Commission decided to collect on the letter of credit on the advice of its counsel, Bill Peterson. Peterson is a Deputy Assistant Attorney General. He was present at all of the Racing Commission meetings.
Wass testified PWE felt betrayed by the State. PWE thought the State should have worked to get PWE paid. Instead, PWE felt the State shut PWE out of communications and the relationship became adversarial.
C. PWE’s Forensic Accountant
Thomas Pastore is a forensic accountant and business appraiser. PWE retained Pastore to render a solvency opinion on RSI and to determine the amount of money transferred from RSI to the State during the one-year period before RSI’s bankruptcy filing.
As of the end of July 2003, PWE had approximately $2,023,100.86 in its deposit account with RSI. This included winnings, deposits, and incentives belonging to PWE. PWE had also purchased the certificate of deposit for $225,000 and pledged it to help RSI get the $450,000 letter of credit.
According to Pastore, beginning in February 2003 and onward, RSI’s liquidity was negatively impacted and it was unable to meet its current obligations. From January through May 2003, RSI incurred monthly losses for earnings before interest, taxes, depreciation and amortization of ($492,067) as well as net income which averaged ($296,212). This resulted in a negative 90% return on assets for January through May 2003. Pastore also noted that from February 2003 onward, the total shareholders’ deficit was more than 30% of total assets. Pastore provided a cash-flow analysis showing RSI was heading into a negative cash balance as of the end of February 2003. The negative cash-flows resulted in a negative cash balance in March 2003. This cash deficit continued to increase thereafter. Based on all these factors, Pastore stated RSI was insolvent by the end of March 2003 and remained insolvent thereafter.9
Pastore’s accounting showed that from February 2003 through at least October 2003, the State collected in excess of $4.3 million from RSI. Additionally, in December 2003, the State drew down the $450,000 RSI letter of credit (which included the $225,000 certificate of deposit PWE provided). In April 2004, the State drew down $50,000 from another RSI letter of credit. The total amount the State collected was $4,839,421.56. This amount does not include checks written to the State by RSI after October 16, 2003, totaling $199,593.70. Pastore also found another $281,085.94 in checks that were not included in the State’s receipts. In total, the State collected $5,320,101.20 in the year before RSI’s bankruptcy filing.10 In the 90 days before RSI’s filing, the State collected $556,244.98, consisting of the $450,000 letter of credit, four checks dated November 24, 2003, totaling $105,544.98,11 and a check dated December 10, 2003, in the amount of $700.00.
*289D. RSI’s Bankruptcy
The receivership ended with RSI’s bankruptcy filing on February 2, 2004. Drewes testified that although he dealt with several challenges as RSI’s receiver, he ultimately thought he had a plan for RSI going forward until RSI lost its license. Bankruptcy then appeared to be the only alternative.
PWE filed a proof of claim in RSI’s bankruptcy for $2,248,100.86. It was broken down as follows:
$1,930,658.70 Total for Wagering Accounts (winnings and deposits)
91,742.41 Incentive for week ending 7/27/03
699.75 Incentive for 7/28/03
225,000.00 Certificate of Deposit
$2,248,100.86 Total Claim
The State filed a proof of claim for $6,726,872.72. It filed an amended proof of claim in 2010 for $6,422,243.58.
SUMMARY OF THE ARGUMENTS
PWE brings multiple theories of recovery on behalf of the estate. First, PWE claims that RSI’s payments to the State in the year leading up to bankruptcy are recoverable as preferential transfers. PWE argues the State had enough control over RSI that its dealings cannot be considered arm’s-length, and therefore, the State should be considered a non-statutory insider. PWE claims in the alternative that, if the State is not an insider, the estate is entitled to recover any preferential transfers made within the 90 days before bankruptcy. The State argues it was not an insider, it dealt at arm’s-length, and whatever influence it exerted in getting paid was no more than that of an ordinary creditor.
PWE also seeks to avoid RSI’s transfers to the State as fraudulent conveyances. PWE asserts that RSI was insolvent when it made the transfers and that RSI received less than reasonably equivalent value. The State admits that RSI was insolvent during the period. However, the State argues that RSI received reasonably equivalent value because the amount RSI paid in taxes was the same amount it owed.
Finally, PWE argues that the State engaged in inequitable conduct and therefore the State’s claims should be equitably subordinated to those of other creditors. PWE suggests its losses might have been mitigated if the State had taken action sooner. Instead, the State waited as long as possible hoping to receive more revenue. PWE also argues the State had a duty to do more as a regulator to protect those bettors who had accounts with RSI. Because the State did not fulfill its regulatory duties, it is inequitable the State should be paid before other creditors. The State denies it engaged in inequitable conduct. Rather, the State claims that its regulators acted reasonably and in good faith adopting a flexible approach in an attempt to save RSI. When the situation finally became intolerable, the State consulted with PWE about putting a receiver in place. The State argues it acted in the interests of all parties and did not engage in inequitable conduct.
CONCLUSIONS OF LAW
A. Preferential Transfer Claims
Section 547(b) provides that, subject to exceptions not applicable here, the trustee may avoid any transfer of an interest of the debtor in property—
(1) to or for the benefit of a creditor;
*290(2) for or on account of an antecedent debt owed by the debtor before such transfer was made;
(3) made while the debtor was insolvent;
(4) made—
(A) on or within 90 days before the date of the filing of the petition; or
(B) between ninety days and one year before the date of the filing of the petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if—
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of this title.
11 U.S.C. § 547(b). The purpose behind the avoidability of preferential transfers is “ ‘to discourage creditors from racing to dismember a debtor sliding into bankruptcy and to promote equality of distribution to creditors in bankruptcy.’ ” Lindquist v. Dorholt (In re Dorholt, Inc.), 224 F.3d 871, 873 (8th Cir.2000) (quoting Jones Truck Lines, Inc. v. Cent. States, Se. & Sw. Areas Pension Fund (In re Jones Truck Lines, Inc.), 130 F.3d 323, 326 (8th Cir.1997)). PWE, standing in the shoes of the trustee, has the burden of proving the avoidability of any transfers under section 547(b). See 11 U.S.C. § 547(g). PWE must establish each element by a preponderance of the evidence. See Wells Fargo Home Mortg., Inc. v. Lindquist, 592 F.3d 838, 842 (8th Cir.2010).
1. The State as an Insider
Normally, a trustee — in this case PWE — may only avoid transfers which occurred within the 90 days preceding the bankruptcy filing. 11 U.S.C. § 547(b)(4)(A). The reach-back period is extended, however, to one year preceding the bankruptcy petition date if the transferee is an insider. 11 U.S.C. § 547(b)(4)(B). PWE argues the State is an insider of RSI.
With respect to a corporate debtor, an “insider” includes a:
(i) director of the debtor;
(ii) officer of the debtor;
(iii) person in control of the debtor;
(iv) partnership in which the debtor is a general partner; general partner of the debtor; or
(vi) relative of a general partner, director, officer, or person in control of the debtor.
11 U.S.C. § 101(31)(B). The Code’s use of the word “includes” is not limiting. See 11 U.S.C. § 102(3). In other words, the list of possible insiders is illustrative, not exclusive. Stalnaker v. Gratton (In re Rosen Auto Leasing, Inc.), 346 B.R. 798, 804 (8th Cir. BAP 2006). Courts have identified a category of creditors, sometimes called nonstatutory insiders, falling within the definition of “insider” but outside the enumerated categories. See generally Schubert v. Lucent Technologies Inc. (In re Winstar Communications, Inc.), 554 F.3d 382 (3d Cir.2009); Anstine v. Carl Zeiss Meditec AG (In re U.S. Med., Inc.), 531 F.3d 1272 (10th Cir.2008). The Court must therefore look beyond the statutory categories to determine whether the State was an insider of RSI.
The Bankruptcy Appellate Panel for the Eighth Circuit considered the question of a nonstatutory insider in In re Rosen Auto Leasing, Inc.:
An insider is one who does not deal at arm’s length with the debtor. Involvement in the day-to-day business of a debtor may elevate a creditor to insider *291status. However, the creditor would have to exert control over the debtor before gaining insider status. The ability of a creditor to compel payment of a debt is insufficient control to render the creditor an insider. In ascertaining insider status, the closeness of the relationship between the parties is also relevant.
346 B.R. at 804 (citations omitted).
a. The State’s level of control
PWE argues that the State, as regulator, controlled every aspect of RSI’s business operations because it had authority to inspect, supervise and audit all of RSI’s operations, and, in the case of a violation, revoke its license.
Courts, however, are reluctant to construe financial oversight — even intrusive oversight — as the control required to impose insider status. In re Armstrong, 231 B.R. 746, 749 (Bankr.E.D.Ark.1999). The fact that a creditor examines, monitors, and even controls some aspects of a debtor’s financial affairs does not render the creditor an insider. Id. (citing In re Meridith Millard Partners, 145 B.R. 682, 688 (D.Colo.1992), aff'd, 12 F.3d 1549 (10th Cir.1994), cert. denied, 512 U.S. 1206, 114 S.Ct. 2677, 129 L.Ed.2d 812 (1994)). “Financial power alone does not render a creditor an insider.” Id. (citation omitted). The court in In re Armstrong stated:
In determining whether a creditor, and particularly a bank, has the requisite level of control to be an insider, the courts examine whether the creditor had more ability to assert control than the other creditors, whether the creditor made management decisions for the debtor, directed work performance, and directed payment of the debtor’s expenses. There must be day-to-day control, rather than some monitoring or exertion of influence regarding financial transactions in which the creditor has a direct stake.
In re Armstrong, 231 B.R. at 749-50 (citations omitted).
In this case, by virtue of its regulatory function, the State asserted some control over RSI. There is no evidence, however, that the State made management decisions for RSI or directed work performance. The State also did not direct payment of RSI’s expenses. See id. at 750 (finding that a creditor was not an insider because even though the creditor required the debtor to submit frequent reports on receivables, invoices, and operations, the creditor received all payments on the receivables and had the power to endorse checks and obtain concessions from the debtor, it had no control of the day-to-day decision making of the debtor). The State may have made payment demands on RSI, even threatening RSI’s license in the event of nonpayment, but that was exerting influence regarding financial transactions in which the State had a direct stake rather than exerting day-to-day control. See id. at 749 (“The examination of the level of control must be made with the understanding that control over financial affairs may be an unavoidable circumstance attendant to many creditor-debtor relationships.”). In short, the State did not wield the control necessary over RSI to render it an insider.
b. The State’s arm’s-length transactions with RSI
The evidence does not suggest that the State’s transactions with RSI were at less-than-arm’s-length. In Anstine v. Carl Zeiss Meditec AG (In re U.S. Med., Inc.), the Tenth Circuit, quoting Black’s Law Dictionary, defined an arm’s length transaction as “a transaction in good faith in the ordinary course of business by parties with independent interests.... The standard under which unrelated parties, each acting *292in his or her own best interest, would carry out a particular transaction.” 531 F.3d 1272, 1277 n. 4 (10th Cir.2008).
In Schubert v. Lucent Tech., Inc. (In re Winstar Commc’ns, Inc.), the Third Circuit Court of Appeals, citing U.S. Medical, focused on whether the alleged insider had the ability to coerce the debtor into transactions that were not in the debtor’s best interest. 554 F.3d 382 (3d Cir.2009). In deeming a creditor to be a nonstatutory insider, the court cited a series of overbearing acts by the creditor. Id. at 397-98. These included coercing the debtor to buy goods that the debtor did not need or that never left the creditor’s warehouse, with the “sales” timed to enhance the creditor’s financial reports; treating the debtor as a captive purchaser; and compelling the debtor to make purchases that violated a covenant in the parties’ contract and then refusing to issue a waiver that would have given the debtor relief. Id.
No such coercion is evident in the circumstances of this case. PWE argues that the State should not have allowed RSI to continue its operations in light of: RSI’s arrearages on special fund payments; the State’s knowledge of RSI’s financial condition and PWE’s unanswered demands for payment; and the discovery of the unlicensed gaming site. PWE further asserts that the State’s allowance of RSI’s continued operations was for its own financial benefit. These arguments are beside the point.
The uncontroverted testimony of several witnesses was that the State wanted to keep RSI operating so that not only it, but also PWE, would get paid. During the August 18 telephonic meeting, PWE agreed to the appointment of a receiver which both sides thought was in everyone’s best interest. After that point the receiver was in control. Further, and more to the point, PWE failed to provide an evi-dentiary basis to establish that the transactions at issue — RSI’s payments to the State in the one-year prior to RSI’s bankruptcy — were not accomplished at arm’s length. The State had the right to the payments and acted in good faith and well within the parameters of its regulatory authority. None of the members of the Racing Commission appeared at trial to offer testimony inconsistent with the foregoing conclusions. Because PWE did not show that the State had the requisite degree of control over RSI or that it engaged in less-than-arm’s-length transactions with RSI, as a matter of law, the State was not a nonstatutory insider of RSI under section 547(b)(4)(B).
2. General Preference Claim
The fact that the State is not an insider means that the time period at issue for preferential transfers is 90 days, rather than one year, before the date of RSI’s bankruptcy filing. See 11 U.S.C. § 547(b)(4)(A) and (B).
In the 90 days before RSI’s filing, RSI transferred a total of $556,244.98 to the State. This amount includes: (1) four checks totaling $105,544.98 dated November 24, 2003; (2) a check for $700.00 dated December 10, 2003; and (3) the $450,000 draw down on the letter of credit on December 23, 2003. In PWE’s Reply to Defendant’s Post-Trial Brief, PWE conceded that the draw down on the letter of credit is not recoverable as a preferential transfer. Therefore, we need focus only on the remaining five checks.
A debtor’s payment to a creditor with a priority claim does not constitute a preference if the creditor would have received the same distribution in a Chapter 7 liquidation. Rocin Liquidation Estate v. Alta AH&L (In re Rocor Intern., Inc.), 352 B.R. 319, 330 (Bankr.W.D.Okla.2006); 11 U.S.C. § 547(b)(5). The State argues *293PWE has failed to show the transfers enabled the State to receive more than it would have received in a liquidation. The State filed a proof of claim asserting a priority tax claim under section 507(a)(8) in the amount of $6,726,872.72. PWE failed to prove the State would not be entitled to payment of at least $106,244.98, the amount of the contested transfers within 90 days of RSI’s bankruptcy filing, by virtue of its priority status.12 Accordingly, PWE’s preferential transfer claim fails.
B. Fraudulent Transfer Claims
PWE also seeks to avoid the transfers of RSI’s assets to the State under 11 U.S.C. § 544(b)(1) which provides that the trustee may avoid any transfers avoidable under applicable law. Specifically, PWE seeks to avoid the transfers under North Dakota law. It also seeks to avoid the transfers under section 548(a)(1)(B) of the Bankruptcy Code.
This Court has previously addressed the similarity in the analysis of claims under sections 544 and 548:
[Section 544(b)(1) ] expressly authorizes a trustee to avoid a transfer voidable under North Dakota’s version of the Uniform Fraudulent Transfer Act (“UFTA”), codified at N.D.C.C. ch. 13-02.1. The policy underlying both the UFTA and section 544 is to preserve assets of the estate for the benefit of creditors. The Bankruptcy Code also contains a provision allowing a bankruptcy trustee to set aside fraudulent transfers, found in section 548. The language of UFTA and section 548 are nearly identical; the only significant difference is a longer statute of limitations under North Dakota law. Considering the similarities in purpose and language, many courts have concluded that the UFTA and section 548 are in pari mate-ria, and that the same analysis applies under both laws. The Court finds the reasoning behind these cases persuasive and will analyze the transfer at issue only under the purview of section 548.
Kaler v. Red River Commodities, Inc. (In re Sun Valley Products, Inc.), 328 B.R. 147, 155-56 (Bankr.D.N.D.2005) (citations and footnote omitted). Likewise, this Court will analyze the transfers at issue only under section 548.
Under section 548(a)(1)(B), a transfer that was made within one year13 of the *294bankruptcy petition is constructively fraudulent if a debtor was insolvent on the date the transfer was made and received less than a reasonably equivalent value in exchange for the transfer. 11 U.S.C. § 548(a)(1)(B)® and (ii)(I). The parties do not dispute that the transfers at issue were within the statutes of limitations or that RSI was insolvent when the transfers were made. Rather, the dispute in this case focuses on whether RSI received reasonably equivalent value for the transfers to the State.
In determining whether the payments a debtor received were in exchange for reasonably equivalent value, courts consider whether: (1) value was given; (2) it was given in exchange for the transfer; and (3) what was transferred was reasonably equivalent to what was received. Meeks v. Don Howard Charitable Remainder Trust (In re S. Health Care of Ark., Inc.), 309 B.R. 314, 319 (8th Cir. BAP 2004); In re Sun Valley Prods., Inc., 328 B.R. at 156. “Value” is defined in section 548(d)(2)(A) as “property, or satisfaction or securing of a present or antecedent debt of the debtor®” 11 U.S.C. § 548(d)(2)(A).
PWE argues that RSI did not receive reasonably equivalent value for the taxes it paid because RSI did not owe the taxes; in other words, the transfers were not in satisfaction of a debt of RSI. PWE reminds the Court of the finding in the Memorandum and Order in this case, dated December 22, 2010: “PWE is correct that after the interim emergency rule lapsed, the responsibility to pay the taxes and fees shifted back to the simulcast operator.” In re Racing Services, Inc., 2010 WL 5376222, at *8 (Bankr.D.N.D. December 22, 2010).
The State responds that PWE’s claims are barred by the voluntary payment doctrine, which provides:
Generally, in the absence of a statute to the contrary, a person who has paid a license fee or tax which is illegal or in excess of the sum which might lawfully be exacted cannot recover the amount paid if the payment was made voluntarily with full knowledge of the facts, although it was made in good faith, through a mistake or in ignorance of the law, unless the recovery is permitted by an agreement entered into at the time the payment was made.
First Bank of Buffalo v. Conrad, 350 N.W.2d 580, 586 (N.D.1984).
The State cites Wolff v. United States, 372 B.R. 244 (D.Md.2007), for support. The court in Wolff found the voluntary payment doctrine applicable under the Maryland Uniform Fraudulent Conveyance Act (MUFCA). Under MUFCA, a conveyance is defined as “every payment of money, assignment, release, transfer, lease, mortgage, or pledge of tangible or intangible property, and also the creation of any lien or encumbrance.” Md.Code Ann., Com. Law, § 15-201(c).
In contrast to the Maryland statute, both the state and federal fraudulent transfer statutes at issue in this case specifically permit recovery of voluntary payments. See 11 U.S.C. § 548(a)(1) (“if the debtor voluntarily or involuntarily — (A) made such transfer ... or (B) received less than a reasonably equivalent value”); N.D.C.C. § 13-02.1-01(12) (“‘Transfer’ means every mode ... voluntary or invol*295untary”). Accordingly, they are statutes to the contrary of the voluntary payment doctrine, and the doctrine does not apply to bar recovery in this case. See First Bank of Buffalo, 350 N.W.2d at 586.
Notwithstanding the inapplicability of the voluntary payment doctrine and the fact that the responsibility to pay the taxes shifted back to Team Makers when the interim rule lapsed, RSI nonetheless received value for the transfers.
Although transfers made solely for the benefit of a third party do not furnish reasonably equivalent value, a transfer on behalf of a third party may produce a benefit that ultimately flows to the debtor, albeit indirectly. Pummill v. Greensfelder, Hemker & Gale (In re Richards & Conover Steel, Co.), 267 B.R. 602, 613-14 (8th Cir. BAP 2001). As the BAP recognized:
[T]he rule that a debtor who pays the debt of another normally does not receive value is subject to “a rather large qualification.... Even though the debtor makes a transfer, or incurs an obligation for consideration that moves (in form or substance) directly to a third person, the debtor nevertheless receives value if she receives an economic benefit indirectly (in form or substance). The consideration need not flow directly to her to satisfy the value component of reasonably equivalent value. Value requires only that the transfer result, whether directly or indirectly, in economic benefit running directly to someone else where: ... 2) the debtor and the other person share an identity of economic interests so that the debtor got some or all of the direct benefit straightforwardly even though, in form, it passed only to the other person because what benefits one will benefit the other.”
In re Richards & Conover Steel, Co., 267 B.R. at 614 (citation omitted).
In this case, the payments to the State resulted in an economic benefit to RSI. They allowed RSI to continue operating. The fact that the Racing Commission considered adverse action against RSI’s license due to its nonpayment of the taxes evidences that RSI’s payment of the taxes was an essential term and condition of its simulcast service provider license in addition to being the longstanding practice. RSI’s annual license renewal applications represented to the Racing Commission that it would be responsible for payment of the parimutuel wagering taxes to the State. Team Makers’ applications similarly indicated that RSI would pay the necessary distributions. Team Makers received the benefit of the tax payments insofar as Team Makers had the responsibility for the payments, but what benefitted Team Makers also benefitted RSI. The tax payments had value and they were given in exchange for that value.
The remaining question is whether the transfers were reasonably equivalent to what was received. See In re S. Health Care of Ark., Inc., 309 B.R. at 319. According to Pastore’s accounting, RSI transferred $5,270,101.20 to the State in the one year prior to bankruptcy. North Dakota law determined the amount of the tax payments that were taken from the wagering pool. See N.D.C.C. § 53-06.2-11. RSI collected the taxes from the wagers and paid them to the State as it was required to do to maintain its license and continue operating. The payments reduced the tax liability dollar for dollar and therefore constituted reasonably equivalent value.
*296C. Equitable Subordination
Section 510(c) of the Bankruptcy Code authorizes the subordination of an allowed claim under principles of equity. 11 U.S.C. § 510(c)(1). The purpose of equitable subordination is to “undo or offset any inequity in the claim position of a creditor that will produce injustice or unfairness to other creditors in terms of the bankruptcy results.” Bunch v. J.M. Capital Fin., Ltd. (In re Hoffinger Indus., Inc.), 327 B.R. 389, 415 (Bankr.E.D.Ark. 2005) (quoting Bostian v. Schapiro (In re Kansas City Journal-Post Co.), 144 F.2d 812, 815 (8th Cir.1944)).
“Equitable subordination requires proof of inequitable conduct by the claimant that injured other creditors or conferred an unfair advantage.” Kaler v. Bala (In re Racing Services, Inc.), 571 F.3d 729, 731 (8th Cir.2009). Examples of such inequitable conduct includes fraud, illegality, and breach of fiduciary duty. Id. Although the doctrine of equitable subordination may be applied to ordinary creditors as well as insiders, cases that subordinate the claims of creditors that dealt at arm’s length with a debtor are few and far between. See generally Carter-Waters Okla., Inc. v. Bank One Trust Co., N.A. (In re Eufaula Indus. Auth.), 266 B.R. 483 (10th Cir. BAP 2001); Official Comm, of Unsecured Creditors of Lois/ USA, Inc. v. Conseco Fin. Serv. Corp. (In re Lois/USA, Inc.), 264 B.R. 69 (Bankr. S.D.N.Y.2001).
PWE argues that the State engaged in inequitable conduct. Specifically, it argues that the State: (1) failed to protect RSI’s creditors’ interests and the integrity of North Dakota’s racing industry by failing to properly regulate RSI; (2) permitted RSI to fall deeper into insolvency despite knowledge of RSI’s financial difficulties; and (3) permitted RSI to retain its license despite the State’s knowledge that RSI was conducting an illegal gambling operation. PWE further argues that the State engaged in inequitable conduct by: (1) “failing to properly regulate to protect PWE’s account with RSI such that the money in the account was not there at the time of RSI’s bankruptcy filing”; (2) “failing to investigate RSI’s financial situation despite its failure to timely pay taxes ... since September 2001”; (3) “failing to investigate and take action despite their suspicion that RSI was engaged in illegal activity as of January 2003”; (4) “permitting RSI to continue to do business even after it was shown to have a multi-million dollar tax liability and it was under investigation for illegal gaming operations”; (5) “failing to appoint a receiver until almost the end of August 2003 despite suspicions of illegal gambling [much earlier].... ” (Plaintiffs Post-Trial Brief, EOF Doc. No. 143, p. 50-51.)
PWE’s assertions rely unduly on the benefit of hindsight. The State authorities clearly hoped to save RSI and did everything they could to help RSI recover from its financial difficulties — difficulties which started after 9/11. The State authorities were willing to work with RSI and be flexible on the payment schedule for the taxes. The record suggests RSI had been a viable operating business for a number of years before its financial problems began, and PWE does not suggest any reason why it would have been impossible for RSI to recover by continuing to operate. PWE is correct that the State authorities were aware of significant problems at RSI by early 2003. However, the State regulators were not under any obligation to take any specific action. They had discretion with how to proceed. In the end, the *297State authorities made the decision to try to save the existing operator who had successfully run the business; they chose to move forward with RSI. When the situation became intolerable, the State sought the appointment of a receiver. Although PWE argues the State should have stepped in and sought the appointment of a receiver sooner, this assertion relies unduly on the benefit of hindsight. This Court will not second guess the decisions of the State regulators. The State exercised its authority, as defined by North Dakota law and administrative procedures, with discretion and a utilitarian goal given the information it had at the time. The State did not engage in inequitable conduct such that its claim should be equitably subordinated.
Finally, PWE makes two arguments in the alternative. First, PWE argues that the State engaged in illegal conduct by demanding that RSI pay the taxes and by coercing payment by threatening revocation of RSI’s license — in violation of its own statutes and regulations. Second PWE argues that “the State ... engaged in inequitable conduct when the State, as an insider (for equitable subordination purposes) convinced PWE not to pursue a writ of attachment against RSI but instead to rely on the receiver process being pursued by the State, while not informing PWE that the State was simultaneously collecting over $1.7 million from the insolvent RSI.” (Plaintiffs Posh-Trial Brief, ECF Doc. No. 143, p. 54.) Taking the latter first, the second argument fails because, as found above, the State was not an insider of RSI. The first argument also fails in that the State did not engage in illegal conduct.
All parties understood that RSI was going to be responsible for paying the State taxes. This Court previously held “RSI’s continued practice of handling this responsibility on behalf of the simulcast operator was not in contravention of the law.” In re Racing Servs., Inc., 2010 WL 5376222, at *8 (Bankr.D.N.D. December 22, 2010). Whether by agreement with the State or agreement with Team Makers or both, all parties understood that RSI was responsible for making the payments to the State. If the State taxes were not paid, the licenses of both parties, not just RSI, were on the line. As RSI was the party who had agreed to pay the State, and RSI was the party who had the State’s funds, the State naturally demanded payment of RSI. While the State statutes did not expressly authorize the State to tax RSI, neither did they prohibit it from collecting from RSI. Thus, there was nothing inequitable about the State’s conduct such that its claims should be subject to equitable subordination.
For the foregoing reasons, PWE’s Complaint is DISMISSED.
The Court has considered all other arguments and deems them to be without merit.
SO ORDERED.
JUDGMENT MAY BE ENTERED ACCORDINGLY.
. The Honorable William A. Hill, presiding.
. In 1991, the Legislature amended N.D.C.C. § 53-06.2-10.1, to reclassify "off track wagering” as “simulcast wagering” to make the statutory language consistent with Racing Commission regulations. See 1991 N.D. Sess. Laws, ch. 556, § 5; N.D.C.C. § 53-06.2-10.1.
. The "Handle” is the total amount of bets placed for a particular period of time.
. The evidence does not provide the date of the FBI raid. Wass testified that he became aware of the FBI investigation into RSI in late April or early May 2003.
. Wass testified that he had estimated one portion of this amount and his estimate was off, but only by a couple hundred dollars. PWE’s proof of claim states that the amount of the debt owed to PWE by RSI is $2,248,100.86.
. Martin Foley is also counsel for PWE.
. Ed Reeser was outside general counsel for PWE at the time.
. Wells Fargo was formerly known as Nor-west Bank, and was Norwest Bank at the time PWE pledged the certificate of deposit.
. Pastore’s analysis showed that RSI was insolvent by February 2003 based on its deteriorating liquidity and total shareholders’ deficit.
. This amount included $50,000 from a letter of credit the State collected in April 2004, after RSI's bankruptcy filing. Deducting this amount from his total results in $5,270,101.20.
.The individual checks are for $25,598.42, $9,012.51, $59,515.01, and $700.00.
. In its opening post-trial brief, PWE’s entire discussion of this element is as follows:
The only possibility creditors have for a meaningful recovery in this case is if PWE is successful in recovering funds from the State. If successful, the State's claims will be subordinated to all other creditors. Accordingly, the State benefitted from the preferential transfers by the lesser of (1) the aggregate amount owed to all creditors, or (2) the total amount of the transfers.
(Plaintiff’s Post-Trial Brief, ECF Doc. No. 143, p. 38.) This completely misses the mark. In its reply to the State’s post-trial brief, PWE revisits the issue and argues that the State is not entitled to a priority claim. It asks the Court to enlarge the pleadings, sua sponte, to include a cause of action seeking a recharac-terization of the State's claim. The Court declines this invitation. In the alternative, it moves the Court to amend its complaint pursuant to Federal Rule of Civil Procedure 15(b)(2) to include the cause of action to recharacterize the State’s claim. PWE's second claim for relief in its complaint sought a determination that the State’s claim was not entitled to priority status because the taxes owed by RSI to the State were not taxes, but rather were fees or assessments. In its motion for summary judgment, PWE abandoned this claim and conceded that the amounts collected and claimed by the State constitute taxes. The motion is denied.
. The reach-back period under section 548 was extended from one year to two years as the result of the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). The one-year reach-*294back period applies in this case because the main bankruptcy case was filed in 2004. The applicable reach-back period under North Dakota law is four years. N.D.C.C. § 13-02.1-09. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495309/ | OPINION RE: LIEN PRIORITY
RANDOLPH J. HAINES, Bankruptcy Judge.
The issue here is whether various mechanics’ lien claimants, who claim priority dating from the commencement of construction in October, 2005, have priority over a construction deed of trust that was recorded in May of 2007. The lender, Mortgages, Ltd., maintains that even if there is but a single project or “work,” a mechanics’ lien has priority only dating from the general contract for which the work was performed (the “separate contracts doctrine”), and that in any event Mortgages is entitled to be equitably sub-rogated to a prior deed of trust that was paid off and released by some of the proceeds of Mortgages’ loan.
BACKGROUND FACTS
The construction project at issue is the remodeling or refurbishment of an existing building commonly known as the Hotel Monroe. Its owner, Central and Monroe, LLC, first obtained a loan from First Commonwealth Mortgage Trust in the amount of $3.2 million, secured by a deed of trust recorded in May, 2002. In July, 2005, that loan was refinanced by an $8.5 million dollar loan provided by Mortgages Ltd., secured by a deed of trust recorded that same month. Almost $3 million of the proceeds of that loan were used to satisfy the First Commonwealth debt and obtain a release of the First Commonwealth deed of trust.
In December, 2006, the owner obtained a new loan from Choice Bank in the amount of $9.3 million. It was secured by a deed of trust recorded that same month. Approximately $7.3 million of the proceeds of the Choice loan were used to satisfy the debt to Mortgages Ltd. and obtain a release of its 2005 deed of trust.
By the time the Choice Bank deed of trust was recorded in December, 2006, however, work was already underway on the remodeling. The first general contract for this remodeling project was an October 18, 2005 contract with Contractors Abate*301ment Services, Inc. (“CASI”) for demolition and asbestos abatement. On October 12, 2006, the owner signed a second general contract for the remodeling project, this time with KGM Builders, Inc. (“KGM”), who is one of the mechanics’ lien claimants asserting priority in this case. KGM then entered into a subcontract for CASI to continue its asbestos abatement work. The principal of KGM, Kevin Markham, was also hired by the owner to act as the owner’s representative for all facets of the renovation project. As early as May, 2007, the owner and Markham recognized that a larger general contractor would be required once the renovation plans were finalized, and had identified Jeffrey C. Stone, Inc., dba Summit Builders (“Summit”) as that general contractor. Summit began work on the demolition and renovation in October, 2007, and finalized its Cost Plus form of construction contract with the owner on December 12, 2007, for a cost plus budgeted amount in excess of $27.7 million. While work continued, the parties waited until a permitted set of construction plans were available to sign the prime contract; the owner signed on April 9, 2008 and Summit signed on April 18, 2008.
In the meantime, while the CASI and KGM demolition and abatement work was going on, the Choice Bank debt was refinanced by another loan from Mortgages Ltd. in the amount of $75.6 million, in May, 2007. The deed of trust securing that debt was recorded on May 16, 2007. From the proceeds of this second Mortgages Ltd. loan more than $8.9 million was used to satisfy the Choice Bank debt and obtain a release of its 2006 deed of trust.
When it made its construction loan and recorded its deed of trust, Mortgages understood that it was making a “broken priority loan” because the construction work was already underway. Consequently it obtained from the owner’s principals a general Indemnity Agreement and Indemnification Agreement for Mechanics’ and Materialman’s Liens, and it required an assignment from the owner of the owner’s rights in the general contract with Summit, even though it had not yet been finalized and signed. Mortgages did not, however, require or obtain any subordination agreements from any of the general or subcontractors performing the work.
Mortgages did not have the $75.6 million necessary to fund the loan that it made to Central and Monroe. Mortgages’ business plan had been to raise the necessary funds from its investors, but by May, 2007, it was already having difficulty raising as much funds as it had committed to lend. When the loan closed on May 16, 2007, Mortgages paid itself in excess of $5.4 million for a “Loan Discount,” “Construction Admin. Fees,” “Rev Op Fees,” and a “Processing Fee.” It agreed with the owner to a “delayed funding” arrangement, purportedly to reduce the owner’s interest accrual but more likely because it did not have the funds to advance. That arrangement called for about $44.7 million to be funded to a “Construction Impound” account by October, 2008, and an additional $9.4 million for interest reserves by the month after that. The initial delayed funding was funded on July 13, 2007.
But by November, 2007, just as the form of contract was being finalized and Summit took over as general contractor, Mortgages already needed to withdraw funds that it had previously paid into the Construction Impound account. Mortgages agreed with the owner to “borrow” back $2.5 million that had been funded, promising to replace $1 million of those funds on 10 days’ notice, another $1 million on 20 days’ notice, and the full balance within 30 days of the owner’s demand. Seven days after the parties agreed upon the form of the general contract with Summit, and while *302Summit was performing work at the Project, the owner demanded the first $1 million to be repaid to the Construction Impound account. Mortgages never honored that demand. Instead it not only stopped funding but diverted more money from the Construction Impound account, including more than $788,000 in April, 2008 and another half million dollars in May. The owner apparently agreed to these diversions because some of that money was used to fund some of the owner’s other projects. Neither KGM nor Summit was ever informed of the withdrawals and diversions from the Construction Impound account or, indeed, of the whole “delayed funding” scheme.
By the spring of 2008 the construction impound account was insufficient to pay the accruing construction costs. Summit’s first two draws were paid by the owner itself because there was insufficient money in the impound account. About $1.6 million was deposited in May, sufficient to pay Summit’s third draw. By June the account was empty, although Mortgages had approved draws in excess of $10 million. Mortgages’ principal Scott Coles committed suicide on June 2, and Mortgages was placed into involuntary bankruptcy on June 23.
PROCEDURAL POSTURE
This litigation was originally filed in Maricopa County Superior Court and was removed to this Court, pursuant to 28 U.S.C. § 1441, in connection with the pending bankruptcy case of Mortgages, Ltd. Rexel Phoenix Electric and some of the other subcontractors of general contractor Summit moved to remand the adversary proceeding to state court. All parties who had appeared in the action agreed that the adversary proceeding should be remanded but only after this Court ruled on the threshold “issue of lien priority,” and on September 10, 2009, the Court entered an order to that effect.
After extensive discovery, pretrial motions, joint pretrial statements and trial memoranda, the priority issue was tried to the Court on August 6, 7, 8, and 9, 2012. After the filing of post-trial memoranda on August 20, the matter was taken under advisement.
THE SEPARATE CONTRACT ISSUE
Summit claims that although it had a separate contract with the owner dating from December, 2007, the work it contracted to do was the same “work” or construction project that CASI and KGM had begun working on as early as October, 2005 and October, 2006, prior to the recordation of the second Mortgages’ deed of trust in May, 2007. Indeed, Summit even entered into a subcontract with CASI for CASI to continue with the demolition and abatement work that it had begun under its own general contract and continued under its first subcontract with KGM. But Mortgages contends that even if it was the same “work” within the meaning of Arizona’s mechanics’ lien priority statute, Arizona Revised Statutes (“A.R.S.”) § 33-992(A), a mechanics’ lien cannot have a priority earlier than the general contract, so when there are successive general contracts as there are here, each of them establishes a new, later priority date for all of the subsequent work of both that general contractor and all its subcontractors.
The statutory language defining the priority of a mechanics’ lien has remained virtually unchanged since it was first adopted in 1901. Currently, the statute reads, in pertinent part: “The liens provided for in this article ... are preferred to all liens, mortgages or other encumbrances upon the property attaching subsequent to *303the time the labor was commenced.... ’’,1 Mortgages contends that “the time the labor was commenced” may not be just a single date but can be multiple dates if there is more than one general contract for the labor, or if some labor is hired directly by the owner outside of any general contract. In its motion for partial summary judgment, Mortgages argued this “separate contracts doctrine” was adopted by the Arizona Supreme Court in 1932 in its decision in Wylie,2 confirmed by its 1970 decision in Wahl,3 and then applied by the Court of Appeals in Woolridge,4 in 1981. Although the Court has already analyzed that case law in denying Mortgages’ motion for summary judgment,5 it will repeat some of that same analysis here for completeness. In addition, Mortgages now contends that two other cases, Allied Contract6 and Mayer Central,7 also adopt its separate contracts theory.
But we must begin with the statute. Prior to 1998, Arizona’s statutes contained a single provision governing the date of priority of mechanics’ and material-man’s liens, A.R.S. § 33-992(A). It provides that the priority date is “the time the labor was commenced or the materials were commenced to be furnished.” That language does not suggest that there may be different dates depending on the contract under which the labor was performed. Indeed, the court in Wooldridge held that “A.R.S. § 33-992 establishes priority for all of the liens provided for in the article on mechanics’ liens.”8 Because the priority rule hinges solely on “the time the labor was commenced,” the statutory language suggests there can be only one such “time,” not multiple times for different contracts. Of course it is entirely possible, as a factual matter, that when there are multiple general contracts they may provide for different “labor,” perhaps on different construction projects. But when the facts are that there is but one “labor” being performed, the statutory language clearly indicates there can only be one “time” that that “labor was commenced,” regardless of how many contracts governed the work.
The seminal case in Arizona is Wylie, where the Arizona Supreme Court held that “when the building, structure, or improvement has been made under a general contract,” then all liens arising from work done under that contract “are upon an equal footing.”9 “The one who furnishes the last item of material or does the last work on the building, structure, or improvement is in just as good shape as the one who did the first work or furnished the first material. Their right of lien relates to the same date.”10
There was also extensive dictum in Wylie indicating that labor performed under *304separate, direct contracts with the owner would not share that same priority date, or indeed have any relation back. This dictum was based on California cases decided under a statute that also required construction contracts to be recorded. That recording requirement “therefore divided liens into two classes, those arising under a valid contract between the owner and the contractor, and those where the labor done and materials furnished were deemed to have been done and furnished at the personal instance of the owner.”11 Arizona’s statute does not similarly require construction contracts to be recorded, and apparently never did. Therefore there is no similar provision in Arizona’s statute that divides mechanics’ “liens into two classes.”
And the Wylie Court was very explicit that it was not deciding whether the same priority date applies to work done under a direct contract with the owner. That opinion recognized that on the facts before the court, “all of the lien claimants have become such through the general contractor.” 12 Therefore the court had no occasion to determine the priority rules for liens arising either under different contracts or directly with the owner: “What the rule should be when the lienors have directly contracted with the owner and rendered services to him personally it will be time enough to decide when the facts present the question.”13
Wahl14 applied the relation-back rule of Wylie, and in doing so quoted extensively from Wylie’s dictum regarding a potentially different priority rule for those contracting directly with the owner. But Wahl similarly had no occasion to decide that issue because “In the instant case the materials were furnished to the contractor, therefore, all the rights of the material-men, including Ray Lumber, relate back to a date prior to” the recording of the mortgage, the date when each of the material men, with the exception of Ray Lumber, delivered materials.15
Wooldridge applied the relation-back principle to earthwork “when it has been performed as a part of the work required under a general contract for the construction of a building.”16 That court also emphasized that it was not deciding whether “work done under subsequent independent contractual arrangements entered into directly with the owner”17 would share the same priority.
In the absence of statutory language that “divided liens into two classes, those arising under a valid contract between the owner and the contractor, and those where the labor done and materials furnished were deemed to have been done and furnished at the personal instance of the owner,”18 which was the basis for the California cases that gave rise to the Wylie dictum, there is no statutory basis to give different priority dates to any liens governed by A.R.S. § 33-992(A).
And in its post-trial memorandum, Mortgages admits that California eliminated its separate contracts doctrine by *305amending its statutes in 1981.19 Since then, the California statute specifies that the priority dates from the “commencement of the work of’ improvement.20
As noted, Mortgages now argues that two other Arizona cases adopt its “separate contracts doctrine.” But neither case construes the language of A.R.S. § 33-992(A) or explains how or why it requires different priority dates depending on the nature of the contractual relationship with the owner. In Allied Contract, the lien-holder claimed a priority from the commencement of construction of “four duplexes on the property,” even though its work was for “installation of water mains on the subject property,” which it did not begin until three months later, after recor-dation of the mortgage.21 Nothing in the opinion establishes that the lienholder’s work was in fact part of the same “work” or project that consisted of the construction of the four duplexes. In the absence of any evidence to that effect, the court might have simply assumed that it was not part of the same work because it was done pursuant to a different general contract. Nothing in the opinion construes the statute or holds that it requires a different priority date for commencement of the same work simply because there were multiple general contracts. And the Mayer Central case22 is even less enlightening, because it similarly fails to construe the language of the statute or provide any rationale or statement of a legal rule or analysis that supports its holding.
If dictum were controlling, then perhaps the most definitive dictum from Arizona courts on mechanics’ lien priority in the broken priority context is the Court of Appeals’ explanation in its extensive opinion in the United California Bank23 case in 1983, after all of the cases and dictum that Mortgages’ relies on for its “separate contracts” theory. That case was all about a “broken priority” $25 million takeout financing of the Hyatt Regency Hotel. The opinion noted that it would be “a gross understatement” to describe the litigation as merely “protracted and hard fought at every turn,” but also “intense” and the “work excellent.”24 The opinion described the basic “broken priority” problem as arising from the fact that the “owner-developer[ ] began construction with its own funds before obtaining interim construction financing. A.R.S. § 33-992 provides that mechanics’ and material-men’s liens will relate back to the date construction commences rather than to the time of actual filing and will, therefore, have automatic priority over a subsequent*306ly recorded deed of trust.”25 The extremely thorough opinion saw no need to describe the mechanics’ lien priority that creates the broken priority problem as arising only when there is only one general contract and no one does any work directly for the owner. That may have been dictum because there may have been no direct contracts with the owner, but even as dictum it is as authoritative as the older dictum Mortgages relies on.
But while there is no definitive authority expressly adopting the “separate contracts” theory after it was repealed by California in 1931, the Arizona Legislature conclusively indicated it did not generally apply by adopting that rule only for the special circumstance of site preparation work that is not governed by a general contract. The mechanics’ lien statute was amended in 1998 to add new paragraph E. The new provision applies only to defined site preparation work and provides that when such work is not included in a general contract for the construction of a building or other structure, then the site improvement “is a separate work” and the mechanics’ liens arising from such work have their own priority.
All parties here agreed that the demolition, abatement and renovation of the Hotel Monroe was not such site preparation and is not governed by A.R.S. § 33-992(E). But for three reasons that paragraph making a special rule for separate site preparation general contracts confirms that for vertical construction contracts, there is no “separate contracts doctrine.”
First, the new paragraph specifically defines such site preparation, when not included in a construction contract, to be a “separate work.” If Mortgages’ separate contract theory were the rule, the separate general contract for the site preparation would be sufficient in itself to give it its own priority. The care taken by the legislature also to define such work as a “separate work” confirms that the general rule is that the nature and identity of the “work,” not the nature or singleness of the contract, governs priority. There would have been no reason for the legislature to define such site preparation work as a “separate work” if that were not otherwise determinative of priority.
Second, and even more importantly, there would have been no need to create a special paragraph, and a special priority rule, for such site preparation work if the law had always already embodied a “separate contracts doctrine.” Paragraph E only applies when the site preparation is done pursuant to a contract that is separate from the general contract for the construction of the building. Under Mortgage’s theory, the priority for that work would always have dated from the commencement of the labor pursuant to that separate site preparation contract. Paragraph E would have been entirely redundant of the general rule under paragraph A. Because the Court should not assume the legislature adopted a useless law, it must conclude that paragraph E adopts a special rule for some, particularly defined separate general contracts, those dealings only with site preparation. Such a special rule for separate site preparation contracts necessarily implies that that rule does not apply to separate vertical renovation contracts such as the work on the Hotel Monroe. These are ordinary applications of the cannons of statutory interpretation of expressio unius est exclusio alterius26 and that a court should not inter*307pret a statute so as to render any portion of it redundant or meaningless surplus-age.27
Third, the new paragraph E also confirms that priority is based on the commencement of the “improvement,” not on the contract under which it is performed. The paragraph specifies that even for such site preparation work that is not included in a general construction contract, the liens “arising from work and labor ... for each improvement at the site shall have a separate priority.... A lien arising from work or labor done ... for each improvement at the site attaches to the property for priority purposes at the time labor was commenced ... pursuant to the contract between the owner and the original contractor for that improvement to the site.”28 In other words, paragraph E adopts the same priority rule as paragraph A has always embodied, which is on a work by work or improvement by improvement basis, rather than on a contract by contract basis. If the work is, factually, all the same improvement, then it will all have the same priority, regardless of how many site preparation general contracts govern that work.
This same project concept is also found elsewhere in Arizona’s mechanics’ lien statutes. The Arizona Supreme Court decision in S.K Drywall29 dealt with the date for perfecting a lien, rather than the priority date of a timely perfected lien. Liens must be filed “within one hundred twenty days after the completion of a building, structure or improvement.”30 The issue in S.K Drywall was whether six buildings constituted a single project or “improvement.” The court of appeals had relied on the “contractual arrangements between the parties,” and the manner of construction, to conclude that the time to perfect ran from the completion of each building. The Supreme Court reversed, holding that the time runs from the completion of the “improvement,” which is a “catch-all” term that refers to the subject of construction.31 Subsequently the legislature changed that result by adding A.R.S. § 33 — 993(B). Since 1998 that statute provides that when the work consists of separate residential buildings, then “each building is a separate work” “without regard to whether the buildings are constructed pursuant to separate contracts or a single contract.” But while the legislature changed the specific result when multiple residential buildings *308are being constructed, it did so by adopting the same principle that liens are governed by the nature of the “separate work,” not by the existence of “separate contracts or a single contract.” This strongly suggests the legislature did not intend a different concept to govern priorities as compared to perfection requirements, and to impose a distinction based on “separate contracts or a single contract” for purposes of § 33-992(A) when that statute never even mentions the word “contract.”
There is no basis in the statute, as there was in California at the time of the Wylie dictum, to apply different priority dates for work under different contracts with the owner. Nor is there any reason to conclude that Arizona would have adopted California’s interpretation after it specifically repealed that interpretation in 1932. To the contrary, the language and structure of A.R.S. § 33-992(A) all imply there is a single priority date, which is the commencement of “the labor,” with the sole exception under A.R.S. § 33-992(E) for liens arising under a site preparation contact that is separate from a contract for the construction of a building.
Of course, as noted above, it is entirely possible, on the facts, that multiple general contracts exist because they define different works or improvements. But now that there has been a trial of those facts, and much of the evidence related to the nature of the work and improvement on the Hotel Monroe, those facts conclusively establish that there was but one improvement underway from October, 2005, until Mortgages ceased funding and work stopped in the summer of 2008. All of the general contractors — CASI, KGM and Summit — were working on the same, single renovation project. Although it significantly evolved over time, there was never more than a single species — the owner did not originally set out to develop a Neanderthal and only later abandon that project to create a Homo Sapiens instead. And CASI’s initial asbestos abatement work was part of that same, single renovation project. The facts are clear there was no need for asbestos abatement, and none would have been undertaken, except because of and as part of the renovation.
Thus for purposes of A.R.S. § 33-992(A), the Court finds that there was only one date on which “the labor” commenced, when CASI started work in October, 2005.
EQUITABLE SUBROGATION
Because Mortgages’ deed of trust was not recorded until May, 2007, it is junior and subordinate to the mechanics’ liens whose priority date from October, 2005. To have priority over those liens, Mortgages asks the Court to apply the equitable doctrine of equitable subrogation, to give it the priority of the deed of trust that was paid and released by a portion of Mortgages’ May, 2007 loan. That was the Choice Bank deed of trust that was recorded in December, 2006. But even that would not provide priority over mechanics’ liens arising from labor that commenced in October, 2005. So Mortgages asserts that it can also claim equitable subrogation on behalf of Choice Bank, to be subrogated to the deed of trust that some of its loan proceeds paid off and released, the July, 2005, deed of trust in favor of Mortgages itself.
The law of equitable subrogation in Arizona has changed since this Court denied a motion for summary judgment in this case.32 In Sourcecorp,33 the *309Arizona Supreme Court expressly adopted the approach of the Restatement (Third) of Property: Mortgages § 7.6 (1997) and rejected any requirement of an “agreement” as a condition of equitable subrogation,34 as some prior Arizona cases had seemed to require.35 Now, under Sourcecorp and the Restatement, “[o]ne who fully performs an obligation of another, secured by a mortgage, becomes by subrogation the owner of the obligation and the mortgage to the extent necessary to prevent unjust enrichment.” 36 The Arizona Supreme Court made clear, however, that equitable subro-gation is available only “to the extent necessary to prevent unjust enrichment,”37 and that it always “depends on the facts of the particular case.”38 Indeed, on the facts of that case the Court did not permit the full remedy of equitable subrogation, because it precluded the homeowner from foreclosing the now-junior priority judgment lien and instead subjected what would have been the homeowner’s equity in the property to satisfaction of that lien that would have been eliminated by their ability to foreclose the mortgage to which they were subrogated.
Most of the trial was devoted to evidence as to whether it would be equitable to subrogate Mortgages to the prior deeds of trust, whether Mortgages had acted equitably, and whether the contractors and subcontractors would be unjustly enriched if equitable subrogation were not permitted.
The evidence conclusively established several respects in which Mortgages did not act equitably and was significantly responsible for both the financial losses and for the priority conflict with the contractors. The facts also establish that Mortgages could have provided notice sufficient to avoid the contractors from being taken advantage of, while at the same time the facts establish there was nothing the contractors could have done to avoid the losses, the priority conflict, or to give better public notice of their claimed interests. And the facts established that Mortgages would be unjustly enriched if equitable subrogation were applied, rather than the remedy being necessary for Mortgages’ benefit to avoid the unjust enrichment of the contractors.
First, Mortgages knew and understood that it was making a “broken priority” loan in May, 2007. It then knew that “the labor” on the renovation of the Hotel Monroe had already begun, so it knew that all of the contractors and subcontractors had lien rights with a priority senior to the Mortgages deed of trust that was granted and recorded when the May, 2007 loan was made. While it attempted to protect itself with both title insurance and indemnity agreements, Mortgages did absolutely nothing to give any notice to the subcontractors that it would assert a priority ahead of them, based on a theory of subro-gation.
Mortgages’ only defense of this inequitable conduct is that the Arizona courts have held that the mere obtaining of insurance *310does not disqualify a lender from equitable subrogation, and that lack of notice of potentially intervening liens is not required.39 While that is correct, it does not excuse someone who actually has notice not only of the conflicting lienholder’s claim to priority but also that the conflicting lienholder was continuing to advance additional value from failing to give public notice that it would seek to defeat that priority by asserting equitable subrogation. In none of the cases that Mortgages relies on in defense of its inaction was the conflicting lienholder continuing to advance value. It is not merely the fact that Mortgages took steps to protect itself that was inequitable; it was that was in a unique position to advise the subcontractors of their risk, and failed to do so. Indeed, the uncontradicted testimony was that it is common for lenders in such situations to specifically request subordinations from the contractors and subcontractors, which would have put them on notice of the risk, and yet Mortgages did not follow this customary practice.
Similarly, Mortgages did not give any public notice, when it recorded its own mortgage or when it released the prior Choice Bank deed of trust, that it would assert a priority based on that same deed of trust that it caused to be released of public record. The Restatement specifically authorizes the giving of such notice,40 and yet Mortgages made absolutely no effort to provide such notice to anyone, despite its acute awareness of the problem. Indeed, it was the only party fully aware of the magnitude of the looming problem, because it was the only party who understood that it did not have the funds that it committed to lend to finance the construction. All other parties, and particularly the contractors, were entitled to rely on the public record that reflected a $75 million deed of trust, which everyone was entitled to assume would provide sufficient funds to pay for the construction. While it is true that the evidence established that neither KGM nor Summit checked that public record, there is no dispute that they knew of and relied on Mortgages’ financing. Indeed, when there were serious delays in funding Summit’s draws, Mr. Markham arranged for Scott Coles to visit the site personally, hoping to expedite Mortgages’ funding of the draws by convincing him the work was proceeding apace and value being added to Mortgages’ collateral.
More significantly, Mortgages gave no notice when it foreclosed its deed of trust that was effectively also foreclosing its belatedly-claimed rights under one or two prior deeds of trust.
On these facts there is unique significance to the lender’s failure to give notice of its claims and intentions. In most eases of equitable subrogation, all of the money that has been lent is already out the door. Neither of the contending parties could have done anything to mitigate their losses. Here, however, the contractors continued to incur more debt, and continued to improve Mortgages’ collateral, while the public record led them to believe they had priority over the Mort*311gages deed of trust. The contractors could have protected themselves, much like Mortgages attempted to do, by requiring the owner to post a payment bond or letter of credit to ensure they were paid. Or they could have insisted that the construction draw account be fully funded and deposited into an escrow to which they were parties. Of course that would have quickly revealed that Mortgages did not have the money to fund its promised loan, but then the contractors could have ceased work and cut their losses; instead, Mortgages’ silence led them on, to their detriment and to Mortgages’ advantage. “Equity aids the vigilant, not those who slumber on their rights.”41
The Restatement, which is now the law in Arizona, specifically recognizes that this kind of delay in asserting subrogation is the primary cause for courts to find that injustice would result and therefore deny subrogation.42 And the Restatement illustrates this situation by reference to a mechanics’ lienholder who continues construction while the payor/mortgagee delays assertion of its claim to equitable subrogation.43
But most significantly of all, the loss to the contractors was, on all the facts established by the evidence, occasioned entirely by Mortgages’ failure to fund the loan to which it had committed. There is no reason to conclude or even assume, on the facts and evidence, that the subcontractors would not have been fully paid if Mortgages had fully funded the loan to which it committed. There was, for example, no evidence that the construction was turning out to be more expensive that predicted, or would cost more than the loan amount to which Mortgages had committed. Consequently on these facts the court must conclude that the subcontractors would have been fully paid if Mortgages had fully funded its loan. Denying equitable subro-gation would permit the subcontractors to recover some, but not all, that they are owed. They will still suffer substantial losses. But they certainly will not be enriched, unjustly or otherwise, compared to what they would and should have been paid if Mortgages had not breached its loan commitment and withdrawn funds from the construction loan account. They would only be paid what they were owed, but not enriched.
Mortgages has cited no case, and the Court has not located any authority, that would extend equitable subrogation to a breaching lender, and certainly not to a lender whose promised but unfulfilled loan was instrumental in inducing the investment of labor and materials by the party with the superior record lien.
Moreover, the facts are undisputed that Mortgages’ benefited itself at the expense of the contractors. First, it paid itself *312more than $5.4 million from the initial loan funding, when it was already on notice that it would likely not be able to raise all the money it had committed to lend. Then it “borrowed” back $2.5 million of the funds it had already advanced (and did so without any notice to the contractors), and then failed to refund those amounts on demand as it had committed to do. And as the well was running completely dry, it took another $1.3 million from the account in the last two months, when it knew it could not fund as much as a tenth of the draws that it had approved. Mortgages has already been unjustly enriched by more than $9 million it received from a loan that it did not fully perform. Mortgages only response to that analysis is to note that the contractors had no direct contract with Mortgages. But the whole purpose of the law of unjust enrichment is to provide a just remedy when there is no contract, so it is no defense to an unjust enrichment analysis to argue there was no direct contractual obligations. And in any event it is Mortgages’ burden to prove that the court must grant it an equitable remedy that is necessary to avoid unjust enrichment of the contractors, which Mortgages can hardly do when it has already been unjustly enriched at the expense of the contractors.
Mortgages also attempts to defend against this analysis by arguing that its investors — those who advanced money to fund the small portion of the loan that was funded, most of which came back to Mortgages’ pockets — had no obligation to the contractors, or indeed to anyone, to fund the balance. While that may be true, it is entirely irrelevant. Mortgages’ investors can claim no greater rights than Mortgages,44 so if Mortgages cannot carry its burden of proving that equitable subro-gation is necessary to prevent the unjust enrichment of the contractors, neither can its investors.
CONCLUSION
On these facts, equitable subrogation is not necessary to prevent unjust enrichment of the contractors and subcontractors. To the contrary, even without equitable subrogation, the contractors will be paid far less than they are justly entitled to receive for their work, and it is entirely just and proper that Mortgages should bear a substantial portion of their loss, for which it is largely responsible in at least an equitable sense. The contractors and subcontractors are therefore entitled to a lien priority dating from October, 2005, and Mortgages is entitled only to the priority dating from the recordation of its deed of trust on May 16, 2007.
Because that concludes the lien priority dispute, this adversary proceeding is remanded to Maricopa County Superior Court pursuant to this Court’s order of September 10, 2009.
. A.R.S. § 33-992(A).
. Wylie v. Douglas Lumber Co., 39 Ariz. 511, 8 P.2d 256, 259 (1932).
. Wahl v. Sw. Sav. & Loan Ass’n, 106 Ariz. 381, 476 P.2d 836 (1970).
. Wooldridge Const. Co. v. First Nat. Bank of Ariz., 130 Ariz. 86, 634 P.2d 13, 19-20 (1981).
. Jeffrey C. Stone, Inc. d/b/a Summit Builders v. Cent. and Monroe, LLC (In re Mortgages Ltd.), 459 B.R. 739, 745-46 (Bankr.D.Ariz.2011).
. Allied Contract Buyers v. Lucero Contracting Co., 13 Ariz.App. 315, 476 P.2d 521 (1970).
. In re Mayer Cent. Bldg. Corp., 275 F.Supp. 873 (D.Ariz.1967).
. Wooldridge, 634 P.2d at 20 (emphasis in original).
. Wylie v. Douglas Lumber Co., 39 Ariz. 511, 8 P.2d 256, 259 (1932).
. Id.
. Id. at 258-59 (quoting Simons Brick Co. v. Hetzel, 72 Cal.App. 1, 236 P. 357, 359 (1925)).
. Wylie, 8 P.2d at 260.
. Id.
. Wahl v. Sw. Sav. & Loan Ass’n, 106 Ariz. 381, 476 P.2d 836 (1970).
. Id. at 840.
. Wooldridge Const. Co. v. First Nat. Bank of Ariz., 130 Ariz. 86, 634 P.2d 13, 19-20 (App.1981).
. Id. at 20.
. Wylie, 8 P.2d at 259.
. K. & K. Brick Co. v. Brooke, 118 Cal.App. 192, 5 P.2d 49, 50-51 (1931); Charles Evans Goulden, et al., California Mechanics’ Liens, 51 Cal. L.Rev. 331, 341 n. 74 (1963) ("Prior to a change of law in 1931, the lien dated from the time the claimant did his work, if he did such work pursuant to a separate contact as opposed to a general contract.”) (citation omitted).
. The Court notes that the current version of the California Statute expressing the priority of a mechanics’ lien is found at Cal. Civil Code § 8450 (2012). Pursuant to the historical notes for this statute, the section was renumbered by the 2010 additions, which became effective July 1, 2012. The current version is a restatement of former Cal. Civil Code § 3134 (1969) without substantive change.
. Allied Contract Buyers v. Lucero Contracting Co., 13 Ariz.App. 315, 476 P.2d 521, 522-23 (1970).
. In re Mayer Cent. Bldg. Corp., 275 F.Supp. 873 (D.Ariz.1967).
. United Cal. Bank v. The Prudential Ins. Co. of Am., 140 Ariz. 238, 681 P.2d 390 (App.1983).
. Id. at 398.
. Id. at 401.
. “Under the statutory interpretive principle of expressio unius est exclusio alterius, when the legislature makes a requirement in one *307provision of the statute but does not include it in another, we assume the absence of the requirement was intentional.” Sharpe v. Arizona Health Care Cost Containment Sys., 220 Ariz. 488, 207 P.3d 741, 749 (App.2009) (quoting Luchanski v. Congrove, 193 Ariz. 176, 971 P.2d 636, 639 (App.1998)).
. "[W]e must avoid interpreting a statute so as to render any of its language mere ‘sur-plusage,’ but rather, must give meaning to 'each word, phrase, clause, and sentence ... so that no part of the statute will be void, inert, redundant, or trivial.’ ” Sharpe, 207 P.3d at 749 (quoting Herman v. City of Tucson, 197 Ariz. 430, 4 P.3d 973, 979 (App.1999)).
. A.R.S. § 33-992(E) (emphasis added).
. S.K. Drywall, Inc. v. Developers Fin. Group, Inc., 169 Ariz. 345, 819 P.2d 931 (1991).
. A.R.S. § 33-993(A). At the time of S.K. Drywall, this time period was sixty days. 819 P.2d at 934. The 1998 amendments to the statute changed the time period from sixty days to one hundred twenty days. The statute further provides that if a notice of completion has been recorded, the person claiming the benefits of the statute must file their lien within sixty days after recordation of such notice. A lien is filed by recording a notice and claim of lien with the county recorder and serving the notice and claim of lien on the owner, if the owner can be found within the county.
. S.K. Drywall, 819 P.2d at 934.
. Jeffrey C. Stone, Inc. d/b/a Summit Builders v. Cent. and Monroe, LLC (In re Mortgages Ltd.), 459 B.R. 739, 741-44 (Bankr.D.Ariz.2011).
. Sourcecorp, Inc. v. Norcutt, 229 Ariz. 270, *309274 P.3d 1204 (2012).
. Id. at 1209, ¶ 21.
. E.g., Lamb Excavation, Inc. v. Chase Manhattan Mortg. Corp., 208 Ariz. 478, 95 P.3d 542, 546, ¶ 13 (App.2004); Peterman-Donnelly Engr’s & Contractors Corp. v. First Nat'l Bank of Ariz., 2 Ariz.App. 321, 408 P.2d 841, 845-46 (1965).
. Restatement (Third) of Property: Mortgages § 7.6(a) (1997) ("Restatement”).
. Sourcecorp, 274 P.3d at 1210, ¶ 27 (quoting Restatement § 7.6(a) (emphasis supplied by Arizona Supreme Court)).
. Id. at ¶ 29.
. "[Tjhere is no general requirement that a person seeking subrogation lack notice in order to obtain equitable relief.... We also agree with the court of appeals that it would be anomalous to deny equitable subrogation merely because a party had been diligent in obtaining title insurance.” Id.., at 1209, ¶ 24.
. "After performing the obligation [that the owner owed to Choice Bank], the subrogee [Mortgages] is entitled to receive upon request a formal written assignment of these [Choice Bank's] rights. Such an assignment may be placed in the public records and may be helpful in ensuring that others recognize the subrogee’s [Mortgages’ claimed] rights.” Restatement § 7.6, cmt. a.
. Irwin v. Pac. Am. Life Ins. Co., 10 Ariz.App. 196, 457 P.2d 736, 741 (1969).
. “Since the purpose of subrogation is to prevent unjust enrichment, it will not be granted where it would produce injustice. In virtually all cases in which injustice is found, it flows from a delay by the payor in recording his or her new mortgage, in demanding and recording a written assignment, or in otherwise publicly asserting subrogation to the mortgage paid. The delay may lead the holder of an intervening interest to take detrimental action in the belief that that interest now has priority.... Even if the payor's mortgage is recorded immediately, prejudice to the holder of a junior interest can arise if the payor delays in making a demand for subrogation to that holder or seeking subro-gation in the courts.” Restatement § 7.6, cmt. f.
.Id., Illustration 30. The notes specifically indicate that Illustration 30 is based in part on the Arizona case of Peterman-Donnelly Engr's & Contractors Corp. v. First Nat’l Bank of Ariz., 2 Ariz.App. 321, 408 P.2d 841 (1965).
. An assignee of a note and deed of trust takes only the rights and remedies of the assignor. Cal X-Tra v. W.V.S.V. Holdings, LLC, 229 Ariz. 377, 276 P.3d 11, 31 (App. 2012) (citing Hunnicutt Constr., Inc. v. Stewart Title & Trust of Tucson Trust No. 3496, 187 Ariz. 301, 928 P.2d 725, 728 (App.1996)). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495310/ | MEMORANDUM DECISION1
LAURA S. TAYLOR, Bankruptcy Judge.
In 2004, Chase Manhattan Bank, USA, N.A. (“Chase”) initiated this adversary proceeding. The underlying facts are set out in numerous prior decisions including, most recently, a Ninth Circuit decision decided adversely to Chase. See Chase Manhattan Bank, USA, Inc. v. Taxel (In re Deuel), 594 F.3d 1073 (9th Cir.2010). In briefest summary, Chase extended a loan to debtor Jill Deuel (“Debtor”) and her non-filing, now former spouse, Will Deuel,2 and the Deuels used the loan proceeds, in part, to repay Chase on account of a previous loan. The Debtor executed and delivered a trust deed in order to collateralize the new loan (the “New Trust Deed”), and Chase reconveyed the trust deed securing the note evidencing the pri- or loan. What Chase inexplicably failed to do was record the New Trust Deed.
The Debtor filed her bankruptcy case and scheduled the Chase obligation as a secured claim. Chase, knowing better, initiated this adversary proceeding (the “Chase Adversary”) to quiet title to the property and to obtain a declaratory judgment that the New Trust Deed, notwithstanding its lack of perfection through recordation, constituted a senior lien enforceable against the Debtor, a junior lienholder HOA, and the Trustee.
Chase initially fared well. The Trustee filed a motion under Federal Rule of Civil Procedure 12(b)(6) requesting that the Court dismiss the Chase Adversary without prejudice and requesting, in the alternative, that the Court grant it summary judgment. The Trustee based his defenses squarely on section 5443 and his strong arm powers. The Trustee argued that the New Trust Deed was subject to set aside as a result of its unperfected status. Chase countered arguing that the New Trust Deed was entitled to enforcement and priority, notwithstanding section 544, based either on alleged constructive or inquiry notice4 provided to the Trustee by the Debtor’s schedules or based on principles of equitable subrogation. This Court, the Honorable John J. Hargrove presiding, agreed with Chase.
Chase’s victory, however, was brief. The Bankruptcy Appellate Panel reversed and the Ninth Circuit thereafter affirmed. Chase attempted Supreme Court review, but the Supreme Court rejected its writ of certiorari.
As a result, the final non-appealable determination in the Chase Adversary was *327that the New Trust Deed was subject to set aside under section 544. Thus, Chase’s claims for declaratory relief and quiet title failed.
The judge currently presiding in this matter became involved in 2008. For most of the years since then, her involvement has consisted of status conferences and monitoring of the initial decision’s path through the appellate system. More recently, however, the parties requested that the Court decide those issues lingering after a decision on the merits. The Court previously determined that the Trustee was entitled to interest at the federal judgment rate on his recovery from Chase of the value of the avoided New Trust Deed. See Adv. Dkt. # 131. The bigger issue, at least, in terms of the amount at issue, however, is whether Chase must also pay the Trustee’s attorneys’ fees. As discussed hereafter, the Court, while extremely sympathetic to the Trustee’s travails in connection with this matter, finds that the parties must pay their own attorneys’ fees.
STANDARDS.
Under the American Rule, each party ordinarily must pay its own attorneys’ fees unless a contract or a statute provides otherwise. Fry v. Dinan (In re Dinan), 448 B.R. 775, 784 (9th Cir. BAP 2011); Cargill, Inc. v. Souza, 201 Cal.App.4th 962, 966, 134 Cal.Rptr.3d 39 (2011). Consistent with the American Rule, the Bankruptcy Code does not provide a general right to attorneys’ fees recovery by a successful litigant. Fry, 448 B.R. at 784. Instead, except for the limited areas where the Bankruptcy Code expressly allows fee recovery, a bankruptcy court awards fees arising in an adversary proceeding filed in a bankruptcy case only when the party requesting fees would be able to recover the fees outside of bankruptcy under state or federal law. Id. at 785. The parties agree that the resolution of this fee dispute requires application of California law.
In California, a determination of fee entitlement begins with a consideration of CCP Section 1032. CCP Section 1032 provides, in subdivision (b), that: “[ejxcept as otherwise expressly provided by statute, a prevailing party is entitled as a matter of right to recover costs in any action or proceeding.” Santisas v. Goodin, 17 Cal.4th 599, 606, 71 Cal.Rptr.2d 830, 951 P.2d 399 (1998). CCP Section 1033.5(a)(10) then provides that attorneys’ fees are allowable as costs under CCP Section 1032 when fee recovery is authorized by either contract, statute, or other law. Thus under California law, recoverable litigation costs can include attorneys’ fees, but only when the party requesting costs has a legal basis, independent of the cost statutes and grounded in an agreement, statute, or other law, upon which to claim recovery of attorneys’ fees. Id. at 606, 71 Cal.Rptr.2d 830, 951 P.2d 399. Where a party claims a right to recover attorneys’ fees based on a contract, the claiming party typically must first establish the existence of a valid enforceable agreement that contains an attorneys’ fees provision, and then must establish that the provision entitles recovery of attorneys’ fees under the particular circumstances of the litigation. Id. at 607, 71 Cal.Rptr.2d 830, 951 P.2d 399.
Absent contractual language providing otherwise, a contract providing for attorneys’ fees to be awarded to a contracting party does not typically apply to a non-signatory party. See Cargill, 201 Cal.App.4th at 966 & 968-969, 134 Cal.Rptr.3d 39. However, a non-signatory party may be entitled to contractual attorneys’ fees for litigation in which “the non-signatory party ‘stands in the shoes of a party to the contract.’ ” Id. at 966, 134 Cal.Rptr.3d 39 *328(citation omitted). That is, if the non-signatory party sues or is sued “as if he were a party” to the contract containing the attorneys’ fees provision, the prevailing party may be entitled to an award of fees. Reynolds Metals Co. v. Alperson, 25 Cal.3d 124, 127-128, 158 Cal.Rptr. 1, 599 P.2d 83 (1979) (non-signatory party who was sued as alter ego of signatory party entitled to contractual attorneys’ fees); Cargill, 201 Cal.App.4th at 966-970, 134 Cal.Rptr.3d 39 (third party beneficiary of contracting party entitled to attorneys’ fees); Exarhos v. Exarhos, 159 Cal.App.4th 898, 900 & 903-908, 72 Cal.Rptr.3d 409 (2008) (non-signatory party who sued as deceased contracting party’s successor in interest required to pay contractual attorneys’ fees); California Wholesale Material Supply, Inc. v. Norm Wilson & Sons, Inc., 96 Cal.App.4th 598, 601 & 608, 117 Cal.Rptr .2d 390 (2002) (non-signatory party who brought action based on assignment of contract rights from signatory party required to pay contractual attorneys’ fees). Also, a chapter 7 trustee in a debtor’s bankruptcy case succeeds to all rights of the debtor under its contract and, thus, is entitled to assert the debtor’s contractual right to recover attorneys’ fees. 11 U.S.C. § 541(a)(1).
In any action on a contract, where a contractual provision provides a right to attorneys’ fees recovery to one party, but not to the other, CC Section 1717 ensures mutuality. Santisas, 17 Cal.4th at 611, 71 Cal.Rptr.2d 830, 951 P.2d 399. CC Section 1717 states that: “[i]n any action on a contract, where the contract specifically provides that attorney’s fees and costs, which are incurred to enforce that contract, shall be awarded either to one of the parties or to the prevailing party, [the prevailing party] on the contract, whether he or she is the party specified in the contract or not, shall be entitled to reasonable attorneys’ fees.” Cal. Civ.Code § 1717(a). CC Section 1717, thus, allows recovery of attorneys’ fees by whichever contracting party prevails in a contract enforcement action, whether the prevailing party is the party specified in the contract or not. Santisas, 17 Cal.4th at 611, 71 Cal.Rptr.2d 830, 951 P.2d 399 (citation omitted). CC Section 1717 applies, however, only to actions that contain at least one contract claim. Id. at 615, 71 Cal.Rptr.2d 830, 951 P.2d 399 (citation omitted). The action must be “on the contract” and the party must prevail “on the contract.”
If an action asserts both contract and tort or other noncontract claims, CC Section 1717 generally applies only to the attorneys’ fees incurred in litigating the contract claims. Id. (citation omitted). Thus, where a complaint does not contain a breach of contract claim, but is based solely on other theories, CC Section 1717 is not applicable. Redwood Theaters, Inc. v. Davison (In re Davison), 289 B.R. 716, 724 (9th Cir. BAP 2003). In Davison, the debtor prevailed on a nondischargeability action based solely on fraud, and sought recovery of attorneys’ fees based on CC Section 1717 and CCP Section 1021, and a provision in an agreement between the debtor and the complaining creditor that allowed attorneys’ fees to the prevailing party in “any action at law or in equity” if it was “to enforce or to interpret” the terms of the agreement. Id. at 725. The Panel determined that the bankruptcy court was not “enforcing or interpreting the terms of the Agreement” when it decided the fraud claim and that the debtor was not entitled to attorneys’ fees under the agreement. Id.; see also Terra Nova Industries, Inc. v. Chen (In re Chen), 345 B.R. 197 (N.D.Cal.2006) (debtor was not entitled to attorneys’ fees under CC Section 1717 based on a contract provision allowing fees to the prevailing party “to enforce the rights under the agreement”, where the court did not interpret or enforce any particular provision of the contract in the underlying tort judgment).
*329Nonetheless, if a contractual attorneys’ fees provision is phrased broadly enough, it may support an award of attorneys’ fees in actions unrelated to the contract; parties may validly agree that the prevailing party will be awarded attorneys’ fees incurred in any litigation between themselves, whether such litigation sounds in tort or in contract. Id. at 608, 71 Cal.Rptr.2d 830, 951 P.2d 399 (citation omitted).
DISCUSSION.
A. The Trustee Is Not Entitled To Attorneys’ Fees Based On Estoppel.
The Trustee argues that the estate is entitled to recover attorneys’ fees based on principles of estoppel. He argues first that Chase unequivocally demanded attorneys’ fees in its complaint and in the bankruptcy court’s order and judgment. He, thereafter, argues generally and generically that estoppel applies. The Court determines that these arguments fail.
1. Chase Did Not Unequivocally Request Attorneys’ Fees In Its Complaint Or In Its Order And Judgment.
Contrary to the Trustee’s assertion, Chase did not unequivocally state that it was entitled to attorneys’ fees in any of its complaint, order, or judgment. In the complaint, Chase’s prayer for relief requested: “Reasonable attorneys (sic) fees, if appropriate.” Adv. Dkt. # 1 at 5:14. Chase’s Order Denying Defendants’ Motion To Dismiss/Summary Judgment And Granting Plaintiffs Cross-Motion For Summary Judgment included an award of: “... cost of suit and, if allowed by law, reasonable attorneys’ fees.” Adv. Dkt. # 35 at 3:6-7. Finally, Chase’s Judgment on Plaintiffs Cross-Motion For Summary Judgment included an award identical to that included in the order. Adv. Dkt. # 45 at 2:20-21. Such language falls far short of an admission that attorneys’ fees were available to Chase under its contract with the Debtor in relation to this adversary proceeding. Instead, the language is suggestive of a not unreasonable desire to keep the possibility of fee recovery open.
The Court notes that inclusion of an attorneys’ fees request in a complaint and in a judgment is the rule rather than the exception. Attorneys appear to somewhat reflexively include this language. This Court is not alone in this observation. See Goldbaum v. The Regents of the University of California, 191 Cal.App.4th 703, 716, 119 Cal.Rptr.3d 664 (2011) (“many pleadings include a prayer for attorneys’ fees out of an abundance of caution, and a mere prayer for fees is an insufficient ground for an award of fees to the opposing party under a reciprocal fee statute”). Here, however, Chase actually qualified the request and never expressly based the request on its contract, even though the dispute arose in relation to and in the context of contracts that contain attorneys’ fees provisions.
The Trustee does not support his argument that such conditioned language es-tops Chase from arguing that attorneys’ fees are unavailable to the Trustee. This Court determines that Chase’s abundance of caution and conditional fee request falls far short of a specific admission that attorneys’ fees are available under any theory. As a result, the Trustee’s estoppel argument fails to the extent based on this argument.
2. To The Extent The Estoppel Theory Has A Continuing Support In California Case Law, Such Support Is Dwindling, And This Court Will Follow More Recent Law Affirming That Estoppel Does Not Support An Attorneys’ Fees Request.
In Pas v. Hill, a California Court of Appeal suggested in dicta that equitable *330estoppel could form the basis for a fee award where a party alleges and attempts to prove that the other party would be obligated to pay fees pursuant to a contractual attorneys’ fees provision. 87 Cal.App.3d 521, 535-36, 151 Cal.Rptr. 98 (1978). In a later decision, the same Court of Appeal acknowledged that equitable es-toppel might provide a path to fee recovery, but chose a different one. Saucedo v. Mercury Sav. & Loan Assn., 111 Cal.App.3d 309, 310-315, 168 Cal.Rptr. 552 (1980). Other decisions provide some support for the theory that merely claiming fees supports the opposing party’s fee recovery request when it prevails. See, e.g., International Billing Services, Inc. v. Emigh, 84 Cal.App.4th 1175, 1189, 101 Cal.Rptr.2d 532 (2000) (discussion of estoppel theory; court notes that a pleader should not be able to threaten another party with a fee award and then avoid a fee award if unsuccessful); see also Manier v. Anaheim Business Center Co., 161 Cal.App.3d 503, 505-507, 207 Cal.Rptr. 508 (1984) (fees awarded in relation to breach of contract and specific performance claims notwithstanding that court determined that a contract did not exist); Jones v. Drain, 149 Cal.App.3d 484, 489, 196 Cal.Rptr. 827 (1983) (fees awarded to defendant on breach of contract action where defendant prevailed in establishing that a contract did not exist); but see M. Perez Co. v. Base Camp Condominiums Assn. No. One, 111 Cal.App.4th 456, 464-69, 3 Cal.Rptr.3d 563 (2003) (International Billing’s reliance on estoppel theory repudiated).
Estoppel theory states: “If one merely alleges a right to recover attorneys’ fees one is estopped from contending that he or she could not recover them if the other party prevails and claims attorneys’ fees.” Sessions Payroll Management, Inc. v. Noble Construction Co., 84 Cal.App.4th 671, 681, 101 Cal.Rptr.2d 127 (2000), citing Leach v. Home Sav. & Loan Assn., 185 Cal.App.3d 1295, 1306, 230 Cal.Rptr. 553 (1986). The Leach court rejected estoppel theory noting that the case that originated the theory had since been overturned. 185 Cal.App.3d at 1306, 230 Cal.Rptr. 553. Sessions similarly rejects the theory and cites numerous other cases which found estoppel theory wanting as a basis for fee recovery.
The Court determines that the es-toppel theory is an inappropriate vehicle for shifting liability for attorneys’ fees in any event and particularly so given the equivocal nature of the attorneys’ fees “demand” and “award” in this case. Instead, attorneys’ fees, if awarded, must be otherwise recoverable by contract, statute, or at law.
This Court finds compelling those California decisions that firmly reject estoppel theory. See Blickman Turkus, L.P. v. M.F. Downtown Sunnyvale, LLC, 162 Cal.App.4th 858, 898-900, 76 Cal.Rptr.3d 325 (2008). Blickman Turkus provides an overview of the attorneys’ fees estoppel theory and a clear catalog of its infirmities. The Court cannot improve on the Blick-man Turkus analysis; it is compelling. Key points that persuade the Court that the estoppel theory is not applicable include: (1) the fact that merely praying for a relief to which one is not entitled cannot ordinarily engender reliance or detriment giving rise to estoppel; (2) that a prayer for relief is not the kind of fraud on the court to which the doctrine of judicial es-toppel is directed. If it was, then theoretically all or most losing parties would be guilty of fraud on the court in connection with unsuccessful legal actions; (3) more specifically, the inclusion of an attorneys’ fees request is not sufficient to justify an equitable award of attorneys’ fees. If it were, then the prayer for millions of dol*331lars in damages in an unsuccessful complaint would correctly be the basis for fee shifting. There is no need to treat a fee request differently than the other prayers for relief in a complaint; and (4) finally, no California statute authorizes attorneys’ fees recovery when neither party would otherwise be entitled to fee recovery. Id.
In Goldbaum, the Fourth Appellate District California Court of Appeal also expressly rejected the estoppel theory. See 191 Cal.App.4th at 715-716, 119 Cal.Rptr.3d 664. As this Court of Appeal authored the initial case law in this area, the clear denunciation of the doctrine in Goldbaum is instructive.
In short, estoppel theory does not form a basis for a fee award here; it is of dubious legitimacy in all cases and its application is particularly inapt here given the qualified nature of the fee request.
B. The Trustee Is Not Entitled To Contractual Attorneys’ Fees.
Chase initiated this adversary proceeding through the filing of an eight page complaint that consisted of a quiet title action and a declaratory judgment action. The request for relief requested confirmation that Chase’s deed of trust was a lien against the property as of September 4, 2002 and that this lien was senior to the rights of the defendants. The complaint attached the relevant deed of trust at Exhibit 8.
The deed of trust included language providing that Chase: “may charge borrower fees ... for the purpose of protecting lenders’ interest in the property and rights under this Security Instrument, including, but not limited to, attorneys’ fees.” It also included a provision that Chase could add to the amounts due on its note, attorneys’ fees incurred if “there is a legal proceeding that might significantly affect Lender’s interest in the Property and/or rights under this Security Instrument (such as a proceeding in bankruptcy, ... for enforcement of a hen which may attain priority over this Security Instrument ... Lender may do and pay for whatever is reasonable or appropriate to protect Lender’s interest in the Property and rights under this Security Instrument, including ... (b) appearing in court; and (c) paying reasonable attorneys’ fees to protect its interest ... including its secured position in a bankruptcy proceeding.” This provision goes on to state that; “[any] amounts disbursed by Lender under this Section 9 shall become additional debt of the borrower.” The language is broad and facially suggestive of Chase’s right to recover attorneys’ fees here. In the final analysis, however, the Court determines that neither Chase nor the Debtor would be entitled to contractual attorneys’ fees as a prevailing party and that the Chase Adversary did not involve a claim “on a contract.” As these are the critical inquires under California law, the Trustee’s request for attorneys’ fees must fail.
1. The Trustee Did Not Prevail Based On Contractual Rights Held By The Debtor.
As the Trustee correctly notes, the Trustee exercises all rights of the Debtor and can assert all claims of the Debtor in connection with this ease. Thus, to the extent the Trustee were asserting a claim of the Debtor under a relevant contract, the Trustee’s attorneys’ fees argument could have merit. The Trustee, however, does not assert such claims here.
The Trustee’s arguments as to the breadth, depth, and wide extent of the *332Debtor claims that he controls under section 541 cannot disguise the fact that the Trustee does not assert any claims held by the Debtor in connection with the Chase Adversary. The Trustee responded to the complaint under rules 7012 and 7056 seeking either dismissal with prejudice or summary judgment in his favor on the Chase complaint. The Trustee’s position was clearly set forth in the motion where he stated “... the Trustee’s rights are superi- or to the unrecorded and unperfected claimed lien of the Plaintiff pursuant to the provisions of Section 544 of Title 11 of the United States Code.” Dkt. # 5 at 2:18-20. Consistent with this characterization, the Ninth Circuit described this dispute as follows:
We address the “strong-arm power” of the bankruptcy trustee under 11 U.S.C. § 544(a)(3) and in the context of an unrecorded deed of trust. The question comes down to whether a bona fide purchaser for value without notice can take ahead of an unrecorded lien, and once the question is put that way, the answer is obviously “yes.” Dkt. # 82 at 2:2-23.5
Here the Trustee stood in the shoes of a bona fide purchaser for value without notice and asserted claims arising under section 544 of the Bankruptcy Code. He did not assert any rights of the Debtor under the note, trust deed, or other contract. The New Trust Deed was attached to the complaint to provide context for a request that the unrecorded New Trust Deed be entitled to priority as of a date certain. The Trustee correctly disputed this assertion based on his hypothetical bona fide purchaser rights and the Bankruptcy Code, not under the contract. Neither the Bankruptcy Code nor section 544 independently allow attorneys’ fees recovery. See In re Seaway Express Corp., 105 B.R. 28, 32 (9th Cir. BAP 1989), aff'd 912 F.2d 1125 (9th Cir.1990). Where the Trustee asserts bona fide purchaser rights rather than rights under the contract, the contract’s terms, including its attorneys’ fees provisions, typically are irrelevant. And that is certainly the case here.
2. Chase Asserted Claims In The Context of A Contract — Not Based On A Contract.
Had Chase attempted to require the Debtor or the Trustee to record the New Trust Deed, to execute another trust deed, or to affirmatively take other steps to support the enforceability and priority of its lien based on provisions in its contracts with the Debtor, and had the Trustee defended against this position, the prevailing party could rely on a contractual attorneys’ fees provision. In such a case, the action would be squarely on the contract. Here, however, Chase merely requested a determination that the unrecorded lien had priority.
While it attached contracts to its complaint Chase did not assert any claim based on the provisions of contracts, and the existence of these contracts was undisputed. The Chase Adversary never required contractual interpretation or enforcement. Thus, the Chase Adversary involved a contract, but was not an action on a contract within the meaning of CC Section 1717. Chase based its priority arguments on equitable subrogation and on a notice argument based on Professional Investment. The Trustee attacked Chase’s claim to a first priority secured claim based on section 544. This was litigation that involved a contract, but nothing *333more. Had the formal adjudication of this dispute been commenced by the Trustee’s section 544 complaint, it is unlikely that the Trustee would request contractual attorneys’ fees; and it is certain that they would not be recoverable. Such an action would arise under the Bankruptcy Code— not under a contract. The fact that the formal adjudication commenced as a quiet title and declaratory relief action does not change the analysis. The Trustee immediately asserted section 544 claims, and the Chase Adversary — notwithstanding its initiating complaint — was in substance a section 544 action.
3. Chase Was Not Entitled To Recover Its Fees.
Parties to a contract can, of course, expand contractual rights as they deem appropriate. The Court acknowledges that the language of the relevant trust deed is indeed broad. The question, however, becomes did the parties to this contract intend that Chase could recover from the Debtor if it successfully defended against the Trustee’s section 544 claims. In order for an attorneys’ fees provision to be enforceable pursuant to CC Section 1717 against the party not named in the contract, it must be one where the named party was entitled to fees if it were successful.
There are two ways that this theory must be examined. First, can the New Trust Deed be read to require that the Debtor pay or assume responsibility for attorneys’ fees that Chase incurs when Chase fails to perfect its lien through its own negligence and, as a result, must litigate with a third party — be it the Trustee in a bankruptcy or an actual bona fide purchaser for value. The New Trust Deed cannot be so interpreted.
The Court must interpret the New Trust Deed so as to make it, among other things, reasonable. See 1 Witkin Summary of Calif. Law (10th Ed. 2005) p. 840 § 750. It is reasonable that the Debtor would be responsible for Chase’s bankruptcy related legal fees incurred solely as a result of her decision to file a bankruptcy such as fees related to filing a proof of claim. It is, however, nonsensical to read the New Trust Deed as allowing Chase to recover fees necessitated only because Chase acted negligently.
Further, any ambiguity as to Chase’s ability to recover such fees from the Debt- or must be interpreted against Chase — the author of the New Trust Deed. Id. at p. 848 § 757. The New Trust Deed is a standard document prepared by Chase and used in consumer transactions. There is no doubt who had the superior bargaining power here, and this underscores the appropriateness of not interpreting the New Trust Deed to allow Chase to recover fees necessitated by its own negligence from the Debtor.
The second question is whether Chase could recover from the Debtor if forced to litigate with the Debtor as a result of its own negligent failure to enforce the contract. The Court finds this only slightly more probable. The Debtor had an obligation to provide security. To the extent Chase, through negligence or otherwise, failed to perfect its lien, however, the New Trust Deed does not clearly obligate the Debtor to take proactive steps to assist Chase in protecting and preserving its collateral. If such a contractual obligation does exist and if the Debtor resisted such a contractual obligation, Chase might correctly recover some quantum of attorneys’ fees notwithstanding its own negligence. But even then, the attorneys’ fees award *334would be closely scrutinized. Thus, while the Court finds that this is a possibility, the Court, again, finds it an inadequate basis for an award of fees here due to the fact that Chase did not advance any such theories. Chase did not assert any contractual rights whatsoever. Chase did not request any affirmative action on the part of the Debtor. Chase merely noted, as is conceded, that the Debtor previously signed a trust deed and intended thereby to collateralize the obligation to Chase. It requested that this Court determine the legal consequences of its failure to record the trust deed in a timely fashion. The Court does not find the attorneys’ fees language sufficiently broad to allow fee recovery by Chase had it prevailed in the Chase Adversary.
CONCLUSION.
Therefore, based on the foregoing, the Court concludes that the Trustee is not entitled to recovery his attorneys’ fees from Chase. Chase and the Trustee are ordered to meet and confer regarding a form of order that takes into account all prior rulings of this Court and that resolves any unresolved matters (or if open issues remain provides a timetable and method for resolution) so that finality, at least at the bankruptcy court level, can be achieved. This order should be submitted jointly by the parties within 14 days.
. This opinion is intended only to resolve the dispute between these parties and is not intended for publication.
. Through a separate related adversary proceeding, the Trustee obtained a judgment by default against Debtor’s former spouse which, in effect, brought the property against which Chase asserted its lien rights into the Debtor’s estate free of Mr. Deuel’s interest. See Adv. Proc. 07-90277. For ease of reference herein, the Court will refer to Chase’s borrower solely as the Debtor.
. Unless otherwise indicated, all chapter, section and rule references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532, and to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037. The Court will reference the California Civil Code and California Code of Civil Procedure as CC Section and CCP Section respectively.
. Chase based this argument on In re Professional Investment Properties of America, 955 F.2d 623, 629 (9th Cir.1992).
. Chase Manhattan Bank, 594 F.3d at 1075. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495311/ | THURMAN, Chief Judge.
This case involves dischargeability of a debt owed by an individual debtor based on breach of fiduciary duty by a limited liability company building contractor that debtor admitted he “controlled.”
I. BACKGROUND
In 2008, Appellee Hawks Holdings, LLC (“Hawks”) contracted with K2 Construction Company, LLC (“K2”) to build three homes on property Hawks owned near Santa Fe, New Mexico, for a contract price of more than $3.6 million. K2 was formed in 2007 as a New Mexico limited liability company, and held a general contractor’s license issued under the New Mexico Construction Industries Licensing Act (the “Contractors Act”).1 K2 neither completed the construction called for by the Hawks contract, nor paid all of the subcontractors and material suppliers that had contributed to the project. However, K2’s liability to Hawks is not at issue in this appeal.
The name “K2” was derived from debtor William Kalinowski’s nickname, “Kal,” and Karen Kalinowski (“Karen”), his sister-in-law. However, while Karen owned 51% of K2, William owned none of it. The remaining 49% of K2 was owned by Chris Ribas (30%) and the KIK Irrevocable Trust of 2007 (19%). Chris Ribas is a licensed contractor in the state of New Mexico, and was the “qualifying party” for issuance of K2’s contractor’s license.2
William and Karen, together with their respective spouses, separately filed for Chapter 7 bankruptcy relief in 2009. Hawks filed an adversary proceeding against William and Karen in their respee-*337tive bankruptcies, and the two adversary proceedings were consolidated into one. Based on the “defalcation while acting in a fiduciary capacity” exception to discharge, set forth in 11 U.S.C. § 523(a)(4),3 Hawks asserted that its claim was not subject to discharge in either William’s or Karen’s bankruptcy case.
Karen was listed as K2’s “sole manager” in its operating agreement and organizational minutes. William was not listed as a member or manager of K2, but was authorized to sign checks on its behalf. William also was not a licensed New Mexico contractor, but admitted that he was “significantly involved in the management of the day-to-day affairs of K2.” In fact, William negotiated the Hawks contract on K2’s behalf, and represented to Hawks that he “was personally responsible for getting the projects built and paid for through K2.” However, Karen signed the Hawks contract on behalf of K2. Karen and William routinely claimed to be co-owners and partners in several construction companies, and admitted that they consulted with each other and made joint decisions regarding K2’s operation and management. In addition, William told Hawks (and others) that he “controlled and managed” K2.
Hawks paid an initial deposit of nearly $364,000 to K2 pursuant to the parties’ contract. Significantly, some of the money that Hawks paid to K2 was then “pooled” into an account held by Fourteen Pueblos Construction Co., LLC (“14 Pueblos”), a company that William in fact controlled. Hawks periodically received and paid draw requests from K2 for work done on the project, but some of its payments were not used to pay for the work specified in the draw requests. Ultimately, K2 ceased work on the Hawks project. At that time, Hawks had paid a total of approximately $1,458,000 to K2. In addition, liens filed on Hawks’ property by subcontractors and suppliers that K2 had failed to pay totaled nearly $587,000.
Hawks sought judgments against both William and Karen in the bankruptcy court for claimed losses related to K2’s mismanagement of the construction project. On cross-motions for summary judgment, the bankruptcy court ruled that both William and Karen were liable to Hawks for its losses and, further, that Hawks’ claim against them could not be discharged in bankruptcy. The basis for the bankruptcy court’s ruling of non-dischargeability was that Hawks’ funds were required by statute to be held in trust by K2 and the trust had been mismanaged. Following a subsequently held evidentiary hearing on Hawks’ damages, the bankruptcy court entered final judgments against both Karen and William in the amount of $775,895.21 plus attorneys’ fees and determined they were non-dischargeable pursuant to § 523(a)(4). Only William appealed.
II. APPELLATE JURISDICTION
The bankruptcy court’s judgment, fully resolving the adversary proceeding, was entered on February 21, 2012. William timely filed a notice of appeal on March 6, 2012, and neither side elected to have this appeal heard by the New Mexico District Court. Therefore, this Court has appellate jurisdiction over this proceeding.4
III. ISSUES AND STANDARD OF REVIEW
The only issue in this appeal is whether the trial court properly deter*338mined that William’s debt to Hawks was for “defalcation while acting in a fiduciary capacity” and, therefore, non-dischargea-ble in bankruptcy.5 Applicability of the § 528(a)(4) exception to discharge, based on uncontested facts, is a legal determination that is reviewed on appeal de novo.6
IV. DISCUSSION
We begin by noting that the standard in bankruptcy cases generally is that “exceptions to discharge are to be narrowly construed, and because of the fresh start objectives of bankruptcy, doubt is to be resolved in the debtor’s favor.”7 Within that context, the fiduciary defalcation exception in § 523(a)(4) has been particularly constrained,8 and it is well settled in the Tenth Circuit that a qualifying fiduciary relationship “exists only where a debtor has been entrusted with money pursuant to an express or technical trust.”9 In addition, “the fiduciary relationship must be shown to exist prior to the creation of the debt in controversy.”10 Finally, the existence of a fiduciary relationship under § 523(a)(4) is ultimately a question of federal law, though state law obligations are certainly relevant to the inquiry.11
With these principles as our guide, we consider whether the bankruptcy court properly applied the fiduciary defalcation discharge exception to William Kalinowski. No express trust was alleged, so the plaintiffs claim that William was acting as a fiduciary depends upon the existence of a “technical trust.” Technical trusts are typically created by statute and, in this case, Hawks relied upon § 60-13-23(F) of the Contractors Act12 for the existence of a trust.
As the facts are uncontested, this Court is left with a straightforward legal determination of the technical trust’s applicability. The relevant portion of the state statute at issue reads:
Any [contractor’s] license issued by the division shall be revoked or suspended by the commission for any of the following causes:
F. conversion of funds or property received for prosecution or completion of a specific contract or for a specified pur*339pose in the prosecution or completion of any contract, obligation or purpose, as determined by a court of competent jurisdiction[.]13
The Tenth Circuit Court of Appeals has looked at a similar situation before. It held, in In re Romero, that the predecessor to this provision “clearly imposes a fiduciary duty upon contractors who have been advanced money pursuant to construction contracts.”14 The Romero court then held that the debtor, an individually licensed New Mexico contractor, was bound by the statutorily imposed technical trust, had violated that trust, and the debt incurred was therefore non-dischargeable under the Bankruptcy Code.
Relying heavily on In re Baines,15 William argues that any fiduciary duty imposed by the Contractors Act is not applicable to him, as he is not a contractor licensed by the state of New Mexico. The Baines case, like the present one, involved a construction contract between the plaintiff and a corporate licensee. However, in Baines, one of the two individual debtors, Robert Baines, was also the “qualifying party,” as that phrase is used in the New Mexico statute, for the company (and thus himself a licensee). The allegations made in Baines were similar to the ones made in this proceeding, and that court ruled as a matter of law that Robert Baines was a fiduciary under the current version of the Contractors Act pursuant to Romero.16 However, the court rejected applicability of the Contractors Act to Robert’s wife, Deann, stating:
Plaintiffs assert that Deann Baines, because of her connection to Building Unlimited, also served in a fiduciary capacity. But Deann Baines is not the qualifying party for the contractor’s license issued to Building Unlimited. The statute upon which Plaintiffs rely to create a technical trust and a consequent fiduciary duty within the meaning of 11 U.S.C. § 523(a)(4) applies to the “licensee or qualifying party of the licensee.” N.M.S.A. 1978 § 60-13-23(A)[.]17
*340Based on this language in Baines, William contends that the technical trust imposed by the Contractors Act is limited to “licensees and qualifying parties.” However, the Baines court relied on N.M. Stat. § 60-18-23(A) in discussing Deann’s liability, but the fiduciary defalcation claim against William was based on § 60-13-23(F), which contains no similarly limiting language.
More importantly, the evidence pertaining to Deann Baines was that although she owned 49% of the corporation and was a named officer, she neither negotiated the plaintiffs contract nor participated in either the planning or execution of construction.18 As such, Deann was subject to immunity under the well-established principle that corporate officers and shareholders cannot be held liable for the acts or debts of the corporation based on their status alone.19 Since there was no evidence that Deann participated in the conduct for which liability was imposed, she could not be held liable for that conduct simply because she was an officer and a shareholder. Therefore, the court’s statements regarding applicability of the Contractors Act to her were dicta.
In the present case, K2 was a Contractors Act licensee, as well as the party that contracted with Hawks. K2 was also the party that failed to finish the project, and that failed to properly handle and account for Hawks’ funds. Therefore, the fiduciary duty owed to Hawks under the Act was owed by K2. But our inquiry does not end there, as K2 was a statutorily created entity as a limited liability company (“LLC”), and is not the debtor in this case. An LLC is analogous to a corporation, but is owned by “members” rather than shareholders, and is run by “managers” rather than officers and directors.20 In bankruptcy filings, an LLC is treated as a corporation.21 Corporations are legal entities that are typically treated as “persons” under the law.22 However, a corporation can only operate through the individuals who perform its actions. Those individuals, typically owners, officers, directors, or managers of the corporation, are generally immunized from individual liability for the corporation’s debts.23 But that immunity is not unlimited, and does not extend to an individual’s own acts of wrongdoing.24
Thus, officers, directors, and shareholders of a corporation are routinely held responsible for the corporation’s liabilities where they “participated” in the corporation’s wrongful conduct. An analysis of the following decisions assists this Court in reviewing the personal liability of William here. First, the appeal of another bank*341ruptcy court case is illustrative. In In re Failing,25 the debtor owned an incorporated lending company that had contracted with the plaintiff for the exclusive right to obtain financing on its behalf. Pursuant to the contract, the plaintiff paid a $30,000 deposit, which the corporation agreed to keep in trust. Instead, the plaintiffs money was placed in the corporation’s general account. When no loan commitment was forthcoming, plaintiff requested that its deposit be returned. Despite repeated demands, the money was not returned, and plaintiff filed a state court action against both the corporation and the debtor, who then filed for bankruptcy relief. Plaintiff filed an adversary proceeding in the personal bankruptcy case relying, in part, on § 523(a)(4). The bankruptcy court found that the parties had created an express trust and that the plaintiff had been “cheated” out of its money by the corporation. However, it denied plaintiffs nondis-ehargeability claim against the company’s owner on the ground that plaintiff had failed to establish grounds to “pierce the corporate veil,” which it held was necessary to hold the debtor personally responsible.
On appeal, the bankruptcy court’s reasoning was determined to be erroneous:
Upon review of the record and the applicable law, the court finds that the bankruptcy court erred in concluding that [debtor] could not be held personally liable such that the exception to discharge set forth in 11 U.S.C. § 523(a)(4) did not apply.
This conclusion is supported by a number of decisions holding that the exception to discharge set forth in 11 U.S.C. § 523(a)(4) applies to corporate officers who directly participate in a fraud or defalcation of a creditor even if such officers are acting in the scope of their employment and even if the corporation rather than the individual officer is actually the fiduciary under the contract or statute that establishes the trust relationship. A corporate officer may be excepted from discharge under § 523(a)(4) even if he or she does not personally profit from the defalcation in question.26
Although Failing involved a corporate entity, many jurisdictions apply similar liability rules to members and managers of LLCs. New Mexico has defined such liability statutorily, and “[n]o member or manager of a limited liability company ... shall be obligated personally for any debt, obligation or liability of the limited liability company solely by reason of being a member or manager of the limited liability company[.]”27 But neither are such parties immunized “from liability for the consequences of [their] own acts or omissions for which [they] otherwise may be liable.” 28
Second, a state court determination has some persuasion with this Court. In d’Elia v. Rice Development, Inc.,29 a state court applied a similar, but non-statutory, standard to the managing member of an LLC. In that case, a limited partner in a real estate development limited partnership filed suit against both the LLC general partner and the LLC’s owner, Gerald Rice, individually. Gerald Rice was the exclusive owner and sole managing member of Rice LLC, which in turn was the *342general partner in Bridlevale, Ltd., a limited partnership formed to build and market a residential development in Utah. The LLC was found to have mishandled partnership funds and was therefore liable to the plaintiff for both breach of contract and breach of fiduciary duty.30 But the trial court denied plaintiffs claim that Mr. Rice was personally liable for breach of fiduciary duty, concluding that the evidence failed to establish that he was the LLC’s “alter ego.” The trial court also refused to find Rice personally liable on the ground that plaintiff failed to establish that he had engaged in “self-dealing.”
Although the appellate court agreed with the trial court’s conclusion that the evidence was insufficient to pierce the corporate veil, it noted that breach of a statutory fiduciary duty is a tort claim. A claim that an individual defendant is liable for a corporate tort in which that defendant participated, “is distinct from the piercing the veil doctrine.”31 The court then considered whether LLC members were subject to the rules of individual liability applicable to their corporate counterparts, concluding that “both limited liability members and corporate officers should be treated in a similar manner when they engage in tor-tious conduct.”32 Finally, the court held that the trial court erred in requiring plaintiff to prove self-dealing by Rice in order to hold him personally liable, noting that “the proper legal standard is not whether Mr. Rice engaged in self-dealing, but whether he participated in Rice LLC’s tortious breach of fiduciary duties.”33
One final case is also of help. The court in Brophy v. Ament34 similarly ruled that New Mexico’s liability shield for members of LLCs “provides no protection when a member engages in actionable conduct ... and the fact that a member’s conduct is in connection with, or even in the service of, a limited liability company will not negate liability.” Therefore, to the extent that the individual defendants in that case had been alleged to be “personally involved” in wrongdoing, their motion to dismiss was denied.35
Unlike Mr. Rice, William was not an official “member” of K2. Neither was he named in the company’s organizational filings as a “managing member.” Karen, however, was both the majority member and the sole managing member of K2, and the undisputed facts establish that she and William “managed” K2 together. The bankruptcy court concluded that William was a “defacto ” manager of K2, as he was actively involved “as the primary decision maker for K2,” stating:
William Kalinowski exercised management and control over the day-to-day activities of K2 Construction under authority delegated to him by Karen Kali-nowski. He admitted that he “was the primary person involved in making decisions for K2, but she [Karen Kalinowski] was involved as well.” William Kalinow-ski negotiated K2 Construction’s contract with Hawks Holdings, represented to others that he controlled and managed K2 Construction and another limited liability company called Barranca *343Builders, LLC, and gave Hawks Holdings “the very real impression that [he] was responsible” for getting the Project built for Hawks Holdings and paid for. William Kalinowski was directly involved in determining which subcontractors and suppliers of K2 Construction’s construction projects for Hawks Holding would be paid. He was involved in decisions to move money from K2 Construction to a pooled account in the name of another entity called Fourteen Pueblos Construction Company (“Fourteen Pueblos”), and was aware that such fund transfers were being routinely made. He was the manager of Fourteen Pueblos and other entities. It was his ordinary practice in the construction industry to transfer money from one entity to another in order to satisfy each entity’s financial obligations to its creditors. These admissions collectively establish that William Kalinowski voluntarily placed himself in a position as an agent of K2 Construction to carry out K2 Construction’s fiduciary duties to Hawk’s Holdings under the New Mexico Construction Industries Licensing Act.36
In concluding that William was acting in a fiduciary capacity with respect to Hawks, the bankruptcy court reasoned that “[w]hen an individual undertakes the duties of a trustee with regard to an express or technical trust, he is, in fact acting in a fiduciary capacity with respect to the beneficiaries of that trust.”37 We agree.
A person who exercises the powers and duties of an office under color of right is a de facto officer, even if ineligible to hold that office.38 It is clear from the undisputed facts that William was a de facto manager of K2, and therefore subject to the same principles of law as a legal manager, such as Karen, would be. These principles include the following:
Corporate officers are liable for their torts, although committed when acting officially, even though the acts were performed for the benefit of the corporation and without profit to the officer personally. ... The plaintiff must show some form of participation by the officer in the tort, or at least show that the officer *344directed, controlled, approved, or ratified the decision that led to the plaintiffs injury.
Personal liability for the torts of officers does not depend on the same grounds as “piercing the corporate veil”.... The true basis of liability is the officer’s violation of some duty owed to a third person that injures such third person.
These rules have been applied to principals of a limited liability company.39
In holding that William subjected himself to liability for defalcation of K2’s fiduciary duties to Hawks, we are mindful of the long-standing admonition that this particular discharge exception must be very narrowly construed. However, we do not view this decision as broadening the exception. The Romero case declared in 1976 that the New Mexico Contractors Act imposes a fiduciary duty on contractors that are advanced money under a construction contract. Thus, under Romero, K2 owed a fiduciary duty to Hawks because Hawks advanced money to it pursuant to a construction contract. K2’s mismanagement of that money constitutes a defalcation while acting in a fiduciary capacity. Likewise, the principle that agents of a corporation are liable for their own conduct while carrying out a corporation’s duties is also long-standing. William in fact “controlled” K2’s handling of Hawks’ money, and thereby subjected himself to liability for any mishandling of those funds. William admits that he “controlled” K2, that he directed how Hawks’ money would be used, and that the money was not properly handled. We conclude that absolving him of responsibility for that conduct through bankruptcy is clearly not the intent of the narrow construction rule. Hawks placed money in trust with K2, which was mismanaged by William acting as a de facto manager of K2. We do not believe that he can discharge that debt in bankruptcy based solely on the doctrine of narrow interpretation. William’s proposed outcome would make a mockery of the fiduciary defalcation exception.
V. CONCLUSION
K2 owed a fiduciary duty to Hawks, and William was responsible for its performance of that duty. William’s mismanagement of funds entrusted to K2 by Hawks rendered him liable to Hawks for defalcation while acting in a fiduciary capacity. Therefore, we AFFIRM the trial court’s judgment in favor of Hawks on its claim of non-dischargeability.
. N.M. Stat. Ann. §§ 60-13-1 through 60-13-59.
. The qualifying test for a contractor's license must be taken by a real person, so a legal entity such as K2, a limited liability company, must have a "qualifying party” take and pass the contractor’s exam on its behalf in order to obtain a license. A “qualifying party” is defined under the Contractor's Act as “any individual who submits to the examination for a license to be issued under the [Contractor’s Act] and who is responsible for the licensee’s compliance with the requirements of that act[J” N.M. Stat. Ann. § 60-13-2(E) (2003).
. Unless otherwise noted, all further statutory references in this decision will be to the Bankruptcy Code, which is Title 11 of the United States Code.
. 28 U.S.C. § 158(b)-(c); Fed. R. Bankr.P. 8001.
. We note that William apparently never disputed his liability for the Hawks debt, only whether or not the debt was dischargeable in bankruptcy.
. Bucl v. Hampton (In re Hampton), 407 B.R. 443, 2009 WL 612491, at *1 (10th Cir. BAP Mar. 11, 2009) (existence of fiduciary duty under § 523(a)(4) is a legal conclusion, reviewed de novo) (citing Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir.1996)).
. Bellco First Fed. Credit Union v. Kaspar (In re Kaspar), 125 F.3d 1358, 1361 (10th Cir.1997).
. See, e.g., Holaday v. Seay (In re Seay), 215 B.R. 780, 786 (10th Cir. BAP 1997) (noting that the Tenth Circuit in Young interpreted the phrase "fiduciary capacity” narrowly); Duncan v. Neal (In re Neal), 324 B.R. 365, 370 (Bankr.W.D.Okla.2005), aff'd, 342 B.R. 384, 2006 WL 452340 (10th Cir. BAP Feb. 22, 2006) ("The Tenth Circuit has taken a very narrow view of the concept of fiduciary duty under this section.”). See also Crossingham Trust v. Baines (In re Baines), 337 B.R. 392, 400 (Bankr.D.N.M.2006) (stating that “[t]he fiduciary duty contemplated by 11 U.S.C. § 523(a)(4) is very narrow”).
. Sawagerd v. Sawaged (In re Sawaged), CO-10-058, 2011 WL 880464, at *3 (10th Cir. BAP Mar. 15, 2011) (internal quotation marks omitted). See also Pacini v. Ennis (In re Ennis), CO-12-008, 2012 WL 3727324 (10th Cir. BAP Aug. 29, 2012).
. Allen v. Romero (In re Romero), 535 F.2d 618, 621 (10th Cir.1976).
. In re Young, 91 F.3d at 1371.
. N.M. Stat. Ann. § 60-13-23 (1993).
.This statute is a regulatory provision that imposes revocation of a contractor's license as a consequence of violating stated rules of conduct. As such, the statutory penalty can only directly affect contractors who are licensed under the Act. But the Act defines a "contractor” as “any person who undertakes, offers to undertake by bid or other means or purports to have the capacity to undertake, by himself or through others, contracting " (emphasis added). In addition, "[c]ontracting includes constructing, altering, repairing, installing or demolishing any ... building, stadium or other structure[.]” N.M. Stat. Ann. § 60-13-3(A)(2) (1999). Arguably, these provisions render William subject to the Contractors Act because, at least with respect to Hawks, he was acting as a "contractor.” However, as the issue of unlicensed contractor liability was neither briefed nor argued by the parties, we assume for purposes of this appeal that William was not directly subject to the Act.
. In re Romero, 535 F.2d at 621. Paragraph F of the current statute is identical to its predecessor, except that the term "conversion” in the present statute was "diversion” in the preceding one, and the current statute adds the phrase "as determined by a court of competent jurisdiction.” Whether this amendment changed the meaning of the statute, or rendered Romero irrelevant, was discussed in depth in Crossingham Trust v. Baines (In re Baines), 337 B.R. 392, 401-04 (Bankr.D.N.M.2006), which concluded that the law remains the same.
. In re Baines, 337 B.R. 392.
. Much of the court’s discussion in Baines regarding fiduciary duty was devoted to whether or not In re Romero still controlled in light of the amendment of the New Mexico statute. The court held that Romero was still good law.
. In re Baines, 337 B.R. at 406.
. Id. at 406-10.
. See, e.g., In re Tinkler, 311 B.R. 869, 874-75 (Bankr.D.Colo.2004). As for the plaintiffs' fraud claim under § 523(a)(2), the Baines court noted that Robert Baines' conduct might be imputable to Deann, but that the fraud claim was not appropriate for summary judgment. In re Baines, 337 B.R. at 407-08.
. See generally "Limited Liability Company Act,” N.M. Stat. Ann. §§ 53-19-1 through 53-19-74.
. Official Form Bl, the cover sheet for voluntary bankruptcy petitions, includes a series of check boxes for "Type of Debtor,” which include "Corporation (includes LLC and LLP).”
. See, e.g., 11 U.S.C. § 101(41) (In the Bankruptcy Code, a "person” can be an individual, a partnership, or a corporation).
. See, e.g., Stinson v. Berry, 123 N.M. 482, 943 P.2d 129, 133 (Ct.App.1997) (shareholders, officers, and directors not personally liable for corporation's obligations).
. Id. at 133-34.
. San Saba Pecan, Inc. v. Failing (In re Failing), 124 B.R. 340 (W.D.Okla.1989).
. Id. at 344-45 (emphasis added) (citations omitted).
. N.M. Stat. Ann. § 53-19-13 (1993).
. Id.
. 147 P.3d 515 (Utah Ct.App.2006).
. The LLC’s fiduciary status was based on a Utah statute making general partners fiduciaries with respect to their limited partners. There was no discussion of a contractor's trust statute in that case.
. Id. at 524.
. Id. at 525.
. Id.
. No. Civ 07-0751, 2008 WL 4821610, at *6 (D.N.M. July 9, 2008) (internal quotation marks omitted).
. Id., at *8-9.
. Mem. Op. at 20-21 (footnotes omitted), in App. at 51-52.
. Id. at 20, in App. at 51. The court cited In re White, 05-2135, 2005 WL 5154692 (Bankr. S.D.Fla. Nov. 21, 2005) and Pool v. Johnson, 3:01-CV-1168L, 2002 WL 598447, at *4 (N.D.Tex. Apr. 15, 2002) as support for this proposition. Both cases are generally supportive of conclusion, but neither is factually similar enough to the present case to be completely relevant. In any event, William's counsel asserted at oral argument that the Contractors Act makes a licensee’s qualifying party solely responsible for its fiduciary obligations, citing N.M. Stat. § 60-13-2(E). The referenced provision defines "qualifying party” as the individual who takes the licensing exam for a licensee, "and who is responsible for the licensee’s compliance with the requirements” of the Contractors Act. William asserts, based on this provision, that since he was not K2’s qualifying party, he cannot be held responsible for its failure to properly handle Hawks’ funds. We do not read this provision, as William does, to limit fiduciary liability to the qualifying party. Rather, we consider the provision to be in the nature of a strict liability statute for qualifying parties; rendering them liable for a licensee's failure to comply with the Contractors Act, whether or not they were personally involved in the conduct. Simply defining a qualifying party as responsible for the licensee's duties under the Act does not equate with immunity for others who undertake a licensee’s trust obligations from liability for their own conduct.
. United States v. MPM Contractors, Inc., 763 F.Supp. 488, 494 (D.Kan.1991). See also Bank of Santa Fe v. Honey Boy Haven, Inc., 106 N.M. 584, 746 P.2d 1116, 1119 (1987) (de facto directors or officers hold, and perform the functions of, an office "under color of” an election or appointment).
. William M. Fletcher, Directors, Other Officers and Agents, XXIX. Liability of Directors and Officers to Third Persons for Torts, 3A Fletcher Cyc. Corp. § 1135 (2012) (footnotes omitted). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495312/ | MEMORANDUM OPINION
ROBERT H. JACOBVITZ, Bankruptcy Judge.
THIS MATTER is before the Court on the Motion for Partial Summary Judgment (sometimes called the “Motion”) and supporting memorandum filed by Plaintiffs, Cody Farms, Inc. (“Cody Farms”), individually and derivatively as a member of and on behalf of Falcon Farms, L.L.C. (“Falcon Farms”), Robert L. Fletcher, and Mary K. Fletcher, husband and wife (the Fletchers), by and through their attorneys of record, Jennings, Strouss, & Salmon, P.L.C. (Brian Imbornoni). See Docket Nos. 28 and 29. Defendants Willard L. Deerman and Charlotte S. Deerman (together, the Deermans), by and through their attorneys of record, Law Office of George “Dave” Giddens, P.C. (Dean Cross), filed a response in opposition to the Motion and Plaintiffs filed a reply. See Docket Nos. 32 and 33. Plaintiffs and Defendants previously entered into a Stipulated Order to Stay Adversary Proceeding and to Compel Arbitration pursuant to which the parties proceeded with an arbitration case captioned Cody Farms, Inc., et al. v. Willard L. Deerman, et ux., American Arbitration Association No. 76 180 & 00397 08 (the “Arbitration Case”). See Docket No. 25. The arbitrator in the Arbitration Case (the “Arbitrator”) has since *352entered his Findings of Fact, Conclusions of Law and Interim Award and has entered a Final Arbitration Award (“Arbitration Award”) in the Arbitration Case.
Plaintiffs assert that the Court should apply collateral estoppel to the findings made by the Arbitrator and determine that a portion of the award issued by the Arbitrator constitutes a non-dischargeable debt as to the Deermans under 11 U.S.C. §§ 523(a)(2)(A), 523(a)(4) and 523(a)(6). The Deermans raise essentially two issues in opposition to the Motion: 1) by filing and prosecuting the Motion, the Plaintiffs have violated both the automatic stay and a stay order entered in this adversary proceeding; and 2) because the Deermans still have the right to contest the arbitration award, the award has no preclusive effect and the Motion is pre-mature. For the reasons set forth below, the Court concludes that the filing and prosecution of the Motion violates neither the automatic stay nor the stay order entered in this adversary proceeding, that the Deermans are barred from contesting the Arbitration Award, and that the Arbitrator’s findings have collateral estoppel effect. The Court will grant Plaintiffs Motion, provided that the Arbitrator’s findings of fact establish all elements necessary to a finding of non-dischargeability of the debt at issue in this adversary proceeding.
BACKGROUND AND PROCEDURAL HISTORY
The Deermans filed a voluntary petition under Chapter 11 of the Bankruptcy Code on November 20, 2009 as Case No. 11-09-15348 JA. Pre-petition, Cody Farms filed its arbitration claim against the Deermans. The Deermans filed a response to the arbitration claims on January 12, 2009, including a counterclaim against Cody Farms and a third-party claim against Robert L. Fletcher. Plaintiffs initiated this adversary proceeding by filing a Complaint to Determine Non-Dischargeability of Debt (“Complaint”) on February 16, 2010. The Complaint includes individual claims and derivative claims asserted by Cody Farms as a member of Falcon Farms. Plaintiffs did not, however, pursue any derivative claims as part of the Arbitration Case. See Memorandum in Support of Motion for Partial Summary Judgment (“Plaintiffs’ Supporting Memorandum”), p. 11, n. 2— Docket No. 29, even though the caption in the Arbitration Case reflects Cody Farms both individually and derivatively as a member of and on behalf of Falcon Farms.
Cody Farms and the Fletchers filed a motion for relief from stay in the Deer-mans’ bankruptcy case requesting relief from the automatic stay to allow the mov-ants and the Deermans to proceed with the Arbitration Case. On October 4, 2010, a Stipulated Order to Stay Adversary Proceeding and to Compel Arbitration (“Stipulated Order”) was entered in this adversary proceeding. See Docket No. 25. The Stipulated Order recited that its purpose is to stay the adversary proceeding to permit the parties to liquidate their claims against each other in the Arbitration Case, and that the Plaintiffs had filed a motion for relief from stay in the Deermans’ bankruptcy case to permit the Arbitration Case to proceed. Id. The Stipulated Order included the following provisions: 1) this adversary proceeding is stayed pending further order of this Court; 2) the Deer-mans agree to proceed with arbitration, provided they are given a reasonable opportunity to cure any previous failure to respond to discovery or to otherwise participate in the Arbitration Case; 3) the factual determinations of liability and the amount of debt, if any, owed by either party to the other will be determined in the Arbitration Case; 4) this Court retains exclusive jurisdiction to determine whether any award in the Arbitration Case is non-*353dischargeable; and 5) either party may request the Court to vacate the Stipulated Order so that the parties may resume proceedings in this adversary case in the event that the motion for relief from stay in the Deerman’s bankruptcy case is denied. See Docket No. 25.
On October 26, 2010, the Court entered an Order Granting Motion for Relief from Stay (“Stay Relief Order”) in the Deer-mans’ bankruptcy case. See Case No. 09-15348 — Docket No. 132. The Stay Relief Order modified the automatic stay provisions of 11 U.S.C. § 362 so that the Plaintiffs and the Deermans could proceed with the Arbitration Case, provided that the Plaintiffs would not attempt to enforce any award entered in the Arbitration Case against the Deermans without further leave of this Court, and provided further that this Court retains exclusive jurisdiction over the dischargeability of any award. Id.
The Arbitration Case was conducted in Arizona. The Arbitrator entered Findings of Fact and Conclusions of Law and an Interim Award in the Arbitration Case on February 2, 2012. On March 19, 2012, the Arbitrator entered a Final Arbitration Award (defined above as the “Arbitration Award”) in the Arbitration Case. The Arbitration Award has not been confirmed.
In their bankruptcy case, the Deermans filed Debtors’ Motion to Extend Time to File Amended Plan and Disclosure Statement (“Motion to Extend”). See Bankruptcy Case No. 11-09-15348 J — Docket No. 237. The Motion to Extend includes arguments that echo the Deermans’ arguments in opposition to the pending Motion filed in this adversary proceeding: namely, that the Plaintiffs cannot obtain a non-dischargeable judgment without first confirming the Arbitration Award and that the Deermans can challenge the Arbitration Award as part of a proceeding to confirm the Arbitration Award. See Motion to Extend — ¶¶ 4, 5, 6 — Case No. 11-09-15348 JA — Docket No. 237. At a preliminary hearing on the Motion to Extend, the parties agreed that the Deermans will have thirty days following the Court’s ruling on the instant Motion within which to file an amended plan and disclosure statement.
SUMMARY JUDGMENT STANDARDS
Summary Judgment, governed by Rule 56, Fed.R.Civ.P., made applicable to adversary proceedings by Rule 7056, Fed. R.Bankr.P., will be granted when the mov-ant demonstrates that theré is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law. Rule 56(a), Fed.R.Civ.P. In order to defeat a motion for summary judgment, the opposing party must “go beyond the pleadings and by [his] own affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate specific facts showing that there is a genuine issue for trial.” Celotex Corp. v. Catrett, 477 U.S. 317, 324, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986) (internal citations omitted). When evaluating a motion for summary judgment, the Court must view the facts in the light most favorable to the party opposing summary judgment. Harris v. Beneficial Oklahoma, Inc., (In re Harris), 209 B.R. 990, 995 (10th Cir. BAP 1997) (“When applying this standard, we are instructed to ‘examine the factual record and reasonable inferences therefrom in the light most favorable to the party opposing summary judgment.’”) (quoting Wolf v. Prudential Ins. Co. of America, 50 F.3d 793, 796 (10th Cir.1995)) (quoting Applied Genetics Int’l, Inc. v. First Affiliated Sec., Inc., 912 F.2d 1238, 1241 (10th Cir.1990) (additional internal quotation marks omitted)).
*354Plaintiffs’ statement of facts not in genuine dispute is based on the Findings of Fact and Conclusions of Law, the Interim Award, and the Arbitration Award entered in the Arbitration Case. The Deermans do not dispute that the Arbitrator made such findings and conclusions as part of the Arbitration Case,1 but nevertheless take issue with several of the Plaintiffs’ undisputed facts.2 As determined below, the Deermans are precluded from contesting the Arbitrator’s factual findings made in the Arbitration Case. Consequently, in reviewing Plaintiffs’ request for partial summary judgment, the Court will treat the Arbitrator’s findings of fact as not subject to genuine dispute and will consider whether those facts entitle Plaintiffs to judgment as a matter of law.
DISCUSSION
A. Whether the Motion violates the automatic stay or the Stipulated Order entered in this adversary proceeding
The Deermans assert that the Motion violates the automatic stay imposed by 11 U.S.C. § 362. This Court disagrees. The automatic stay imposed by 11 U.S.C. § 362 operates to stay the continuation of an action or proceeding against the debtor “to collect, assess, or recover a claim against the debtor that arose before the commencement” of the debtor’s bankruptcy case. 11 U.S.C. § 362(a)(6). Its scope is extremely broad. In re Sullivan, 357 B.R. 847, 853 (Bankr.D.Colo.2006) (citing In re Gagliardi, 290 B.R. 808, 814 (Bankr.D.Colo.2003)). However, an action to contest dischargeability of a debt under section 523 of the Bankruptcy Code brought by a creditor against a debtor cannot violate the automatic stay because the automatic stay does not apply to acts taken in a debtor’s bankruptcy case brought before the Bankruptcy Court seeking relief under the Bankruptcy Code. See Sears, Roebuck & Co. v. Hodges (In re Hodges), 83 B.R. 25, 26 (Bankr.N.D.Cal.1988) (observing that “an action taken in the bankruptcy court can only be found to be a violation of the automatic stay when there is no basis under the Code for the action[,]” and concluding that, “[a]s a matter of law ... a *355nondischargeability action can never violate the automatic stay.”); Lawson v. NationsBanc Mortg. Corp. (In re Lawson), 2000 WL 33943198, *6 (Bankr.S.D.Ga. Sept. 22, 2000) (“the automatic stay does not apply to actions or claims brought before the bankruptcy court with jurisdiction over the debtor’s bankruptcy case”) (citation omitted). See also, United States v. Inslaw, Inc., 932 F.2d 1467, 1474 (D.C.Cir.1991) (“For obvious reasons, however, courts have recognized that § 362(a) cannot stay actions specifically authorized elsewhere in the bankruptcy code, such as motions to convert reorganizations to liquidation proceedings”).
The Deermans also assert that the Stipulated Order entered in this adversary proceeding precluded the Plaintiffs from filing or prosecuting their Motion. The Stipulated Order provides that this “adversary proceeding is stayed pending further order of this Court.” See Stipulated Order, p. 2, ¶ 1 — Docket No. 25. But even the Stipulated Order provides that either party may request the Court to vacate the Stipulated Order so the parties may resume proceeding in this adversary proceeding if the Stay Relief Order in the Deermans’ bankruptcy case is denied; that any award entered in the Arbitration Case in favor of the Plaintiffs and against the Deermans “shall not be enforceable without further order of this Court[;]” and that this Court retains “exclusive jurisdiction to determine whether any such award is non-dischargeable under § 523 of the Bankruptcy Code.” Id. at ¶ 2.
Having proceeded with the Arbitration Case and obtained an arbitration award as contemplated by the Stipulated Order and Stay Relief Order, Plaintiffs have returned to the this Court as contemplated by the Stipulated Order to request a determination that the debt at issue is non-dis-chargeable. The stay imposed by the Stipulated Order was intended to stay this adversary proceeding until the Arbitrator concluded the Arbitration Case. That has occurred. The Motion has been fully briefed. It does not make sense to require the movants to refile a motion for partial summary judgment and supporting papers and the Defendant to refile their response. Under the circumstances, the Court will vacate the stay imposed by the Stipulated Order nunc pro tunc as of the date of the filing of the Motion. The filing and prosecution of the Motion, therefore, does not violate the stay imposed by the Stipulated Order.
B. Whether the Deermans can contest the arbitration award
Section 9 of the Federal Arbitration Act, 9 U.S.C. §§ 1-16 (“FAA”), governs the procedure for confirming an arbitration award. That section provides, in relevant part:
If the parties in their agreement have agreed that a judgment of the court shall be entered upon the award made pursuant to the arbitration, and shall specify the court, then at any time within one year after the award is made any party to the arbitration may apply to the court so specified for an order confirming the award, and thereupon the court must grant such an order unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title. If no court is specified in the agreement of the parties, then such application may be made to the United States court in and for the district in within which such award was made.
9 U.S.C. § 9.
Sections 10 and 11 of the FAA specify which court may issue an order vacating, modifying or correcting an arbitration *356award and set forth the grounds for issuance of such an order.3 Section 12 of the FAA describes how a motion is to be made for an order vacating, modifying or correcting an arbitration award, and imposes a three-month time limit for serving such a motion.4 Here, Plaintiffs have not sought to confirm the Arbitration Award pursuant to Section 9 the FAA; nor have the Deer-mans sought to vacate, modify or correct the Arbitration Award within the three-month period specified in Section 12 of the FAA.
The Deermans cite cases from other jurisdictions which hold that a party can challenge an arbitration award in defense to an action to confirm an arbitration award. See, e.g., Chauffeurs, Teamsters, Warehousemen and Helpers Local Union No. 86b v. Rúan Transport Corp., 473 F.Supp. 298, 303 (N.D.Ind.1979) (holding that Section 12 of the FAA “only limits the time during which the party against whom an arbitrator rules can initiate court action; section 12 does not limit the time during which the defenses enumerated in *357sections 10 and 11 are available.”); Paul Allison, Inc. v. Minikin Storage of Omaha, Inc., 452 F.Supp. 573, 575 (D.Neb.1978) (holding “that the time stricture within § 12 is inapplicable when the party who prevails at arbitration moves to confirm the award and the defendant desires to raise objections in response to that motion”). Those courts reason, in part, that because the language in Section 9 references Sections 10 and 11 of the FAA, but not Section 12 which imposes the three-month limit for seeking to vacate, modify or correct an arbitration award, the time limit in Section 12 does not limit a party’s ability to contest the arbitration award in defense of an action to confirm the award. See Ruan Transport, 473 F.Supp. at 302 (pointing out that the reference in Section 9 to “ ‘the next two sections’ indicates that-the time limitation of section 12, the third following section, was not intended to apply to the defense of a motion to confirm.”). This Court disagrees.
In discerning a statute’s meaning, the starting place is the plain meaning of the language itself. See United States v. Ron Pair Enters., Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989) (resolving a dispute over the meaning of a statute “begins ... with the language of the statute itself.”) (citation omitted); In re Wilbur, 344 B.R. 650, 653 (Bankr.D.Utah 2006) (“Statutory construction begins with the language of the statute itself and an analysis of whether the language is plain.”) (citation omitted). When the meaning of the language is plain, the Court’s analysis ends. Ron Pair, 489 U.S. at 241, 109 S.Ct. 1026 (when the plain meaning of the language is clear, the court’s inquiry ends, and “ ‘the sole function of the courts is to enforce it according to its terms.’ ’’)(quoting Caminetti v. United States, 242 U.S. 470, 485, 37 S.Ct. 192, 194, 61 L.Ed. 442 (1917)).
A plain reading of the language in Sections 9 through 12 of the FAA supports the conclusion that a party’s failure to act within the three-month limitation period is fatal to such party’s ability to vacate, modify, or correct the award under the FAA. There is no need for Section 9 of the FAA to reference Section 12 in order for the time limitation contained in Section 12 to apply to a defense to an application to confirm an award on grounds specified in Sections 10 and 11. Under Section 9, on a timely application the court “must” confirm the award “unless the award is vacated, modified, or corrected as prescribed in sections 10 and 11 of this title.” 9 U.S.C. § 9 (emphasis added). An arbitration award cannot be vacated, modified, or corrected as prescribed in sections 10 and 11 unless a motion is made within the three-month period specified in Section 12. As pointed out by the Seventh Circuit in Chauffeurs, Teamsters, Warehousemen and Helpers, Local Union 135 v. Jefferson Trucking Co., Inc., 628 F.2d 1023, 1026 (7th Cir.1980), Section 9 of the FAA:
instructs that a court ‘must grant’ an application for confirmation unless the award is challenged within a three month period following its issuance. .... Accordingly, the plain meaning of Section 9 of the statute would seem to bar the defendant from raising a delinquent motion to vacate the award.5
*358Many courts likewise hold that the failure to timely seek to vacate, modify or correct an arbitration award within the time limits contained in Section 12 of the FAA precludes such party from contesting the award. See, e.g., In re Robinson, 326 F.3d 767, 771 (6th Cir.2003) (stating that “arbitration awards under the FAA are binding unless a motion to vacate or modify has been filed in accordance with the terms of that Act” and finding that because the complainant did not avail himself of the review provisions under the FAA and did not make a timely request to vacate or modify the arbitration award, he was barred from collaterally attacking the award in his bankruptcy proceeding). See also, Int’l Bhd. of Elec. Workers, Local Union 969 v. Babcock & Wilcox, 826 F.2d 962, 966 (10th Cir.1987) (applying Colorado law and recognizing that “courts have uniformly held that a defendant’s failure to move to vacate the arbitration award within the prescribed time period precludes it from seeking affirmative relieve in a subsequent action to enforce the award.”) (citing Taylor v. Nelson, 788 F.2d 220, 225 (4th Cir.1986); Florasynth, Inc. v. Pickholz, 750 F.2d 171, 175 (2nd Cir.1984) (holding that the defendant’s failure to seek to vacate an arbitration award within the three month time limit under the FAA precluded the defendant from later seeking to vacate the award in defense of a motion to confirm the award)); Brotherhood of Teamsters and Auto Truck Drivers Local No. 70 of Alameda County v. Celotex Corp., 708 F.2d 488, 490 (9th Cir.1983) (“a party’s failure to petition to vacate an unfavorable award within the applicable statutory period bars the party from asserting affirmative defenses in a subsequent proceeding to confirm the award.”) (citing Sheet Metal Workers Int’l Ass’n, Local 252 v. Standard Sheet Metal, Inc., 699 F.2d 481, 483 (9th Cir.1983)).
This application of the plain meaning of the FAA is consistent with the strong federal policy favoring resolution of disputes through arbitration.6 In furtherance of this policy,
[o]nce an arbitration award is entered, the finality that courts should afford the arbitration process weighs heavily in favor of the award, and courts must exercise great caution when asked to set aside an award. Because a primary purpose behind arbitration agreements is to avoid the expense and delay of court proceedings, it is well settled that judicial review of an arbitration award is very narrowly limited.
Foster v. Turley, 808 F.2d 38, 42 (10th Cir.1986) (internal citations omitted).
The Deermans assert that because the parties’ agreement requires application of New Mexico law, the Court must apply the Arbitration Act as adopted in New Mexico, not the FAA. See Response, p. 16, ¶ 12- — Docket No. 32. But the result is the same whether the Court applies the FAA or applicable New Mexico law. New Mexico has adopted the Uniform Arbitration Act. See N.M.S.A.1978 § 44-7A-l(a) (Repl. Pamp. 2007) (“The provisions of this act may be cited as the ‘Uniform Arbitration Act.’ ”). Similar to the FAA, the New Mexico Uniform Arbitration Act contains a restriction on the *359time period within which a party may seek to vacate, modify, or correct an arbitration award. See N.M.S.A.1978 § 44-7A-24(a) (Repl. Pamp. 2007) (providing that a motion to vacate an arbitration award “must be filed within ninety days after the mov-ant receives notice of the award ... ”) and N.M.S.A.1978 § 44-7A-25 (Repl. Pamp. 2007) (providing a ninety-day period within which a party can seek to modify or correct an arbitration award). Under N.M.S.A.1978 § 44-7A-29 (Repl. Pamp. 2007), a party may contest the following decisions through an appeal:
(1) An order denying a motion to compel arbitration;
(2) An order granting a motion to stay arbitration;
(3) An order confirming or denying confirmation of an award;
(4) An order modifying or correcting an award;
(5) An order vacating an award without directing a rehearing; or
(6) A final judgment entered pursuant to the Uniform Arbitration Act.
N.M.S.A.1978 § 44-7A-29(a) (Repl. Pamp. 2007).
The Deermans point out that this section contemplates a right to appeal an order confirming an arbitration award and contend that, until Plaintiffs seek to confirm the arbitration award, the Deermans have not been allowed to fully realize their appeal rights. However, under New Mexico law, a party who fails to timely file an action seeking to vacate, modify, or correct an arbitration award cannot later contest the award. See United Technology and Resources, Inc. v. Dar Al Islam, 115 N.M. 1, 5, 846 P.2d 307, 311 (1993) (“By failing to file a motion to modify or correct within ninety days after delivery of the arbitrator’s award, [Appellant] waived its right to present its substantive defenses to confirmation of the award.”). Thus, where a party fails to make a timely request to vacate, modify, or correct an arbitration award, a court is required to confirm the award. Id. Because the Deermans did not seek to modify or vacate the arbitration award within the ninety-day period provided under the New Mexico Uniform Arbitration Act, they have forfeited their right to do so even if the New Mexico Uniform Arbitration Act applies.
C. Confirmation of the Arbitration Award
The Deermans also argue that Plaintiffs must first confirm the Arbitration Award before they can enforce it, and that by seeking to obtain a non-dischargea-ble judgment based on the collateral estop-pel effect of the Arbitration Award Plaintiffs are making an end run around the confirmation requirement. Though Plaintiffs assert that confirmation is permissive, not mandatory, they alternatively request this Court to confirm the Arbitration Award. The Deermans agree that this Court has the authority to confirm the Arbitration Award, but assert that they must be allowed to present evidence exposing the flaws in the Arbitration Award. See Case No. 11-09-15348 — Docket No. 237, ¶¶ 7 and 14. This Court agrees that confirmation is not the only method of enforcing an arbitration award.7 But be*360cause entry of a non-dischargeable monetary judgment based on the Arbitration Award would have the same practical effect as confirmation, and Plaintiffs have requested this Court to confirm the Arbitration Award, the Court will consider whether to confirm the Arbitration Award.
Section 9 of the FAA imposes a one-year statute of limitations period for motions to confirm an arbitration award. Photopaint Technologies, LLC v. Smartlens Corp., 335 F.3d 152, 158-160 (2nd Cir.2003).8 The New Mexico Uniform Arbitration Act does not contain a limitations period to confirm an arbitration award. See N.M.S.A.1978 § 44-7A-23 (“After a party to an arbitration proceeding receives notice of an award, the party may make a motion to the court for an order confirming the award, at which time the court shall issue a confirming order ...”). Here, the Arbitration Award was entered on March 9, 2012, less than one year ago. Therefore, the motion to confirm the Arbitration Award is not time barred whether confirmation is sought under the FAA or the New Mexico Uniform Arbitration Act. The Operating Agreement of Falcon Farms, L.L.C., pursuant to which the parties arbitrated their dispute, provides that “judgment on such [arbitration] decision may be entered in any court of competent jurisdiction.” See Operating Agreement, ¶ 10. 14. This language, combined with the parties’ agreement and consent to this Court’s authority to confirm the Arbitration Award, is sufficient to allow this Court to confirm the Arbitration Award.9
The Deermans assert that this Court should not confirm the Arbitration Award for two reasons: first, the Deermans take issue with several of the Plaintiffs’ undisputed facts set forth in the Motion, although they agree that the Arbitrator made those findings (see Response, p. 3 n. 1); and second, the Deermans assert that the Arbitrator made errors of law. This Court has concluded that the Deermans may not, as a defense to confirmation of the Arbitration Award, assert that the award should be vacated, modified or corrected. The Deermans have forfeited any right to contest the Arbitration Award as a defense to confirming it on the grounds to the award should be vacated, modified or corrected.
In addition, even if the Deermans had not forfeited their right to contest the Arbitration Award, their two defenses to confirmation of the Arbitration Award fail as a matter of law. Judicial review of an arbitration award is extremely limited. Dominion Video Satellite, Inc. v. EchoStar Satellite, L.L.C., 430 F.3d 1269, 1275 (10th Cir.2005) (citation omitted). Erroneous *361findings of fact made by an arbitrator in issuing an arbitration award are insufficient grounds to vacate or modify the award. See United Paperworkers Int’l Union, AFL-CIO v. Misco, Inc., 484 U.S. 29, 38, 108 S.Ct. 364, 371, 98 L.Ed.2d 286 (1987) (stating that “[cjourts thus do not sit to hear claims of factual or legal error by an arbitrator as an appellate court does in reviewing decisions of lower courts.”); In re WorldCom, Inc., 340 B.R. 719, 726 (Bankr.S.D.N.Y.2006) (“Mere ‘errors of law and fact are not grounds for vacating an arbitral award ... ’ ”)(quoting Sanders v. Gardner, 7 F.Supp.2d 151, 163 (E.D.N.Y.1998) (citing Edward M. Siegel v. Titan Indus. Corp., 779 F.2d 891, 892-93 (2d Cir.1985))).
Other than the statutory bases for contesting confirmation of an arbitration award authorized under the FAA and the New Mexico Uniform Arbitration Act, there may exist a judicially-created basis for vacating an award where an arbitrator acts “in ‘manifest disregard’ of the law.” Dominion Video, 430 F.3d at 1275. Under the “manifest disregard” standard, the moving party must demonstrate from the record of the arbitration proceeding that the arbitrator “ ‘knew the law and explicitly disregarded it.’ ” Id. (quoting Bowen v. Amoco Pipeline Co., 254 F.3d 925, 932 (10th Cir.2001) (internal citation omitted)). Even when an arbitrator makes a mistake in the application of the law, the arbitrator’s findings will not be set aside. Dominion Video, 430 F.3d at 1275 (stating that “[m]erely ‘erroneous interpretations or applications of the law are not reversible.’ ”)(quoting ARW Exploration Corp. v. Aguirre, 45 F.3d 1455, 1463 (10th Cir.1995)). In contesting the Motion, the Deermans have not asserted that the Arbitrator’s decision exhibited a “ ‘willful inattentiveness to the governing law.’ ” Dominion Video, 430 F.3d at 1275 (quoting ARW Exploration, 45 F.3d at 1463). Nor, for that matter, have the Deermans asserted that there was any other type of misconduct on the part of the Arbitrator, such as fraud or corruption. Consequently, the Court concludes that the Arbitration Award should be confirmed.
D. Whether to give preclusive effect to the Arbitration Award
Having determined that the Deermans cannot contest the Arbitration Award and that the Arbitration Award should be confirmed, the Court must now determine whether to give collateral estop-pel effect to the Arbitration Award for purposes of determining the non-dis-chargeability of the debt at issue in this adversary proceeding. It is well-settled that collateral estoppel can be applied in bankruptcy to determine dischargeability claims. See Grogan v. Garner, 498 U.S. 279, 284-85 n. 11, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991) (clarifying that “collateral estoppel principles do indeed apply in discharge exception proceedings pursuant to § 523(a).”). Further, courts, including bankruptcy courts, have given arbitration awards preclusive effect in subsequent litigation, even in the absence of confirmation of the award.10 Whether it is appropriate *362to give collateral estoppel effect in a particular instance depends on applicable state law. Rosendahl, 307 B.R. at 208 (stating that “the preclusion effects of decisions of state tribunals in bankruptcy court are determined by the preclusion law of the concerned state” and applying California law to determine whether the arbitration award resulting from arbitration conducted in California was entitled to pre-clusive effect).
Here, the arbitration was conducted in Arizona, and the Arbitrator’s factual findings that Plaintiffs assert have collateral estoppel effect were issued in the Arizona Arbitration Case. Accordingly, the Court will look to the collateral estoppel law of Arizona. Under Arizona law, collateral estoppel will preclude a party from contesting an issue litigated in a prior proceeding if the following requirements are met:
1) the issue was actually litigated in the prior proceeding;
2) the parties had a full and fair opportunity and motive to litigate the issue;
3) the prior decision was a valid and final decision on the merits;
4) resolution of the issue was essential to the prior decision; and
5)the parties to the prior action are the same (or in privity with a party to the prior action).11
Campbell v. SZL Properties, Ltd., 204 Ariz. 221, 223, 62 P.3d 966, 968 (Ct.App.2003) (citing Garcia v. Gen. Motors Corp., 195 Ariz. 510, 514, 990 P.2d 1069, 1073 (Ct.App.1999)); See also, In re Guccione, 268 B.R. 10, 14-15 (Bankr.E.D.N.Y.2001) (same) (citing Collins v. Miller & Miller, Ltd., 189 Ariz. 387, 397, 943 P.2d 774 [747], 757 (1996)).
The Court has not found a case interpreting Arizona law that gave collateral estoppel effect to an arbitration award, nor has either party directed the Court to a case on that point. However, in Lansford v. Harris, 174 Ariz. 413, 850 P.2d 126 (Ct.App.1992), the Arizona Court of Appeals considered whether an issue had already been litigated as part of a fee arbitration, ultimately determining that collateral estoppel did not bar subsequent litigation because the issue had not actually been litigated as part of the arbitration. The collateral estoppel elements under New Mexico law are substantially similar to the requirements under Arizona law.12 Under New Mexico law, arbitra*363tion awards may be given collateral estop-pel effect provided that the “‘arbitration affords opportunity for presentation of evidence and argument substantially similar in form and scope to judicial proceedings[ ]’ ” and provided that all elements of collateral estoppel are also satisfied. Rex v. Manufactured Housing, 119 N.M. at 505, 892 P.2d at 952 (quoting Restatement (Second) of Judgments § 84 cmt. c (1980)). The Court will give preclusive effect to the Arbitration Award provided that all the collateral estoppel elements are satisfied.
As analyzed above, the Arbitration Award is a valid and final decision on the merits. Further, the issues the Arbitrator decided were actually litigated, and the issues were essential to the issuance of the Arbitration Award. The parties to the Arbitration Award are the same, or in privity, with the parties to this adversary proceeding.13 Cody Farms, Robert Fletcher, and the Deermans were all parties to the Arbitration Case and are also parties in this adversary proceeding. And while Mrs. Fletcher was not a named party in the Arbitration Case and Cody Farms did not pursue its derivative claims as part of the Arbitration Case,14 Arizona recognizes the use of non-mutual offensive collateral estoppel by a party who was not a party to the prior litigation against a party who was a party to the prior proceedings. See In re Ward, 21 F.3d 1119, 1994 WL 134682, *3 n. 8 (9th Cir.1994) (Table) (stating that “Arizona courts have recently accepted the use of nonmutual offensive collateral estoppel as long as the party against whom preclusion is sought had a ‘full and fair opportunity to litigate the issue in the prior proceedings.’ ”) (emphasis in original)(quoting Wetzel v. Arizona State Real Estate Dep’t, 151 Ariz. 330, 727 P.2d 825, 828-29 (Ct.App.1986), cert. denied, 482 U.S. 914, 107 S.Ct. 3186, 96 L.Ed.2d 674 (1987) (remaining citation omitted)).15
*364The Deermans had a full and fair opportunity to litigate the issues raised in the arbitration, and, in fact did actively participate in the arbitration proceeding. See Stipulated Order, ¶¶ 3 and 4 (providing that the Deerman’s agreement to proceed with arbitration “is conditioned upon the Arbitrator’s agreement to provide Debtors with a reasonable opportunity to cure any previous failure to respond to discovery or to otherwise participate in the Arbitration Case” and that the parties would “reasonably cooperate to obtain a new mutually acceptable schedule with the Arbitrator for the amendment of pleadings, the disclosure of expert witnesses and opinions, the completion of discovery and the completion of the arbitration hearing consistent with the applicable rules of arbitration.”).
The Court will, therefore, give collateral estoppel effect to the factual findings of the Arbitrator. The only remaining issue is whether the Arbitrator’s factual findings establish all elements necessary to a determination of non-dischargeability under 11 U.S.C. § 523(a)(2)(A), (a)(4) and/or (a)(6).
E. The Facts Not Subject to Genuine Dispute
The following facts, which include many of the factual findings made by the Arbitrator in connection with the Arbitration Case are not subject to genuine dispute:
1. Falcon Farms is a New Mexico limited liability company, formed in 2005.
2. The members of Falcon Farms are Cody Farms, which holds a 50% interest, and the Deermans, who, together, hold a 50% interest.
3. Cody Farms is a Texas corporation owned by Robert Fletcher.
4. Robert Fletcher and Willard Deer-man are the managers of Falcon Farms.
5. The business purpose of Falcon Farms was to buy premium quality alfalfa hay cut in the field by the growers, and to bale the hay in three-tie bales to sell to horse owners and race tracks.
6. Because Mr. Fletcher had no experience in the hay business, it was agreed that Mr. Deerman would be responsible for running the business, including buying and selling the hay, and that Mr. Fletcher would handle the finances and accounting.
7. Falcon Farms entered into a verbal agreement with James Rascoe to purchase his entire 2006 production of alfalfa hay from approximately 800 acres in the Dell City, Texas area at $125.00 per ton in the windrow.
8. Falcon Farms also purchased hay from Bud Deerman Farms and from other growers in the La Mesa, New Mexico area.
9. On December 14, 2006, Fletcher Farms, Inc. (“Fletcher Farms”), a Texas corporation, bought 320 acres of farmland in the Dell City area, and on February 28, 2007, Fletcher Farms bought another 320 acres.
*36510. Fletcher Farms added improvements to the properties with the construction of four hay barns, an office and a commercial scale.
11. Beginning in early 2007, Mr. Deer-man repeatedly represented to Mr. Fletcher that Falcon Farms’ 2006 carryover hay inventory had been sold.
12. Mr. Fletcher believed Mr. Deer-man’s statement that Falcon Farms’ 2006 carryover hay inventory was sold.
13. It would not be unusual for Falcon Farms to be storing hay that had been sold to customers. It is very common in the horse industry for alfalfa growers to store hay for customers for later delivery. See Plaintiffs’ Supporting Memorandum, ¶25; Defendants’ Response, p. 2, ¶ D.
14. Mr. Deerman’s representations that the 2006 hay had been sold were false. Falcon Farms continued to carry large quantities of 2006 hay inventory through 2007 and 2008.
15. In reliance upon Mr. Deerman’s representations that the 2006 carryover hay had been sold, Mr. Fletcher incurred additional debt to purchase hay grown during the 2007 season. Mr. Fletcher would not have agreed to borrow additional money to purchase 2007 hay and would not have agreed to supply additional hay to Falcon Farms if he had known that the 2006 carryover hay had not been sold.
16. Through the summer of 2007, Mr. Deerman continued to represent to Mr. Fletcher that Falcon Farms’ hay had been sold, including the 2007 hay that was being purchased, and that Falcon Farms needed to buy more hay.
17. With a large volume of 2006 hay still on hand and with new purchases underway, Falcon Farms was soon experiencing cash flow problems. To address these problems, Falcon Farms applied to Capital Farm Credit for an increase in its revolving line of credit.
18. On June 20, 2007, Falcon Farms, Cody Farms, the Fletchers, and the Deermans signed a new Promissory Note increasing Falcon Farms’ revolving credit to $2.5 million. The additional $901,000 in borrowing was fully disbursed to Falcon Farms by July 25, 2007.
19. By the end of 2007 and the beginning of 2008, Falcon Farms owed Fletcher Farms $186,776.20 for a portion of Fletcher Farms’ 2007 hay cuttings. Falcon Farms also owed Cody Farms $43,297.20 for money advanced to pay James Ras-coe for his fourth 2007 hay cutting.
20. In late 2007 and early 2008, as Falcon Farms’ financial condition continued to deteriorate, Mr. Deer-man began systematically diverting Falcon Farms’ cash and hay proceeds to his own benefit.
21. On November 1, 2007, Mr. Deer-man withdrew $5,000 from Falcon Farms’ bank account by writing a countercheck to himself.
22. On November 30, 2007, Mr. Deer-man wrote a check for $15,000 to Bud Deerman Farms from Falcon Farms’ bank account.
23. When Mr. Fletcher discovered these payments of $5,000 and $15,000, he confronted Mr. Deer-man about the payments and Mr. Deerman said he withdrew the *366funds because he needed some money.
24. In January and March of 2008, Mr. Deerman wrote checks to Bud Deerman Farms from Falcon Farms’ bank account even though Falcon Farms had stopped buying hay months earlier when it ran out of money. The first check was written to Bud Deerman Farms on January 10, 2008 in the amount of $12,558.80. The second check was written to Bud Deerman Farms on January 31, 2008 in the amount of $31,200.00, and the third was written to Bud Deerman Farms on March 19, 2008 in the amount of $27,382.60. These three checks were not written for any legitimate business purpose and constituted an improper conversion of money by Mr. Deerman.
25. On March 18, 2008, the Deermans opened a bank account in the name of Falcon Farms at Bank of the Rio Grande in Las Cruces, New Mexico, with themselves as the sole signatories. The account was opened without the knowledge or consent of Cody Farms or the Fletchers.
26. The Deermans transferred funds from a Falcon Farms account to the account at Bank of the Rio Grande.
27. On September 11, 2008, the Deer-mans opened a bank account in the name of Falcon Farms at Bank of America with themselves as sole signatories. The account was opened without the knowledge or consent of Cody Farms or the Fletchers.
28. The Deermans transferred funds from Falcon Farms’ bank account at Bank of the Rio Grande to Falcon Farms’ bank account at Bank of America.
29. On September 28, 2008, the Deer-mans wrote a check from Falcon Farms’ bank account to their personal accountants in the amount of $803.04.
30. On September 22, 2008, the Deer-mans wrote two checks from Falcon Farms’ bank account to the firm of James & Haugland, P.C. in the amount of $5,000,000 and $299.00. On February 16, 2009, the Deermans wrote another check to James & Haugland, P.C. in the amount of $45,000.00. Wiley James, with the firm of James & Haugland, P.C. represented the Deermans personally, represented the Deermans in their Chapter 11 bankruptcy case, and currently represents Deerman Farms, Inc. in its Chapter 12 bankruptcy case.
31. On January 5, 2009, the Deermans wrote a check from Falcon Farms’ bank account to Hubert & Hernandez, P.A. in the amount of $25,000.00, and on January 4, 2009, the Deermans wrote another check from Falcon Farms’ bank account to Hubert & Hernandez, P.A. in the amount of $23,000.
32. Dean B. Cross, Esq., one of the attorneys who represented the Deermans in the Arbitration Case, was previously associated with Hubert & Hernandez, P.A. The Arbitration Case was filed just before the two checks were written to Hubert & Hernandez, P.A.
33. On April 20, 2009, the Deermans wrote a check from Falcon Farms’ bank account to James & Haug-land, P.C. in the amount of $5,000.00 representing the Deer-mans’ half of the retainer for attor*367ney Steve James who was retained to serve as independent counsel for Falcon Farms in the action filed by Capital Farm Credit. The Deer-mans agreed to split the cost of the retainer with Cody Farms and the Fletchers, who paid the other half of the retainer.
34. On April 20, 2009, the Deermans wrote a check from Falcon Farms’ bank account in the amount of $14,475.00 to the American Arbitration Association in connection with the Arbitration Case. The Deer-mans admit that this was a personal expense paid by them with Falcon Farms’ funds.
35. In March of 2006, the Deermans paid $25,000.00 from Falcon Farms’ bank account to the Deerman’s late son, Wade Deerman, to purchase a used mobile home. Mr. Fletcher never agreed to purchase the mobile home from Wade Deerman, and the mobile home was never used in Falcon Farms’ business.
36. The mobile home was eventually sold to Mr. Deerman for $6,000, when Falcon Farms’ equipment was liquidated.
37. In 2007, Mr. Deerman received distributions from Falcon Farms’ petty cash in the amount of $16,000.00 but provided receipts supporting only the sum of $1029.17, leaving a balance owed by Mr. Deerman to Falcon Farms in the amount of $14,970.00.
38. In 2008, Mr. Deerman received distributions from Falcon Farms’ petty cash in the amount of $10,600.00 but provided no receipts justifying these distributions.
F. Whether Partial Summary Judgment Should Be Granted
i) 11 U.S.C. § 528(a)(2)(A) — non-dis-chargeability based on fraud
Debts for money obtained by false pretenses, a false representation, or actual fraud are non-dischargeable under 11 U.S.C. § 523(a)(2)(A). There are five required elements under this subsection to establish the non-dischargeability of a debt obtained by false representation: 1) the debtor made a false representation to the creditor; 2) the debtor made the false representation with the intent to deceive the creditor; 3) the creditor relied on the false representation; 4) the creditor’s reliance was justifiable16; and 5) the false representation caused the creditor to sustain a loss. See Fowler Bros. v. Young (In re Young), 91 F.3d 1367, 1373 (10th Cir.1996). “False representations are ‘representations knowingly and fraudulently made that give rise to the debt.’ ” Adams Cnty. Dept. of Soc. Services v. Sutherland-Minor (In re Sutherland-Minor), 345 B.R. 348, 354 (Bankr.D.Colo.2006) (quoting Cobb v. Lewis (In re Lewis), 271 B.R. 877, 885 (10th Cir. BAP 2002)). False pretenses, as distinguished from false representations, “involve! ] an implied misrepresentation that is meant to create and foster a false impression.” Gordon v. Bruce (In re Bruce), 262 B.R. 632, 636 (Bankr.W.D.Pa.2001) (citing In re Scarlata, 127 B.R. 1004, 1009 (N.D.Ill.1991)). In other words, “a ‘false pretense’ is an ‘implied misrepresentation or conduct which creates and fosters a false impression, as distinguished from a “false representation” which is an express misrepresentation.’ ” Stevens v. Antonious (In re Antonious), 358 B.R. 172, 182 (Bankr.E.D.Pa.2006) (quoting In re Hain-*368ing, 119 B.R. 460, 463-64 (Bankr.D.Del.1990) (remaining citations omitted)).17 “False pretenses have ‘also been defined as any series of events, when considered collectively, that create a contrived and misleading understanding of a transaction, in which a creditor is wrongfully induced to extend money or property to the debtor.’ ” Id. at 182 (citing In re Barr, 194 B.R. 1009, 1019 (Bankr.N.D.Ill.1996)).
The Arbitrator’s factual findings issued as part of the Findings of Fact and Conclusions of Law entered in the Arbitration Case include the following:
While acting as a managing member of Falcon [Farms], Mr. Deerman represented to the Fletchers and others that the millions of dollars’ worth of hay Falcon [Farms] had in inventory in the fall of 2006 and throughout 2007, including the large amount of hay stacked out of doors, was sold. These representations were false. In fact, the hay had not been sold and no contracts for sale of the hay had been made. Mr. Deerman knew that his representations were false at the time they were made, and he made them with the intent and purpose of deceiving Claimants [Cody Farms and the Fletchers].
The evidence reflects that Mr. Deerman concealed his failure or inability to sell the thousands of tons of hay purchased by Falcon [Farms] to induce Claimants to continue their financial support of Falcon [Farms]’s operations.
In reliance upon Mr. Deerman’s representations that Falcon [Farms]’ hay was sold, Claimants advanced additional money and incurred additional liability for Falcon [Farms]’ borrowing. In June of 2007, Claimants agreed to sign as co-borrowers on $901,000.00 in increased borrowing from Capital Farm Credit. Claimants also agreed to provide the production from their own hay farms, for which they are owed $186,776.20, and to advance $43,297.20 to Falcon [Farms] to fund additional hay purchases from James Rascoe. Claimants would not have agreed to advance additional funds or to incur additional debt if the true status of Falcon [Farms]’ hay inventories had been known to them.
Claimants sustained damages in the amount of $1,030,073.40 as the direct and proximate result of their reasonable reliance on Mr. Deerman’s materially false representations.
Findings of Fact and Conclusions of Law, pp. 14-15, ¶¶ 4 — 8.
Though set forth as part of the Arbitrator’s legal conclusions, the above statements contain factual findings that are supported by the Arbitrator’s findings of fact. These facts establish all elements necessary to a determination of non-dis-chargeability under 11 U.S.C. § 523(a)(2)(A). Mr. Deerman made false representations to the Cody Farms and the Fletchers that the 2006 hay inventory had been sold, when, in fact, it had not. Mr. Deerman knew that his representations were false at the time he made them, and he made them with the intent to deceive Cody Farms and the Fletchers. In reliance on Mr. Deerman’s representations, Cody Farms and the Fletchers agreed to co-sign a promissory note to Capital Farm Credit that increased Falcon Farms’ borrowing by $901, 000, provided additional production from their own hay *369farms for which they are owed $186,776.20, and advanced $43,297.20 to fund additional hay purchases from James Rascoe.
The Arbitrator also found that the Fletchers’ reliance on Mr. Deerman’s misrepresentations was reasonable. It was not unusual for hay that had been sold to be stored, which supports an inference that the Fletchers had no reason to suspect that Mr. Deerman’s representation that the 2006 hay had been sold was false. Non-dischargeability under 11 U.S.C. § 523(a)(2)(A) requires only justifiable, not reasonable, reliance. Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (establishing justifiable reliance standard under 11 U.S.C. § 523(a)(2)(A)). Reasonable reliance is a higher standard than justifiable reliance. See Columbia State Bank, N.A. v. Daviscourt (In re Daviscourt), 353 B.R. 674, 684 n. 23 (10th Cir. BAP 2006) (stating that “ ‘[Reasonable’ reliance requires a higher standard of care by the relying party than does ‘justifiable’ rebanee.”) (citations omitted). Consequently, the Arbitrator’s finding that the Fletchers’ reliance was reasonable is more than sufficient to satisfy the reliance requirement under 11 U.S.C. § 523(a)(2)(A).
ii) 11 U.S.C. § 523(a)(6) — -willful and malicious injury
Debts resulting from “willful and malicious injury by the debtor to another entity or to the property of another entity” are non-dischargeable. 11 U.S.C. § 523(a)(6). Nondischargeability under this subsection requires that the debtor’s actions be both willful and malicious. Panalis v. Moore (In re Moore), 357 F.3d 1125, 1129 (10th Cir.2004) (“Without proof of both [willful and malicious elements under 523(a)(6) ], an objection to discharge under that section must fail.”) (emphasis in original); Mitsubishi Motors Credit of America, Inc. v. Longley (In re Longley), 235 B.R. 651, 655 (10th Cir. BAP 1999) (stating that “[i]n the Tenth Circuit, the phrase “willful and malicious injury’ has been interpreted as requiring proof of two distinct elements — that the injury was both ‘willful’ and ‘malicious.’ ”).18
*370Plaintiffs assert that Cody Farms and the Fletchers were willfully and maliciously injured by the Deermans’ purposeful and deliberate diversion of cash and hay proceeds from Falcon Farms’ bank accounts. The Arbitrator’s Findings of Fact and Conclusions of law include findings that the Deermans wrote checks from Falcon Farms’ bank accounts to pay Deermans’ personal expenses, the expenses of a separate Deerman entity, or for the benefit of members of the Deer-mans’ family, that had no legitimate business purpose for Falcon Farms, and that the Deermans diverted hay proceeds from Falcon Farms for their own benefit. Conversion can support a finding on non-dis-chargeability under 11 U.S.C. § 523(a)(6).19 However, a threshold requirement to a determination of non-dischargeability under 11 U.S.C. § 523(a)(6) premised on conversion is whether the plaintiff had a property interest in the converted property. See May v. Cagan (In re Cagan), 2010 WL 3853316, *4 (Bankr.D.N.M.2010) (stating that whether the plaintiff had a property interest in the funds at issue is a prerequisite to establishing a nondischargeable claim under 11 U.S.C. § 523(a)(6) and is also required to establish the tort of conversion under state law); Shah, 96 B.R. at 293 (“The threshold issue for Plaintiff is whether it had any personal property over which Defendants asserted wrongful dominion.”). Neither Cody Farms nor the Fletchers had a security interest in the funds that the Deermans diverted from Falcon Farms’ bank accounts; nor did the funds in Falcon Farms’ bank accounts constitute property of the Fletchers or property of Cody Farms.20 Cody Farms’ and the Fletchers’ only interest in the diverted funds is an indirect one arising from Cody Farms’ membership interest in Falcon Farms. Consequently, Cody Farms and the Fletchers are not entitled to summary judgment on their direct claim for non-dischargeability under 11 U.S.C. § 523(a)(6). Cody Farms may, however, be entitled to assert a derivative claim on behalf of the limited liability company. As discussed below, the Court concludes that Cody Farms has derivative standing to assert claims under 11 U.S.C. § 523(a)(4) and 11 U.S.C. § 523(a)(6) on behalf of Falcon Farms. The Arbitrator’s factual findings sufficiently establish that the Deer-mans acted both willfully and maliciously in converting Falcon Farms’ cash and hay proceeds to their own use. The Deer-mans’ actions were deliberate, necessarily caused Falcon Farms an intentional financial harm, and were undertaken without just cause or excuse. Therefore, all elements necessary to sustain a claim for non-*371dischargeability of debt under 11 U.S.C. § 523(a)(6) have been satisfied.
iii) 11 U.S.C. § 523(a)(A) — fraud or defalcation while acting in a fiduciary capacity, larceny or embezzlement
Plaintiffs assert that the Arbitration Award in the amount of $254,289.67 “for the misappropriation and diversion of the assets and funds of Falcon Farms” constitutes a non-dischargeable debt under 11 U.S.C. § 523(a)(4). See Arbitrator’s Findings of Fact and Conclusions of Law, p. 16, ¶ 16. Debts for “fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny” are non-dischargeable pursuant to 11 U.S.C. § 523(a)(4).
Fiduciary Capacity under 11 U.S.C. § 523(a) (A)
Fiduciary capacity within the meaning of 11 U.S.C. § 523(a)(4) is extremely narrow; it only arises when there is an express or technical trust, and must exist prior to and not as a result of the wrongdoing. See Duncan v. Neal (In re Neal), 324 B.R. 365, 370 (Bankr.W.D.Okla.2005), aff'd, 342 B.R. 384 (10th Cir. BAP 2006) (“The Tenth Circuit has taken a very narrow view of the concept of fiduciary duty under this section.”); Allen v. Romero, 535 F.2d 618, 621 (10th Cir.1976) (stating that “[t]he exemption under § 17(a)(4) [the predecessor under the former Bankruptcy Act to § 523(a)(4) ] applies only to technical trusts and not to those which the law implies from contract.”) (citation omitted). See also, Davis v. Aetna Acceptance Co., 293 U.S. 328, 333, 55 S.Ct. 151, 154, 79 L.Ed. 393 (1934) (noting that the debtor “must have been a trustee before the wrong and without reference thereto.”). “Neither a general fiduciary duty of confidence, trust, loyalty, and good faith, nor an inequality between the parties’ knowledge or bargaining power is sufficient to establish a fiduciary relationship for purposes of dischargeability.” Young, 91 F.3d at 1372 (internal citations omitted).
Plaintiffs assert that the Deer-mans owed them a fiduciary duty within the meaning of 11 U.S.C. § 523(a)(4) based on their status as members of a limited liability company. In support of their argument, Plaintiffs direct the Court to the language in the New Mexico statutes governing limited liability companies providing that members of limited liability companies owe a fiduciary duty to other members. See N.M.S.A.1978 § 53-19-16(D). A statute can impose fiduciary duties sufficient to establish a technical trust for purposes of 11 U.S.C. § 523(a)(4).21
However, even when a state statute imposes fiduciary duties upon members of a limited liability company, courts often conclude that such duties are insufficient to establish a trust within the meaning of 11 U.S.C. § 523(a)(4). See, e.g., Abraham, Bar-Am and Nourit, LLC v. Grosman (In re Grosman), 2007 WL 1526701, *16 (Bankr.M.D.Fla. May 22, 2007) (finding that “[although Florida Statute Section 608.4225 does supply certain fiduciary duties, for example, holding limited liability company property as trustee and refraining from intentional misconduct, .the *372statute does not establish any type of express or technical trust as required by Section 523(a)(4).”); Moses v. Duncan (In re Duncan), 2011 WL 6749054, *18 (Bankr.N.D.Okla. Dec. 22, 2011) (concluding that the “trust” provision of the Oklahoma limited liability statute created a “ ‘trust ex maleficio’ (i.e., a trust arising from malfeasance)” which falls outside the scope of § 523(a)(4)). Cf. Holaday v. Seay (In re Seay), 215 B.R. 780, 787 (10th Cir. BAP 1997) (“Even though the Oklahoma state courts may approve of a general policy that creates a fiduciary duty between joint venturers, this policy is not sufficient to fulfill the Tenth Circuit’s requirements of a common law trust for purposes of § 523(a)(4).”).22
The relevant New Mexico statute governing limited liability companies provides, in part:
every member who is vested with particular management responsibilities by the articles of organization or an operating agreement and every manager shall account to the limited liability company and hold as trustee for it any profit or benefit he derives from:
(1) any transaction connected with the conduct or winding up of the limited liability company; or
(2) any use by such member or manager of the company’s property, including confidential or proprietary information of the limited liability company or other matters entrusted to him as a result of his status as a member or manager unless:
(a) the material facts of the relationship of the interested manager or member to the contract, transaction or use were disclosed or known to all of the other managers or members who, in good faith, authorized or approved the contract, transaction or use by: 1) the affirmative vote of a majority of all of the disinterested managers; or 2) the affirmative vote of all of the disinterested members, even though all of the disinterested managers were less than a majority of all of the managers or even though all of the disinterested members did not have a majority share of the voting power of all of the members; or
(b) the contract, transaction or use was fair to the limited liability company when it was authorized or approved.
N.M.S.A.1978 § 53-19-16(D).23
*373This statutory language uses trust-type language requiring every member to “hold as trustee” any profit or benefit derived from any transaction or use of the limited liability company’s property. Plaintiffs argue that because the statute uses trust-type language and defines the trust res as “any profit or benefit” derived from the use of the limited liability company’s property, the statute imposes a technical trust within the meaning- of 11 U.S.C. § 523(a)(4). This Court disagrees.
Although the statute uses trust-type language, it contemplates a trust that would arise as a result of a member’s failure to account. That type of trust is a trust that arises as a result of a member’s wrongdoing and cannot support a finding of fiduciary capacity for purposes of 11 U.S.C. § 523(a)(4). The substance of the New Mexico statute is similar to the Oklahoma statute at issue in Duncan, 2011 WL 6749054 which the bankruptcy court concluded did not meet the non-dischargeability requirements for a technical trust. That statute provided in relevant part that
every manager must account to the limited liability company and hold as trustee for it any profit or benefit derived by the manager without the informed consent of the members from any transaction connected with the conduct or winding up of the limited liability company or from any personal use by the manager of its property.
18 O.S. 2001, § 2016(5).
The Duncan court reasoned that the statutory language “without the consent” renders the so-called trust a trust ex malefi-do which falls outside the scope of 11 U.S.C. § 523(a)(4). Duncan, 2011 WL 6749054, at *18 (relying on case law from the Tenth Circuit Bankruptcy Appellate Panel interpreting similar language in the Uniform Partnership Act). Sections 53-19-16(D)(2)(a) and (b) similarly contemplate consent or approval from the disinterested member or managers, such that action taken without consent or approval is what gives rise to the trust relationship. The Court concludes that the statute creates a trust that arises from a member’s malfeasance which cannot support a non-dischargeability claim under 11 U.S.C. § 523(a)(4). Thus, Plaintiffs claims premised on a breach of fiduciary duty while acting in a fiduciary capacity fail as a matter of law.
Embezzlement and Larceny Under 11 U.S.C. § 523(a)(Í)
Embezzlement and larceny are separate grounds under 11 U.S.C. § 523(a)(4) for which no fiduciary capacity is required. See In re Lynch, 315 B.R. 173, 175 (Bankr.D.Colo.2004) (“A claim for nondischargeability under Section 523(a)(4) may rest on proof of larceny or embezzlement, without proof of a fiduciary relationship.”) (citing In re Wallace, 840 F.2d 762, 765 (10th Cir.1988)).24 Embezzlement, for purposes of non-dischargeability under 11 U.S.C. § 523(a)(4), is defined as “ ‘the fraudulent appropriation of property by a person to whom such property has been entrusted or into whose hands it has lawfully come.’ ” Wallace, 840 F.2d at 765 (citation to quoted case omitted).25 “ ‘Lar*374ceny is defined as the “fraudulent and wrongful taking and carrying away of property of another with intent to convert it to the taker’s use and with intent to permanently deprive the owner of such property.” ’ ” Dorado, 400 B.R. at 309 (quoting In re Tilley, 286 B.R. 782, 789 (Bankr.D.Colo.2002) (additional internal quotation marks and citations omitted)). Larceny differs from embezzlement in that larceny “ ‘requires that the funds originally come into the Debtor’s hands unlawfully,’ ” whereas with embezzlement, the debtor initially acquires the property lawfully. Id. (quoting Tinkler, 311 B.R. at 876 (quoting Webber v. Giarratano (In re Giarratano), 299 B.R. 328, 338 (Bankr.D.Del.2003))). Both larceny and embezzlement require that the debtor act with fraudulent intent.26
The Arbitrator’s findings of fact are sufficient to support a claim for embezzlement. To demonstrate that the debtor fraudulently appropriated property for purposes of establishing embezzlement under 11 U.S.C. § 523(a)(4), the plaintiff must show that the debtor appropriated the property for a use other than that for which it was entrusted or that the debtor was not lawfully entitled to use the funds for the purposes for which they were in fact used, and the circumstances indicate fraud.27 The Arbitrator’s findings of fact establish that Mr. Deerman diverted cash from Falcon Farms to his own benefit, that certain checks he wrote were not written for any legitimate business purpose, and that such actions constituted an improper conversion of money by Mr. Deerman. These facts establish that Mr. Deerman used property of Falcon Farms for a purpose other than that for which the funds were entrusted to him. Mr. Deerman wrote checks from Falcon Farms’ bank account to pay for his own personal expenses, including legal fees, accountant’s fees, and the Deermans’ share of the arbitration costs. He also used Falcon Farms’ funds to pay Bud Deerman Farms even though Falcon Farms had stopped buying hay months earlier when it ran out of money. Mr. Deerman used petty cash without supporting the disbursement with proper receipts. Finally, Mr. Deerman *375used Falcon Farms’ funds to purchase his son’s mobile home. The Award determined that the Deermans are liable to Plaintiffs “for the sum of $254,289.67 for the misappropriation and diversion of assets and funds of Falcon Farms.” See Final Arbitration Award, ¶ 1(b). The Arbitration Award together with the Findings and Conclusions are sufficient for the Court to infer that the Deermans acted with the requisite fraudulent intent to establish a claim for embezzlement within the meaning of 11 U.S.C. § 528(a)(4).
However, Plaintiffs claim based on embezzlement cannot be asserted directly against the Deermans since the funds that the Deermans misappropriated belonged to Falcon Farms; the embezzlement claim is a derivative claim. See Spivey, 440 B.R. at 545 (finding that a claim for defalcation by debtor of limited liability company’s property belonged to the limited liability company since the duty and the debt was owed to the company; consequently, the member’s interest in the claim was derivative); White v. Whittle (In re Whittle), 449 B.R. 427, 430 (Bankr.M.D.Fla.2011) (finding that plaintiffs could not assert a direct claim for embezzlement against a member of limited liability company because any damage would be inflicted on the limited liability company, not the plaintiffs individually). See also Wallner v. Liebl (In re Liebl), 434 B.R. 529, 541 (Bankr.N.D.Ill.2010) (concluding that plaintiff could not recover individually on a claim based on the debtor’s embezzlement of funds from limited liability company because plaintiff could not demonstrate that the misappropriated property belonged to him personally).
Derivative Standing
Plaintiffs did not pursue derivative claims as part of the Arbitration Case28 but have filed this adversary proceeding both individually and on behalf of Falcon Farms. As a member of Falcon Farms-, Cody Farms can sue derivatively on behalf of the limited liability company. The New Mexico Limited Liability Company Act provides, in relevant part:
a suit on behalf of the limited liability company may be brought in the name of the limited liability company by: (A) any member of the limited liability company who is authorized to sue by the affirmative vote of members having a majority of the voting power of all members whose interests are not adverse to the interests of the limited liability company, whether or not the articles of organization or an operating agreement vests management of the limited liability company in one or more managers.
See N.M.S.A.1978 § 53-19-58 (emphasis added).
The members of Falcon Farms are Cody Farms and the Deermans. Because the Deermans’ interest is adverse to the interest of Falcon Farms, and the Deermans and Cody Farms are the only members of Falcon Farms, Cody Farms was not required under N.M.S.A.1978 § 53-19-58 to obtain a vote before initiating a derivative suit on behalf of Falcon Farms. See In re D’Anello, 477 B.R. 13, 23 (Bankr.D.Mass.2012) (reasoning that when 1) other members did not raise the lack of a vote authorizing a derivative suit as grounds for dismissal; 2) the derivátive claims were brought against members whose claims were adverse to the limited liability company, and 3) the only member eligible to vote to authorize the suit was the member *376who sought to file the suit, filing the complaint impliedly constituted the necessary vote to authorize a derivative suit) (quoting Billings v. GTFM, LLC, 449 Mass. 281, 289 n. 18, 867 N.E.2d 714 (Mass.2007)).29
Because this adversary proceeding was brought both derivatively and individually, the Court finds that Cody Farms is entitled to partial summary judgment on its derivative claim for embezzlement against the Deermans brought on behalf of Falcon Farms based on the arbitrator’s findings of fact. Cf. Liebl, 434 B.R. at 537 (sustaining non-dischargeability claim for embezzlement brought derivatively on behalf of a limited liability company, inferring that the debtor acted with fraudulent intent by appropriating funds from the limited liability company for his own personal use and benefit).
iv) Damages — the amount of the non-dischargeable debt
The Arbitration Award awarded the sum of $254,289.67 based on “the misappropriation and diversion of the assets and funds of Falcon Farms.” See Arbitration Award, p. 2, ¶ 1(b). As analyzed above, these misappropriated funds are non-dischargeable under 11 U.S.C. § 523(a)(4) and 11 U.S.C. § 523(a)(6) as a derivative claim brought by Cody Farms on behalf of Falcon Farms. The Arbitration Award includes pre-judgment interest in the amount of $135,419.94 based on the award for the Deermans’ misappropriation and diversion of Falcon Farms’s assets. See Arbitration Award, p. 2, ¶ 1(b). This pre-judgment interest amount is entitled to collateral estoppel effect and constitutes part of the non-dischargeable judgment. Cf. In re Roussos, 251 B.R. 86, 94 (9th Cir. BAP 2000), aff'd, 33 Fed.Appx. 365 (9th Cir.2002) (acknowledging that collateral estoppel can be applied to a state court’s award of punitive damages and included as part of a non-dischargeable debt, and observing further that “a nondischargeable ‘debt’ may include prejudgment interest, attorneys’ fees and costs, and punitive damages, not all of which are actual out-of-pocket losses to the creditor due to fraud, but all of which arise from the debtor’s liability for the fraudulent conduct.”); The Aetna Casualty and Surety Co. v. Markarian (In re Markarian), 228 B.R. 34, 45 (1st Cir. BAP 1998) (concluding, based on Cohen v. de la Cruz, 523 U.S. 213, 118 S.Ct. 1212, 1215, 140 L.Ed.2d 341 (1998) that the entire amount of damages awarded by the district court, including the pre- and post-judgment interest was excepted from discharge).
Plaintiffs also request the Court to determine that $1,130,073.40 is non-dis-chargeable under 11 U.S.C. § 523(a)(2)(A) as a debt procured by fraud. The Arbitration Award provides:
Claimants sustained damages in the amount of $1,130,073.40 as the direct and proximate result of their reasonable reliance on Mr. Deerman’s materially false representations. This amount in-*377eludes $901,000.00 in increased liability to Capital Farm Credit as co-borrowers on Falcon’s revolving line of credit, $186,776.20 for the value of additional hay provided to Falcon and $43,297.20 in additional advances to fund hay purchases from James Rascoe.
See Findings of Fact and Conclusions of Law, p. 15, ¶ 8.
However, the Arbitrator’s findings of fact establish that $186,776.20 of the $1,130,073.40 in damages is attributable to additional hay provided to Falcon Farms by Fletcher Farms, not by the Fletchers individually and not by Cody Farms. See Findings of Fact and Conclusions of Law, p. 7, ¶30 (stating that “[t]he La Mesa office [of Falcon Farms] only paid Fletcher Farms for its first and second cuttings and a small portion of its third cutting in 2007, leaving a balance due of $186,776.20 for Fletcher Farm’s [sic.] third and fourth cuttings.”). Fletcher Farms is not a party to this adversary proceeding. Thus, $186,776.20 cannot be included in the total amount of the non-dischargeable judgment in favor of the Plaintiffs. The Arbitrator's factual findings also establish that Cody Farms paid the $43,297.20 to James Ras-coe. Id. (“Falcon also failed to pay James Rascoe $43,297.20 for his fourth cutting. Cody Farms paid this invoice as an additional advance to Falcon.”). Cody Farms is owned by Mr. Fletcher, and is a party to this adversary proceeding, both individually, and derivatively on behalf of Falcon Farms. As analyzed above, Plaintiffs’ fraud claims against the Deermans are direct claims. Cody Farms, is, therefore, entitled to a non-dischargeable judgment under 11 U.S.C. § 523(a)(2)(A) in the amount of $43,297.20.
With respect to the remaining $901,000.00 component of the $1,130,073.40 award attributable to the Deermans’ misrepresentations, Cody Farms and the Fletchers each co-signed the promissory note that increased Falcon Farms’ liability to Capital Farm Credit by $901,000.00. However, it is not entirely clear from the Arbitrator’s factual findings what portion of this debt Plaintiffs paid to Capital Farm Credit. The Arbitrator’s factual findings establish that Capital Farm Credit filed a complaint against Falcon Farms, Cody Farms, the Fletchers and the Deermans, and that Capital Farm Credit agreed to settle its claims against Cody Farms and the Fletchers for the total sum of $1,500,000.00 pursuant to a Compromise and Settlement Agreement. See Findings of Fact and Conclusions of Law, pp. 11, ¶ 46. Certain proceeds held in trust by the Deermans’ attorneys in the amount of $160,039.91 were used to pay a portion of the settlement amount. Id. The remaining balance in the amount of $1,339,960.0030 due under the terms of the Compromise and Settlement Agreement was paid from the sale of certain real property owned by Fletcher Farms. Id., ¶ 47. The Arbitrator awarded $669,980.04, one-half of the amount paid to Capital Farm Credit from the sale of Fletcher Farms’s property, as a contribution claim. See Arbitration Award, p. 3, ¶ 1(c). The Arbitration Award provides that any amounts recovered under the contribution award shall be credited against the $1,130,073.40. Id.
It is not possible for the Court to determine from the Arbitration Award what portion of the $901,000.00 is non-discharge-able. While the Arbitrator’s factual findings reflect that Capital Farm Credit filed *378a proof of claim in the Deermans’ bankruptcy case in the amount of $1,828,-427.8731, the factual findings do not set forth the components of Capital Farm Credit’s claim. Further, the Arbitrator made no findings regarding what portion of the $1,500,000 the Fletchers paid to Capital Farm Credit was or should have been applied to the $901,000. It is possible that Capital Farm Credit discounted the $901,000 as part of the settlement. Thus, the Court cannot ascertain from the Arbitrator’s factual findings what portion of the $1,500,000.00 settlement amount is attributable to the $901,000 that the Plaintiffs paid. Further evidence is required to establish the amount of the non-discharge-able debt attributable to the $901,000.00 in increased liability caused by the Deer-mans’ fraudulent misrepresentations, including the impact, if any, of the contribution claim awarded in paragraph (c) of the Arbitration Award.
CONCLUSION
For the foregoing reasons, the Court concludes that Plaintiffs are entitled to partial summary judgment on their non-dischargeability claims under 11 U.S.C. § 523(a)(2)(A), 11 U.S.C. § 523(a)(4), and 11 U.S.C. § 523(a)(6) based on the preclu-sive effect of the Arbitration Award. Cody Farms is entitled to a non-discharge-able judgment in the amount of $389,709.61, including pre-judgment interest in the amount of $135,419.94, as a derivative claim on behalf of Falcon Farms based on its claims under 11 U.S.C. § 523(a)(4) and 11 U.S.C. § 523(a)(6) arising from the Deermans’ misappropriation and diversion of the assets and funds of Falcon Farms. Cody Farms is also entitled to a non-disehargeable judgment in the amount of $43,297.20 based on its fraud claim under 11 U.S.C. § 523(a)(2)(A).
The Fletchers are entitled to a determination of liability on their claim for fraud under 11 U.S.C. § 523(a)(2)(A). However, further evidence is needed with respect to the damages amount attributable to the Fletchers’ fraud claim. The Court will enter a separate judgment consistent with this Memorandum Opinion.
. See Response to Motion for Summary Judgment, Memorandum in Support of Response to Motion for Summary Judgment, and Alternatively Motion to Stay Briefing on Motion for Summary Judgment ("Defendants' Response”), p. 3, n. 1 ("Respondents to do not dispute that the Arbitrator made the Findings ... cited in Petitioners [’] Statement of Undisputed Fact.”).
. For example, Plaintiffs’ Statement of Undisputed Fact No. 24 states that "Beginning in early 2007, Mr. Deerman repeatedly represented to Mr. Fletcher that Falcon's 2006 carryover hay inventory had been sold. Mr. Fletcher believed Mr. Deerman’s statement that Falcon's 2006 carryover hay was sold.” See Plaintiffs’ Supporting Memorandum, p. 5, ¶ 24 — Docket No. 29. In response, the Deer-mans state, in part, that
Falcon’s inventory records reflect that Falcon sold approximately 78.2% of its 2006 horse quality hay inventory from January 2007 through May 2007. Falcon’s hay sales for the first five months of 2007 were from Falcon’s 2006 inventory because the hay from 2007 crop year had not come in. Respondent Deerman told Petitioner Fletcher that the remaining 2006 hay inventory was sold to dairies if Petitioner Robert Fletcher would agree to reduce the price of the damaged 2006 inventory to as low as $100 per ton. Respondent Fletcher repeatedly refused to reduce the 2006 hay inventory prices because the bank would call the note and Falcon would be out of business.
Deermans' Response, p. 6-7, ¶ 5.
Based on these additional facts, the Deer-mans assert that there is a genuine issue of material fact as to whether the 2006 hay inventory had been sold and whether Mr. Fletcher had a legitimate belief that the inventory had been sold or had not been sold. Id.
. Those sections provide:
(a) In any of the following cases the United States court in and for the district wherein the award was made may make an order vacating the award upon the application of any party to the arbitration—
(1) where the award was procured by corruption, fraud, or undue means;
(2) where there was evident partiality or corruption in the arbitrators, or either of them;
(3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing, upon sufficient cause shown, or in refusing to hear evidence pertinent and material to the controversy; or of any other misbehavior by which the rights of any party have been prejudiced; or
(4) where the arbitrators exceeded their powers, or so imperfectly executed them that a mutual, final, and definite award upon the subject matter submitted was not made.
(b) If an award is vacated and the time within which the agreement required the award to be made has not expired, the court may, in its discretion, direct a rehearing by the arbitrators.
(c) The United States district court for the district wherein an award was made that was issued pursuant to section 580 of title 5 may make an order vacating the award upon the application of a person, other than a party to the arbitration, who is adversely affected or aggrieved by the award, if the use of arbitration or the award is clearly inconsistent with the factors set forth in section 752 of title 5.
9 U.S.C. § 10.
In either of the following cases the United States court in and for the district wherein the award was made may make an order modifying or correcting the award upon the application of any party to the arbitration—
(a) Where there was an evident material miscalculation of figures or an evident material mistake in the description of any person, thing, or property referred to in the award.
(b) Where the arbitrators have awarded upon a matter not submitted to them, unless it is a matter not affecting the merits of the decision upon the matter submitted.
(c) Where the award is imperfect in matter of form not affecting the merits of the controversy. The order may modify and correct the award, so as to effect the intent thereof and promote justice between the parties.
9 U.S.C. § 11.
. Section 12 of the FAA provides:
Notice of a motion to vacate, modify, or correct an award must be served upon the adverse party or his attorney within three months after the award is filed or delivered. If the adverse party is a resident of the district within which the award was made, such service shall be made upon the adverse party or his attorney as prescribed by law for service of notice of motion in an action in the same court. If the adverse party shall be a nonresident then the notice of the application shall be served by the marshal of any district within which the adverse party may be found in like manner as other process of the court. For the purposes of the motion any judge who might make an order to stay the proceedings in an action brought in the same court may make an order, to be served with the notice of motion, staying the proceedings of the adverse party to enforce the award.
9 U.S.C. § 12.
. As noted by the District Court in Tokura Construction Co., Ltd. v. Corporacion Raymond, S.A., 533 F.Supp. 1274, 1278 (S.D.Tex.1982), the fact that Jefferson Trucking was decided under the Labor Relations Act of 1947, 29 U.S.C. § 185(e), "does not detract from the persuasiveness” on the issue of whether the failure to timely seek to vacate or modify an arbitration award under Section 12 of the FAA precludes a defendant from prosecuting objections to an award even in defense to a motion to confirm the award.
. See Metz v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 39 F.3d 1482, 1488-89 (10th Cir.1994) (stating that "[tjhere is a strong federal policy encouraging the expeditious and inexpensive resolution of disputes through arbitration.”) (citation omitted); ARW Exploration Corp. v. Aguirre, 45 F.3d 1455, 1462 (10th Cir.1995) (stating that "[t]he Federal Arbitration Act, § 9 U.S.C. §§ 1-16, evinces a strong federal policy in favor of arbitration.”)(citing Shearson/American Express, Inc. v. McMahon, 482 U.S. 220, 226, 107 S.Ct. 2332, 2337, 96 L.Ed.2d 185 (1987)).
. See Photopaint Technologies, LLC v. Smartlens Corp., 335 F.3d 152, 159 (2nd Cir.2003) (acknowledging that "an action at law offers and alternative remedy to enforce an arbitral award ... ”); Sverdrup Corp. v. WHC Constructors, Inc., 989 F.2d 148, 154 (4th Cir.1993) (stating that “[t]he FAA supplemented rather than extinguished any previously existing remedies!]” and finding, therefore, that "an action at law remains a viable alternative to confirmation proceedings under § 9 [of the FAA]” as a means to enforce a final arbitration award) (citations omitted); Kentucky River Mills v. Jackson, 206 F.2d 111, 120 (6th *360Cir.1953) (explaining that "[a] party may ... apply to the court for an order confirming the award, but is not limited to such remedy. Prior to the enactment of the United States Arbitration Act, an action at law on the award was the proper method of enforcing it.”)(citing Red Cross Line v. Atlantic Fruit Co., 264 U.S. 109, 44 S.Ct. 274, 68 L.Ed. 582 (1924)); Insurdata Mktg. Services, LLC v. Healthplan Services, Inc., 352 F.Supp.2d 1252, 1254-55 (M.D.Fla.2005) (holding that a party could seek enforcement of arbitration award through common law contract action rather than seeking confirmation of the award under the FAA).
. But see Sverdrup, 989 F.2d at 151-156 (refusing to read Section 9 of the FAA as a strict statute of limitations, reasoning that the language in Section 9 of the FAA is permissive, and holding that the FAA did not bar an action to confirm an arbitration award more than one year after the award).
. Cf. Robinson, 326 F.3d at 771 (reasoning that because bankruptcy courts are " 'courts of the United States' for purposes of Section 3 of the FAA, it would seem to follow that they are 'United States Court[s]' for purposes of Section 10 of the FAA as well.”) (citation omitted).
. See, e.g., In re Rosendahl, 307 B.R. 199, 209 (Bankr.D.Or.2004) (stating that "an unconfirmed arbitration award can be regarded as a final determination for issue preclusion purposes on subject matters of fact and law in appropriate circumstances” and applying collateral estoppel to a non-dischargeability claim under § 523(a)(6) based on an unconfirmed arbitration award); Wilbert Life Ins. Co. v. Beckemeyer (In re Beckemeyer), 222 B.R. 318, 321 (Bankr.W.D.Tenn.1998) (finding that confirmation of an arbitration is not required in order to give preclusive effect, provided the award is final under applicable law); Val-U Const. Co. of South Dakota v. Rosebud Sioux Tribe, 146 F.3d 573, 581 (8th Cir.1998) *362(" '[t]he fact that the award in the present case was not confirmed in a court ... does not vitiate the finality of the award.' ”) (quoting Wellons, Inc. v. T.E. Ibberson Co., 869 F.2d 1166, 1169 (8th Cir.1989)); Jacobson v. Fireman's Fund Ins. Co., 111 F.3d 261, 267-68 (2nd Cir.1997) (holding that "res judicata and collateral estoppel apply to issues resolved by arbitration where there has been a final decision on the merits, notwithstanding a lack of confirmation of the award.”) (citation and internal quotation marks omitted).
. Scottsdale Mem’l Health Sys., Inc. v. Clark, 157 Ariz. 461, 466, 759 P.2d 607, 612 (1988) (collateral estoppel only applies to parties and persons in privity with parties).
. See Rex, Inc. v. Manufactured Housing Committee, 119 N.M. 500, 504, 892 P.2d 947, 951 (1995) (the required collateral estoppel elements are " '(1) the party to be estopped was a party [or privy] to the prior proceeding, (2) the cause of action in the case presently before the court is different from the cause of action in the prior adjudication, (3) the issue was actually litigated in the prior adjudication, and (4) the issue was necessarily determined in the prior litigation.' ”)(quoting Shovelin v. Central New Mexico Electric Cooperative, Inc., 115 N.M. 293, 297, 850 P.2d 996, 1000 (1993)). Matched up side by side, the collateral estoppel elements under New Mexico and Arizona law are:
*363Arizona New Mexico
The issue was actually litigated The issue was actually litigated
the parties had a full and fair opportunity and motive to litigate the issue; Once the other three elements are demonstrated, the court determines "whether the non-moving party 'had a full and fair opportunity to litigate the issue in the prior litigation.’ ” Rex, 119 N.M. at 504, 892 P.2d at 951 (quoting Shovelin, 115 N.M. at 297, 850 P.2d 996).
The resolution of the issue was essential to the decision in the prior action The issue was necessarily determined in the prior litigation
The parties in the prior action are the same the party to be estopped was a party to the prior proceeding
The prior decision was a valid and final decision on the merits
. Under Arizona law, "privity between a party and a non-party requires both a substantial identity of interests and a working or functional relationship ... in which the interests of the non-party are presented and protected by the party in the litigation.” Hall v. Lalli, 194 Ariz. 54, 57, 977 P.2d 776, 779 (Ariz.1999) (internal quotation marks and citations omitted). Mr. Fletcher owns Cody Farms and is one of the two managers of Falcon Farms. Mr. Fletcher is in privity with Cody Farms in its derivative capacity inasmuch as Mr. Fletcher’s interests as manager of Falcon Farms and owner of Cody Farms are substantially identical to the derivative interests of Cody Farms in this adversary proceeding. Similarly, Falcon Farms is in privity with Cody Farms, which owns 50% Falcon Farms, and with Mr. Fletcher, one of Falcon Farms' two managers.
. See Plaintiffs' Memorandum in Support of Motion for Partial Summary Judgment, p. 11, n. 2.
. Cf. Resolution Trust Corp. v. Keating, 186 F.3d 1110, 1114 (9th Cir.1999) (the elements for non-mutual collateral estoppel in a federal court are: 1) a full and fair opportunity to litigate the issue in the prior action; 2) the issues to be precluded were actually litigated and necessary to support the judgment in the prior action; 3) the judgment was a final judgment; and 4) the party against whom collateral estoppel is asserted was a party or in privity with a party in the prior action) (citing Pena v. Gardner, 976 F.2d 469, 472 (9th Cir.1992)).
. See Field v. Mans, 516 U.S. 59, 116 S.Ct. 437, 133 L.Ed.2d 351 (1995) (establishing justifiable reliance standard under § 523(a)(2)(A)).
. See also, The William W. Barney, M.D. P.C. Retirement Fund v. Perkins (In re Perkins), 298 B.R. 778, 788 (Bankr.D.Utah 2003) (stating that ''[a] false pretense as used in § 523(a)(2)(A) includes material omissions, and means 'implied misrepresentations or conduct intended to create and foster a false impression.’ ”) (quoting Peterson v. Bozzano (In re Bozzano), 173 B.R. 990, 993 (Bankr.M.D.N.C.1994) (remaining citation omitted)).
. The "willful” element requires both an intentional act and an intended harm; an intentional act that leads to harm is not sufficient. See Kawaauhau v. Geiger, 523 U.S. 57, 61, 118 S.Ct. 974, 977, 140 L.Ed.2d 90 (1998) (holding that "[t]he word 'willful’ in (a)(6) modifies the word 'injury,' indicating that nondischargeability takes a deliberate or intentional injury, not merely a deliberate or intentional act that leads to injury.”)(emphasis in original). "[D]ebts arising from recklessly or negligently inflicted injuries do not fall within the compass of § 523(a)(6).” Id. at 64, 118 S.Ct. 974. In The Tenth Circuit has articulated the "willful” component as requiring proof that the debtor "must 'desire ... [to cause] the consequences of his act ... or believe [that] the consequences are substantially certain to result from it.’ ” Moore, 357 F.3d at 1129 (quoting Longley, 235 B.R. at 657 (quoting Restatement (Second) of Torts § 8A (1965)). The "malicious” element requires an intentional, wrongful act, done without justification or excuse. See, e.g., Bombardier Capital, Inc. v. Tinkler (In re Tinkler), 311 B.R. 869, 880 (Bankr.D.Colo.2004) (finding that "the malice prong of 11 U.S.C. § 523(a)(6) is satisfied upon a showing [that] the injury was inflicted without just cause or excuse.”) (citations omitted)(emphasis in original)); America First Credit Union v. Gagle (In re Gagle), 230 B.R. 174, 181 (Bankr.D.Utah 1999) (finding that "[i]n order for an act to be willful and malicious it must be a deliberate or intentional injury (willful) that is performed without justification or excuse (malicious).”); Saturn Systems, Inc. v. Militare (In re Militare), 2011 WL 4625024, *3 (Bankr.D.Colo.2011) ("a malicious act under § 523(a)(6) is a 'wrongful act, done intentionally, without just cause or excuse.' ")(quoting Tinkler, 311 B.R. at 880 (quoting Tinker v. Colwell, 193 U.S. 473, 486, 24 S.Ct. 505, 48 L.Ed. 754 (1904)); Tso v. Nevarez (In re Nevarez), 415 B.R. 540, 544 (Bankr.D.N.M.2009) (" 'Malicious' requires that an intentional act be 'performed without justification or excuse.’ ")(quoting Gagle, 230 B.R. at 181)). *370But cf. McCain Foods USA, Inc. v. Shore (In re Shore), 317 B.R. 536, 543 (10th Cir. BAP 2004) (pointing out that "neither Geiger nor the Tenth Circuit have explicitly addressed whether a plaintiff must demonstrate that an injury occurred without just cause or excuse in a § 523(a)(6) proceeding or even what circumstances might establish such an element[J").
. See Longley, 235 B.R. at 657 (acknowledging that "conversion can, under certain circumstances, give rise to a non-dischargea-ble debt pursuant to § 523(a)(6).”); Bank of Utah v. Auto Outlet, Inc. (In re Auto Outlet, Inc.), 71 B.R. 674, 676 (Bankr.D.Utah 1987) ("Although this section does not specifically mention conversion, 'willful and malicious injury' was intended to include 'willful and malicious conversion.’ ")(citing 124 Cong. Rec. H. 11096 (daily ed. Sept. 28, 1978); S. 17412 (daily ed. Oct. 6, 1978)(statement of Rep. Edwards and Sen. DeConcini)); Borg-Warner Acceptance Corp. v. Shah (In re Shah), 96 B.R. 290, 293 (Bankr.C.D.Cal.1989) ("The tort of conversion is one type of wrongful behavior that may be nondischargeable under Section 523(a)(6).”) (citations omitted).
. Falcon Farms is also a plaintiff in this adversary proceeding through Cody Farms’ derivative claims.
. See, e.g., Allen v. Romero, 535 F.2d at 621 (finding that the New Mexico statute governing licensed contractors “clearly imposes a fiduciary duty upon contractors who have been advanced money pursuant to construction contracts."). See also, Neal, 324 B.R. at 370 (a technical trust is a trust "imposed by state statutes ... which may lead to the existence of a fiduciary relationship.”); Cundy v. Woods (In re Woods), 284 B.R. 282, 288 (D.Colo.2001) (noting that "[a] technical trust may arise as a result of defined obligations imposed upon the debtor by state or federal statute.”)(citing Allen v. Romero, 535 F.2d at 622).
. But see, e.g., Andrews v. Wells (In re Wells), 368 B.R. 506, 512 (Bankr.M.D.La.2006)(find-ing that the Louisiana limited liability company statute imposed a fiduciary duty on a debtor-member of a limited liability company sufficient to establish fiduciary capacity under 11 U.S.C. § 523(a)(4), provided that the debtor actually takes part in managing the entity.); Lewis v. Spivey (In re Spivey), 440 B.R. 539, 545 (Bankr.W.D.Ark.2010) (finding that “a managing member of a limited liability company may also have a fiduciary relationship with the limited liability company” and noting that Arkansas has recognized "that a corporate officer is charged with a fiduciary duty to the corporation ... sufficient for a § 523(a)(4) cause of action.”)(citing Bell v. Collins (In re Collins), 137 B.R. 754, 756 (Bankr.E.D.Ark.1992)). Cf. The Credit Experts, LLC v. Santos (In re Santos), 2012 WL 2564366, *5 (Bankr.E.D.Va. July 2, 2012) (noting that courts "have held that partners have fiduciary duties to each other, for purposes of § 523(a)(4).”) (citing FNFS, Ltd. v. Harwood (In re Harwood), 637 F.3d 615 (5th Cir.2011) and Ragsdale v. Haller, 780 F.2d 794 (9th Cir.1986)).
. Because subsection (a) refers to transactions described in subsection (1), subsections (a) and (b) apply not only to subsection (2) but also to subsection (1).
. See also, Hernandez v. Dorado (In re Dorado), 400 B.R. 304, 309 (Bankr.D.N.M.2008) (acknowledging that debts may be excepted from discharge when the debts result from a debtor’s embezzlement or larceny even in the absence of a fiduciary relationship).
. See also Hill v. Putvin (In re Putvin), 332 B.R. 619, 627 (10th Cir. BAP 2005) ("Under 523(a)(4) embezzlement will have occurred when there is a 'fraudulent appropriation of property by a person to whom such property has been entrusted, or into whose hands it has lawfully come, and it requires fraud in fact, involving moral turpitude, or intentional *374wrong, rather than implied or constructive fraud.' ")(additional internal quotation marks and citations omitted)); Marks v. Hentges (In re Hentges), 373 B.R. 709, 723 (Bankr.N.D.Olda.2007) ("embezzlement requires proof of a defalcation or misappropriation of property by one to whom it is entrusted, plus proof of fraudulent intent.”).
. See Tinkler, 311 B.R. at 876 (" 'Larceny is proven for § 523(a)(4) purposes if the debtor has wrongfully and with fraudulent intent taken property from its owner.’ ”)(quoting Kaye v. Rose (In re Rose), 934 F.2d 901, 902 (7th Cir.1991)); Tilley, 286 B.R. at 789 (among the required elements for embezzlement is fraudulent intent); Sullivan v. Clayton (In re Clayton), 198 B.R. 878, 885 (Bankr.E.D.Pa.1996) ("Essential to both larceny and embezzlement is the element of fraudulent intent.”) (citing In re Graham, 194 B.R. 369, 374 (Bankr.E.D.Pa.1996) and In re Spector, 133 B.R. 733, 741 (Bankr.E.D.Pa.1991)).
. See, e.g., In re Bucci, 493 F.3d 635, 644 (6th Cir.2007) (" 'A creditor proves embezzlement by showing that he entrusted his property to the debtor, the debtor appropriated the property for a use other than that for which it was entrusted, and the circumstances indicate fraud.’ ”)(quoting Brady v. McAllister (In re Brady), 101 F.3d 1165, 1173 (6th Cir.1996)); Belfry v. Cardozo (In re Belfry), 862 F.2d 661, 662 (8th Cir.1988) ("A plaintiff must establish that the debtor was not lawfully entitled to use the funds for the purposes for which they were in fact used.”) (citation omitted); Kruse v. Murray (In re Murray), 408 B.R. 268, 275 (Bankr.D.Mo.2009) (to establish a claim for embezzlement, the plaintiff must demonstrate that "the debtor was not lawfully entitled to use the funds for the purpose for which they were in fact used.”) (citation omitted).
. See Plaintiffs’ Memorandum in Support of Motion for Partial Summary Judgment, p. 11 n. 2.
. Plaintiffs cite Bevan v. Davita, Inc., 2011 WL 4343223 (D.N.M.) (Arbitration Award) which interpreted N.M.S.A.1978 § 53-19-58 to bar a manager from bringing a derivative claim against the other manager in a two-manager limited liability company because the manager who sought to file suit did not have the majority vote authorizing the action, as the reason Plaintiffs declined to pursue a derivative claim in the Arbitration Case. That decision of an arbitrator is not binding on this Court. Section 53-19-18 does not serve as a bar to a derivative action where, as here, Cody Farms holds all of the voting power of all members where the interests are not adverse to the interests of Falcon Farms. Moreover, similar to D’Anello, the Deermans have not raised a lack of standing on the part of Cody Farms to assert a derivative claim as grounds for dismissal; consequently, they have waived it.
. The Findings of Fact reflect that the remaining balance is $1,339, 960.00; however, $1,500,000.00 less the $160,039.91 applied from the proceeds in the Deermans’ attorneys’ trust account leaves an actual balance of $1,339,960.09. This discrepancy is immaterial and hardly worth noting.
. The Arbitrator’s Findings of Fact and Conclusions of law include a finding that Capital Farm Credit filed a proof of claim in the Deermans’ bankruptcy case in the amount of $1,828,427.87, of which all but $1,000.00 is unsecured, and that the Deermans have filed an objection to the claim, asserting that in the event Capital Farm Credit holds a valid claim, it should be reduced by the $1,500,000.00 to be paid under the compromise and settlement agreement. See Findings of Fact and Conclusions of Law, p. 12, ¶ 46. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495314/ | Amended Memorandum Opinion On Net Revenues And Applicability of 11 U.S.C. § 928(b)
THOMAS B. BENNETT, Bankruptcy Judge.
This declaratory judgment action is the reaction of The Bank of New York Mellon and those joining it as plaintiffs to a stance taken by Jefferson County, Alabama (hereinafter sometimes the County). The stand taken by the County is that the monthly withholding of millions of dollars that had not been, to the degree and scope now argued by the County, if at all, part of the calculus in determining how much of its sewer system’s revenues are to be paid to warrant holders who/which lent to the County over a period of years $3,685,150,000.00. This litigation has been necessitated by actions taken by the County within days of January 2012 rulings by this Court. One was that the filing of the County’s chapter 9 bankruptcy case effectively ended an Alabama court’s receivership control over the County’s sewer system properties. The Alabama court’s receiver’s control over the properties constituting the County’s sewer system that had commenced in September 22, 2010, was in question from the November 9, 2011, County bankruptcy filing until this Court’s January 6, 2012, ruling on the receiver’s status. So, effectively, the *408County did not regain possession and control over the sewer system until sometime in early to mid-January 2012.
Cash and the ability to obtain it is perhaps one of the most critical needs of any enterprise, private or governmental. Without cash or ready access to it, even consistently profitable companies may not be able to survive over time. The obverse is that with cash or access to it even businesses that perennially lose money may continue to operate while continuing to lose more money. This adversary proceeding highlights some of the problems faced by the County. Its sewer system is an enterprise with large flows and stores of monies, but limited access to them.1 The limited access is partly due to the contractual agreements, the County’s default under the agreements, and the excessive debt incurred to fund rehabilitation and improvements to its sewer system. Many of the reasons for its sewer system’s limited access to cash are the fault of prior commissioners and employees of the County. Others are the results of missteps by individuals and businesses involved in the funding and construction of the improvements and enhancements of the sewer system. This is the backdrop of this suit. An initial task is to set the contours of the disputes.
I. Declarations, Categories, Revenues, And Outcomes
The Bank of New York Mellon, as indenture trustee (hereinafter Indenture Trustee), along with Bank of America, N.A., Bank of Nova Scotia, Société Géné-rale, New York Branch, The Bank of New York Mellon, State Street Bank and Trust Company, Lloyds TSB Bank PLC, JPMor-gan Chase Bank, N.A., Syncora Guarantee Inc., Assured Guaranty Municipal Corporation, and Financial Guaranty Insurance Company are plaintiffs in this declaratory judgment action against Jefferson County, Alabama. The Indenture Trustee along •with the other named plaintiffs are collectively referred to as the Trustee.
As amended, the Trustee’s complaint contained five counts. Three of the counts were severed by the Court and designated as a new adversary proceeding. The counterclaims of the County were severed along with the Trustee’s three counts. The two remaining ones are counts I and II, which revolve around a fight over what expenditures for the County’s sewer system are payable ahead of payments to those lenders who/which secured payment of interest and principal owed on the County’s sewer system’s warrants by obtaining a consensual lien against some revenues of the sewer system.
Count I is for a declaration that the contracted for scheme for how revenues of the County’s sewer system are to be applied controls, that a bankruptcy subsection allowing subordination of contracted for payments of the kind at issue here is inapt, and that the County may not with*409hold payment of monies falling into certain categories of disputed expenditures. Count II is an alternative request. Should a portion of the bankruptcy laws for municipal bankruptcies allow subordination of the contracted format for payments to holders of warrants of the County’s sewer system, the Trustee seeks a ruling that the disputed categories of expenditures are not part of what is to be paid ahead of principal and interest on the warrants. The monies that the County asserts are payable ahead of disbursements to warrant holders have been classified by the Trustee and the County.
According to the parties there are six general categories of expenditures that are in dispute. As designated by the County and Trustee, they are (1) maintenance expenditures, (2) project expenditures, (3) other expenditures, (4) professional fees and related costs, (5) reserves for depreciation/amortization and future operating and/or capital expenditures, and (6) extraordinary items. The maintenance expenditures are for keeping the sewer system in good repair and good operating condition. Included within this category are expenditures for maintenance of the sewer system’s existing collection system, i.e., pipes, manholes, and its plants and pumping stations. The County and the Trustee disagree on what are project expenditures. The Trustee asserts they are those expenditures that expand, modernize, update, or improve the sewer system, including those incurred to meet regulatory requirements and industry standards that expand, modernize, update, or improve the sewer system. The County contends project expenditures are those required to comply with regulatory requirements or industry standards and whether they expand, modernize, update, or improve the County’s sewer system is irrelevant to whether they are properly payable ahead of warrant holders.
Other expenditures are those described in the “Joint Statement with Respect to April Hearing” (hereinafter the Joint Statement) as expenditures “on all other items,” including for vehicles and equipment to replace worn, lost, or destroyed vehicles and equipment and expenditures for what the parties call internal labor. Joint Statement at 4. Internal labor is labor performed by employees of the sewer system.
Professional fees and related costs is the next category and it is subdivided into two types. One is comprised of those professional fees and costs directly related to the efficient and economical administration of the sewer system exclusive of those related to the County’s chapter 9 bankruptcy case. For instance, included are fees and costs incurred in defending against claims arising from the termination of a sewer system employee. This subclass of professional fees is not in dispute and all parties agree that they are properly payable ahead of payments to warrant holders. The second is the disputed one. It is all other professional fees. This subclass includes, but is not limited to, the County’s professional expenditures for lawyers and others associated with its chapter 9 case “including both negotiation and litigation.” Id. This disputed subcategory of professional fees and costs entails mostly those associated with the County’s chapter 9 case including litigation and negotiation of matters arising after its November 2011 municipal bankruptcy filing. Part of the disagreement on whether these are payable from revenues that would otherwise be available to pay the sewer system’s warrant obligations is whether the disputed professional fees and costs are directly related to the sewer system’s efficient and economical operation. Another part is whether they are extraordinary items *410within the sixth category of contested expenditures.
The category for what the parties call reserves for depreciation and amortization along with those for future operating and/or capital expenditures relates to what are monies withheld for (a) estimated future expenditures that may be incurred in some future time for each of the four earlier categories already described, plus (b) a calculation of an estimated amount for depreciation and amortization of the sewer system’s assets. In any given period of time, this category does not entail any expenditures of monies. Rather, depreciation and amortization are non-cash items that under generally accepted accounting principles are part of operating expenses. See Government Accounting Standards Board Statement No. 34 (hereinafter GASB 34); see also Plaintiffs’ Brief in Support of Counts I, II and V of Their Amended Complaint for Declaratory Judgment at 44-47 (“[Depreciation and amortization may properly be accounted for as ‘operating expenses’ under GAAP.... ”); Jefferson County’s Trial Brief Regarding Appropriate Postpetition Net Revenues Payable to the Trustee at 4-5 (hereinafter County Trial Brief) (“[D]epreciation and amortization ... are universally recognized as operating expenses under generally accepted accounting principles.”). The reserve for future expenditures is what it says it is: deducting monies from current period revenues for estimated future expenditures. The Trustee’s position is that under the contract between it and the County, only expenditures incurred and for which payment is due in the current month or a prior month reduce the amount of sewer system revenues that are available for servicing the debt owed to warrant holders. For various reasons, the County disagrees.
The last category is extraordinary items as they are determined under generally accepted accounting principles. At this time, the majority of monies in question is an estimated amount of $833,333.00 per month for professional fees and costs of the County, which it attributes as chargeable against revenues of the sewer system. The Trustee contends they are not because they are extraordinary items under generally accepted accounting principles, and, as a result, are not a deduction from sewer system revenues before payments of interest and principal owed to the County’s sewer system’s warrant holders.
The dispute between the County and the Trustee over the categories of maintenance expenditures, project expenditures, and other expenditures is straightforward. The Trustee maintains that under the contract documents, those that are chargeable to a fixed capital account under generally accepted accounting principles are not expenditures payable ahead of the warrant holders. For each of these three categories, the County contends that there is no such limitation. Although not expressed in the Joint Statement, the Trustee implicitly takes the position that any items in professional fees and related costs, reserves for depreciation and amortization and for future operating and/or capital expenditures, and extraordinary items that, under generally accepted accounting principles are also properly chargeable to a fixed capital account, are not under the contracted for scheme reductions in the amount of monies that are to be used for repayment to holders of sewer system warrants.
In addition to the disagreement over how the expenditures within these six categories are to be treated under the contract documents and under the Bankruptcy Code, 11 U.S.C. § 101 et seq., the Trustee and the County are at odds over the scope *411of inquiry this Court should make into each of the categories. The County’s position is that it should be only category-by-category and not the item-by-item details of what is in each classification. The Trustee does not seek a line-by-line review of all expenditures within each category, but does want a review of some such as those professional fees and related costs associated with the County’s chapter 9 bankruptcy case.
In the later part of January 2012, notification was sent by the County to the Indenture Trustee that the County was withholding revenues for December 2011 and January 2012 that are asserted to be either included as expenses under the governing contractual provisions or under a particular subsection of the Bankruptcy Code, 11 U.S.C. § 928(b). The first of the two sets forth that $7,351,378.00 was being withheld to create a reserve for future expenditures of the sewer system plus a monthly amount representing a ten year estimated amount in lieu depreciation and amortization.2 On top of this sum, another $1,666,666.00 was being deducted from revenues that otherwise were payable to the Indenture Trustee for the benefit of the warrant holders. This represents professional fees and expenses of the County for December 2011 and January 2012 which, in large part, are fees and expenses attributable to or arising in or from matters associated with the County’s bankruptcy case. The aggregate of these two sums is $9,018,044.00.
The added amount that the County argues is properly deductible before remitting monies for payment of interest and principal on warrants is quite large by any measure. It is also a sum that exceeds, on average, a little over $4,500,000.00 per month increase in deductions from revenues otherwise dedicated to pay warrant holders. During the time the sewer system was controlled by an Alabama court’s receiver, approximately fourteen months, the County pushed $4,500,000.00 average monthly increase is greater than the total monthly amount of the Indenture determined operating expenses paid by the receiver to keep the system operational and in good condition. Put another way, it is an amount that is more than a one hundred percent increase in what these expenses had been during the state court receivership period. By comparison and on average, the County’s asserted increase in the operating expenses of the sewer system takes the total average monthly operating expenses to about ninety-two percent higher than they had been for the two fiscal years prior to the state court receivership period.
The County’s notification letters make clear that for future months similar sums would be part of the expenditures for which the County contends it is authorized, under either the Indenture or a bankruptcy code subsection, to either pay or withhold from its sewer system’s revenues. Although there may be some variation in the precise amounts that might be allocated within each of the six categories for *412future months, the aggregate sum of the monthly amounts for the six contested categories of expenditures will not vary. This is because all of the fought over dollars are based on estimates for (a) professional fees and expenses, and (b) the reserve for future expenditures plus depreciation and amortization. This is made clear by the contents of one of the County’s notification letters: $3,675,689.00 per month is for depreciation, amortization, and reserves for other future items plus $833,333.00 per month for professional fees. Thus, the only variability would have to come from a modified calculation of these estimated amounts.
More importantly, the January 20, 2012 letter giving notice of the withholdings demonstrates that regardless of which of the six categories the estimated sums may be allocated to, the reality is that only two categories are involved in the dispute. One is the $3,675,689.00 which is estimated depreciation and amortization that supposedly includes a reserve for future expenditures. The other is $833,333.00 for estimated future professional fees and expenses. These classifications do not entail payment of any monies in a given month. Similarly, they do not represent an incurred obligation of the sewer system in a given, current month or any prior month.
All of this needs to be viewed from the historic background of the period during which the warrant indebtedness was incurred to today, which is over fifteen years. During this period, the County’s sewer system has operated, maybe not perfectly, but at a better overall level of service than before the warrant base debts were incurred. It has also generated revenues sufficient to pay all of the operating expenses as defined under the Indenture and have monies available for payment of interest and principal on the warrants.
Until January 2012, the consistent practice of the County and the Indenture Trustee shows that the items in what the County calls a reserve, its proxy for depreciation and amortization, has never been treated as an expenditure that decreases what is to be paid for interest and principal on the warrants. When it comes to the estimate for professional fees, no such estimated amount has prior to 2012 been withheld by the County for professional fees and expenses. To the extent that some or all of these estimated professional fees and expenses are exclusively related to the County’s chapter 9 case, their previously not having been estimated is understandable. Before preparing for a filing of a bankruptcy case, there would have been no reason for such an estimate. Also part of the history that complicates resolution of issues in this adversary proceeding is that the last rate increase by the County’s sewer system occurred in 2008.3 Not having rate adjustments to the extent specified in the Indenture was one of the reasons the Alabama court appointed a receiver for the County’s sewer system. In re Jefferson Cnty., Ala., 465 B.R. 243, 255-56 (Bankr.N.D.Ala.2012). Should rate increases have been implemented, it has also deprived the sewer system of needed additional revenues.
If the County prevails on its position for how the revenues from its sewer system are to be applied under its classification of properly recognized expenditures, the impact on the warrant holders is dramatic. Over the course of twelve months, it reduces monies that could have been used to pay principal and interest to them in the approximate amount of $54,000,000.00. During the course of what may be the time *413it takes to achieve a hoped for approved plan of adjustment of the County’s debts, the amount is potentially well above $100,000,000.00.
Heightened importance to this amount of reduction in revenues payable to warrant holders’ claims comes from the structure of the indebtedness used to finance the sewer system’s rehabilitation and improvement. It is not a general obligation of the County and no lien exists, see In re Jefferson Cnty., Ala., 465 B.R. at 265, against the physical assets making up the sewer system. The only source of monies dedicated to repayment of the sums borrowed is expressly limited under the terms of the contract documents to revenues of the sewer system after payment of what are essentially the costs and expenses of operating and maintaining the sewer system.
Should the County succeed in this case, there is one outcome from this sort of revenue based financing that will happen and another that is a potential. The one that will occur is a delay in payments to warrant holders to a later date from what would otherwise have been earlier. This imposes costs on warrant holders in the form of added risk of nonpayment and the opportunity costs associated with any time delay. It also assumes that the second outcome does not occur.
The second arises from any change in the contracted payments to warrant holders that might occur should 11 U.S.C. § 1129(b)(1) — (b)(2)(A) & (B) be applicable and utilizable by the County as part of its plan of adjustment of debts. See 11 U.S.C. §§ 901(a), 1129(b)(1) — (b)(2)(A) & (B). Basically, the County’s contract’s terms’ posture regarding the six disputed categories, if correct, results in an approximate $54,000,000.00 per year further decrease in the revenue stream available for sewer system warrant based debt repayment. For any present valuation of this reduced revenue stream, the decrease in value, whatever it may be, caused by the County’s contract based argued allocation for expenditures is likely in the hundreds of millions of dollars, if not more. The point of this discussion is that should the second potentiality become a reality, the delay in payment may be truncated by a plan of adjustment of debts in a fashion that results in the loss of some of what would otherwise have been ultimately received by the warrant holders. These outcomes show why the distribution of the County’s sewer system’s revenues under the Indenture, or as modified under § 928(b) of the Bankruptcy Code, are of moment to all parties to this lawsuit.
Resolving the contract classification of expenditures payable ahead of monies to be applied to payment of the sewer system’s warrant indebtedness and whether a provision of the bankruptcy laws allows alteration of the contracted flow of sewer system revenues encompasses knowing what is meant by two phrases and where they have importance. One is “necessary operating expenses” and the other is “operating expenses.”
II. Distinctions Of A Kind— An Ancestral Overview
Each of “necessary operating expenses” and “operating expenses” is a progenitor of the dispute before the Court. One is in a statute. The other is in a contract. What is included within each meaning and how they compare are essential to resolution of this adversary proceeding.
“Necessary operating expenses” are words contained in § 928(b) of the Bankruptcy Code, 11 U.S.C. § 928(b), that sometimes allow modification of the impact of 11 U.S.C. § 928(a)’s retention of certain pre-bankruptcy consensual liens on revenues from, among other sources, the ownership, operation, or disposition of projects *414or systems such as Jefferson County’s sewer system. To the extent that the contractual agreements do not permit payment of those costs and expenses encompassed within “necessary operating expenses” ahead of interest and principal payments to the warrant holders, 11 U.S.C. § 928(b) may modify the contracted for flow of monies that would otherwise occur so that these “necessary operating expenses” are paid prior to payment of interest and principal owed on the secured obligations. Essentially and in some instances, § 928(b) is designed to cause the subordination of a consensual lien on those revenues defined as “special revenues” under § 902(2) of the Bankruptcy Code to payment of costs and expenses determined to be what is designated as “necessary operating expenses” under 11 U.S.C. § 928(b).
A portion of the disagreements arises from “necessary operating expenses” being undefined in the Bankruptcy Code, 11 U.S.C. § 101 et seq. The County envisions “necessary operating expenses” expansively as including certain expenditures for assets that under generally accepted accounting principles are capitalized, reserves for anticipated future expenditures for capitalized and non-capitalized items, and other non-expenditure items, such as depreciation and amortization. The Bank of New York Mellon in its capacity as trustee under the trust indenture dated as of February 1, 1997, by and between Jefferson County, Alabama and the Bank of New York Mellon’s predecessor trustee, AmSouth Bank of Alabama (hereinafter the Indenture) and the other parties to this lawsuit do not view its scope as broadly and assert that § 928(b)’s priming of payments of principal and interest to warrant holders comes into play only in the context of a consensual lien on special revenues involving all revenues of the system or project, a gross revenue pledge (hereinafter a gross revenue pledge), and not a consensual lien on special revenues remaining after payment of operating expenses, which is referred to as a net revenue pledge (hereinafter a net revenue pledge).4
Other aspects of the contest originate from the phrase, “operating expenses” and how it is defined in the Indenture. Under the Indenture’s structure, placement of costs and expenses within “operating expenses” causes them to be paid ahead of distributions of interest and principal to holders of outstanding warrants issued by the County under the terms of the Indenture and eleven supplemental indentures entered into between 1997 and 2003.5 As one might surmise and despite “operating expenses” being defined in the Indenture, there are differing interpretations by the County and the Trustee over what is included within “operating expenses” under the Indenture’s definition (hereinafter the Operating Expenses). The County reads Operating Expenses as more inclusive than does the Trustee. The County’s interpretation of Operating Expenses is so broad that it contends that reference to what is contemplated by the Indenture’s provisions resolves how payment of the disputed special revenues is to occur. The *415County insists that under its view of Operating Expenses 11 U.S.C. § 928(b) does not come into play.
From an analytical perspective and although for different reasons, the County and the Trustee urge that resolution of the flow of special revenues received by the sewer system may be accomplished by reference to the Indenture without knowing § 928(b)’s scope. Accepting this joint position requires, among other things, agreeing with the proposition that all pledges of special revenues that are not gross revenue pledges are not subject to § 928(b)’s standard — the Trustee’s position — and that Operating Expenses includes expenditures that are capitalized and cash flow items that are not expenditures — part of the County’s stance. It is accurate that each of these necessitates analysis of Operating Expenses under the Indenture. However, both still require knowing when § 928(b) is to be applied which, of necessity, means understanding what is contemplated by “necessary operating expenses.” For this reason and in the context of this case, the Court does not agree that this declaratory judgment action may be resolved without knowing the when of applicability of and the what of that which is contemplated by “necessary operating expenses.”
As has been outlined, how Jefferson County sewer system’s “special revenues” are to be paid is the focal point of the disagreements between the County and the Trustee. Resolution of what costs and expenses of the County’s sewer system are to be paid ahead of payments to warrant holders entails a comparison of what the Indenture brings within Operating Expenses and what is envisioned by § 928(b)’s “necessary operating expenses.” This comparison requires consideration of the scope of and the underlying purpose for 11 U.S.C. § 928(b)’s subjecting certain consensual liens on special revenues to payment of “necessary operating expenses” along with knowing how “special revenues” are treated under the Indenture. The initial focus is on the terms contained in the Indenture.
III. The Contracted Apparatus
A. Definitions And The Flow
Under the Indenture, the County granted a consensual lien via section 2.1 against (a) “System Revenues that remain after payment of Operating Expenses,” but excluding revenues received from a sewer tax and other taxes that are a portion of the System Revenues, (b) monies required to be deposited in a debt service fund and a reserve fund along with investments, reinvestments, income, and proceeds of such monies, and (c) all monies and properties transferred to or otherwise acquired by the Indenture Trustee as additional security. The System Revenues against which a lien has been granted by the County to secure repayment of the warrant holders is defined in section 1.1 of the Indenture as Pledged Revenues. The parties also reference the Pledged Revenues as Net Revenues.
System Revenues is defined in section 1.1 as:
[Rjevenues derived from the Sewer Tax and all revenues, receipts, income and other moneys hereafter received by or on behalf of the County from whatever source derived from the operation of the [sewer] [s]ystem, including, without limitation, the fees, deposits and charges paid by users of the [sewer] [s]ystem and interest earnings on the Indenture Funds (other than the Rate Stabilization Fund) and any other funds held by the County or its agents that are attributable to or traceable from moneys derived from the operation of the [sewer] [s]ystem, but excluding, however, any *416federal or state grants to the County in respect of the [sewer] [s]ystem and any income derived from such grants.
(Emphasis added). This definition causes only revenues received or derived from operation of the County’s sewer system to be part of what is System Revenues plus those received from the Sewer Tax which is also defined in section 1.1, and interest earnings, if any, from four of the five Indenture Funds.6 Indenture § 1.1 at 13.
Comparison of the revenues against which a lien is created under section 2.1 of the Indenture with the definition of System Revenues under section 1.1 reveals that the lien against revenues of the County’s sewer system, the Pledged Revenues, is not necessarily equal to the full amount of what is included in System Revenues. For instance, it is less by the amount of any Operating Expenses as defined under section 1.1, the Sewer Tax as identified in section 1.1, and other undefined tax revenues that are part of System Revenues.7 It suffices for purposes of this Court’s analysis of the contract terms to (a) learn what are Operating Expenses under the contractual agreement between the County and the Indenture trustee, and (b) know that Pledged Revenues have been and will remain less than System Revenues.
Operating Expenses are specified for the applicable period or periods to mean:
(a) the reasonable and necessary expenses of efficiently and economically administering and operating the [sewer] [s]ystem, including, without limitation, the costs of all items of labor, materials, supplies, equipment (other than equipment chargeable to fixed capital account), premiums on insurance policies and fidelity bonds maintained with respect to the [sewer] [sjystem (including casualty, liability and any other types of insurance), fees for engineers, attorneys and accountants (except where such fees are chargeable to fixed capital account) and all other items, except depreciation, amortization, interest and payments made pursuant to Qualified Swaps, that by generally accepted accounting principles are properly chargeable to expenses of administration and operation and are not characterized as extraordinary items, (b) the expenses of maintaining the [sewer] [s]ystem in good repair and in good operating condition, but not including items that by generally accepted accounting principles are properly chargeable to [a] fixed capital account, and (c) the fees and charges of the Trustee.
Indenture § 1.1 at 9 (emphasis added). It is not disputed that Operating Expenses under the Indenture are made up of (a) reasonable and necessary expenses for the efficient and economical administration and operation of the sewer system, (b) expenses of maintaining the sewer system in good repair and in good operating condition, and (c) fees and charges of the Indenture Trustee. The contest is over the makeup of the first two of these categories. What is included or not in these categories of Operating Expenses is of importance to the warrant holders and the County because of the Indenture prioriti*417zation of how the System Revenues are to be applied.
The sequence in which these revenues are to be applied is detailed in Article XI of the Indenture. A special account called the Jefferson County Sewer System Revenue Account (hereinafter the Revenue Account) has been established to receive all System Revenues and all amounts received by the County pursuant to certain swap agreements.8 On or before the last business day of each calendar month, the County is required to apply monies in the Revenue Account first to payment of all Operating Expenses “that are then due and that were incurred during the then-current or in any then-preceding calendar month.” Indenture § 11.1.
Of the monies in the Revenue Account, those that were received from the Sewer Tax are to be used first to pay the Operating Expenses. Following exhaustion of the Sewer Tax revenues, any remaining incurred and then due Operating Expenses from the current or any preceding month are to be paid from the residual funds in the Revenue Account. When the due, incurred, and unpaid Operating Expenses from the current and preceding months have been fully paid, any remaining monies in this account are to be paid in a specific priority.9 They are to go first into the Debt Service Fund to the extent and on the dates specified in section 11.2, second into the Reserve Fund (also designated the Debt Service Reserve Fund) at the times and amounts specified in section 11.3,10 then into the Rate Stabilization Fund as specified in section 11.4, next into the Depreciation Fund as determined under section 11.5, followed by and to the extent allowed under section 11.6 to Surplus Revenues as defined in the Indenture, and lastly into the Redemption Fund as set forth in section 11.7. Should there be insufficient monies in the Revenue Account in any given month to fully pay what is required to be placed into the Debt Service Fund, no monies are to be paid into any of *418the other Indenture Funds given lower priority under section 11.1. Similarly, a shortfall in monies to meet the requirements for payments into one of the Indenture Funds lower in priority than the Debt Service Fund results in no monies being paid during a given period into those others even lower in section ll.l’s priority scheme.
At this time, having sufficient monies to fully fund payment of the Operating Expenses along with the required deposits into the Debt Service Fund and the Reserve Fund is, at best, problematic. Having monies to fund other of the Indenture Funds remains elusive, if not unattainable, during many, if not most or all, months. Without revenue increases from a rate increase or other sources along with enhanced operational efficiencies and other means of reducing costs, this state of affairs will not change.
Knowing the composition of Operating Expenses, what are Pledged Revenues, and how System Revenues are applied under the Indenture reveals some of the reasons underlying the County’s and the Trustee’s positions regarding Operating Expenses. Those costs and expenses that are Operating Expenses are not Pledged Revenues: the lien is only on System Revenues remaining after payment of Operating Expenses. Indenture § 2.1. As is discussed later in this memorandum opinion, the Indenture categories of Operating Expenses, Pledged Revenues, and System Revenues affect whether and the extent to which 11 U.S.C. §§ 922(d), 928(a) & 928(b) are applicable to some of the System Revenues.
Perhaps of more importance to the warrant holders is that each dollar increase in the amount of sewer system revenues used to satisfy Operating Expenses results in an equal reduction in monies available to pay interest and principal on the warrants. Somewhat differently, the ability of the County to appropriately pay or charge as Operating Expenses those costs and expenses that it might otherwise fund from its non-sewer system revenues, in particular professional fees arising from or related to the chapter 9 case, frees these other sources of County revenues for other purposes. At this point, the Court needs to note that there is no evidence that the County has or intends to use any of the System Revenues or other sums pledged or dedicated to the its sewer system for any other purposes. For both the Trustee and the County and stated in a different way than previously, whether System Revenues are used to pay Operating Expenses or become Pledged Revenues may (1) impact (a) any valuation of either the stream of revenues generated by the County’s sewer system or (b) the County’s sewer system, and (2) affect how the claims of the warrant holders are treated under any restructuring of the County’s indebtedness.
How Operating Expenses and Pledged Revenues are determined under the Indenture takes on added meaning when one focuses on the non-recourse nature of the County’s sewer system’s warrant obligations and that the County did not become generally liable for any aspect of what it agreed to under the Indenture. See In re Jefferson Cnty., Ala., 465 B.R. at 265. For the warrant based financing of its sewer system, the non-recourse, non-general obligation nature of the sewer system’s indebtedness is a requisite of Ala. Code § 11-28-1 et seq. (1975) when it comes to warrants that are not general obligations of a municipality and is confirmed by, among others, the witnesseth paragraph on the first page of the Indenture, sections 2.2 and 18.1 of the Indenture, along with section 3 of 1997 resolution of the Jefferson County Commission *419approving and authorizing the execution and delivery of the Indenture and issuance of certain of the warrants.
Ail of this non-recourse, non-general obligation status of the County’s sewer system warrant based indebtedness and obligations has been recited by the County to this Court as support for its position in this declaratory judgment action. A distinction needs to be drawn for purposes of some of the arguments by the County in this adversary proceeding. It is accurate that the sole recourse of the warrant holders for payment of what they are owed is the revenues of the sewer system. It is as true that none of the obligations agreed to by the County under the terms of the Indenture, including all supplemental indentures and all of the warrants issued pursuant to each, are not by the Indenture’s provisions made general obligations of the County. However, this is decidedly different from whether the County may be liable for some of its sewer system’s obligations independent of the Indenture’s provisions. Indeed, a close reading of the Indenture demonstrates that the limitations relating to the non-recourse nature and its obligations not being general obligations of the County are with reference to making sure that the debt limitations imposed under Alabama law are not exceeded and no mention is made of when, if ever, the County may be liable for obligations incurred independently from those also agreed to under the Indenture. This, too, is accurate regarding the scope of Ala.Code § 11-28-2 (1975). See, e.g., Indenture §§ 2.2, 18.1; Ala. Code § 11-28-2 (1975).
B. Performance And The Whole
(1) Distributions And Deñnitions Revisited: Operating Expenses Do They Matter?
Although the County relies on the non-recourse, non-general obligation standing of its Indenture based obligations, the analysis at this point is of what was agreed to under the Indenture. In doing such an examination, a cardinal rule is that the contract needs to be viewed as a whole. Vankineni v. Santa Rosa Beach Dev. Corp. II, 57 So.3d 760, 763 (Ala.2010). Another is that the course of performance by the parties to a contract may be used to construe a contract. See, e.g., Chevron U.S.A., Inc. v. United States, 20 Cl.Ct. 86, 87-89, — F.3d — (Cl.Ct.1990); Flavor House Prods. Inc. v. Int’l Nut Alliance, LLC, 2012 WL 2339754, at *7 (M.D.Ala. June 19, 2012); Marshall Durbin Farms, Inc. v. Fuller, 794 So.2d 320, 325 (Ala.2000); see also, e.g., Brooklyn Life Ins. Co. v. Dutcher, 95 U.S. 269, 273, 24 L.Ed. 410 (1877) (“The practical interpretation of an agreement by a party to it is always a consideration of great weight. The construction of a contract is as much a part of it as anything else. There is no surer way to find out what parties meant, than to see what they have done.”); Noell v. Am. Design, Inc. Profit Sharing Plan, 764 F.2d 827, 832 (11th Cir.1985) (quoting City of Montgomery v. Maull, 344 So.2d 492, 495 (Ala.1977)).
When it comes to determining the treatment of the County’s proxy for depreciation and amortization, or as it is categorized as a reserve for depreciation, amortization, and future expenditures, the plain language of the Indenture excludes these from sums that are a reduction in revenues that are to be applied to pay items ahead of interest and principal to warrant holders. This is for two reasons. The first is that even if they are part of Operating Expenses, the distribution format of the Indenture, section 11.1 requires that for payment as Operating Expenses the items must have been both incurred plus due for payment. Indenture § 11.1. Nothing in this category is due for payment in the *420current month or in a prior month. If truly depreciation or amortization, the expenditures upon which they are premised may have already been paid. Again and by definition as a reserve for a future expenditures, nothing has been incurred in the current month or a prior one along with no payment being then due. This first reason arises from the distribution scheme of the Indenture, not from the details of what are Operating Expenses.
Under section 11. 1, all System Revenues plus monies received by the County from certain swap agreements go into the Revenue Account, not just pledged special revenues. There is an exclusion of grants, borrowed sums, and some types of deposits from the mathematics of the distributive scheme, but they do not alter the Court’s point or analysis. From the monies in the Revenue Account, exclusive of the referenced grants, borrowed sums, and deposits, only the Operating Expenses incurred and then due for payment are permitted to be paid in any given month. Id. After payment of these, the agreement of the County is that the remaining monies in the Revenue Account are to be paid in a prioritized order to various of the Indenture Funds. The fund to which monies are required to be paid after payable Operating Expenses is the Debt Service Fund. After that, the monies flow to other of the Indenture Funds or become Surplus Funds. At this time and for the anticipated life of this bankruptcy case, all of the parties agree that there will not be sufficient System Revenues to do anything more than pay the Operating Expenses and then a residual sum into the Debt Service Fund.
What all of this means is that even if the County is correct that the monies it wants to reserve are within Operating Expenses, they remain unpayable in the current month and, concomitantly, the revenues representing this withheld amount are required to be paid to the Indenture Trustee for the Debt Service Fund. It is from this fund that payments of interest and principal are remitted to the warrant holders. This is the contracted for distribution of monies under the Indenture and the remaining revenues after satisfaction of payable Operating Expenses in a given month must next be paid into the Debt Service Fund. Unless otherwise required or agreed, none of the monies in the Revenue Account are permitted to be held for a future use or for any purpose other than the distributions set forth in section 11.1. Id. Thus, that the reserve proposed by the County may or may not be an Operating Expense is irrelevant under the distributive schematic for the Revenue Account.11
The definition of Operating Expenses is the second reason the revenues reserved as a proxy for depreciation and amortiza*421tion are not Operating Expenses. The Indenture’s definition is quoted above in this subpart of this memorandum opinion. There are three kinds of Operating Expenses within this definition. Only two types are at issue. They are those that are either (a) reasonable and necessary expenses of efficiently and economically administering and operating the County’s sewer system, or (b) expenses of maintaining the sewer system in good repair and in good operating condition. As a proxy for depreciation and amortization, the County’s withholdings for a reserve are expressly excluded from the portion of Operating Expenses that are for the efficient and economical administering and operating of the sewer system by the words “except depreciation, amortization.” Indenture § 1.1 at 9.
Somewhat akin to the exclusion of depreciation and amortization from the grouping for efficient and economical administering and operating of the sewer system is why the proposed reserve for these is not within the second type of Operating Expenses in dispute. All of the parties agree that depreciation and amortization are operating expenses under generally accepted accounting principles. Understanding how this treatment of depreciation and amortization comes into play under the Indenture and why the County’s desired reserve is also not part of Operating Expenses is an instance where viewing the contract as a whole principle is important. See Vankineni, 57 So.3d at 763.
The definition of Operating Expenses along with the distribution scheme of section 11.1 of the Indenture work together to create the mechanism by which all of the revenues from fees and charges generated by the sewer system plus certain other sources such as the Sewer Tax are placed into the Revenue Account from which are paid as Operating Expenses only those items for which a payment is actually made, not those for which one is not being made. Fundamentally, the Indenture is designed to take all of the inflows of monies from all but a few sources not relevant to this discussion less those Operating Expenses for which an outflow of monies is called for in a given monthly period. This structure is designed to get as much as possible of the hoped for positive cash flow to the Debt Service Fund and then, if revenues remain, to the other funds with a lower standing in the prioritization. This is why depreciation and amortization are also not included within the expenses of maintaining the sewer system in good repair and good operating condition. They are not expenditures. Rather, they are positive cash flow items intended under the Indenture to be part of the total cash available which is reduced by only actual expenditures before payments to the Debt Service Fund.
Joined with seeing the Indenture’s operational framework as a whole is the added factor that it is structured so that capital expenditures excluded from Operating Expenses are not paid for from monies placed into the Revenue Account unless sums placed via § 11.1 of the Indenture go into an Indenture Fund that permits such a use or, potentially, but not likely given the current finances of the sewer system, into Surplus Funds. For excluded capital expenditures, the structure is that, if they are paid, it has to be from either borrowed monies that are held in one or more funds created as part of the sewer system’s warrant indebtedness or from other sources, borrowed or not. See Indenture Art. XI. This treatment of capital expenditures is consistent with how the System Revenues are designed to be distributed. The excluded capital expenditures are to ensure that the cash flow that is distributed under Article XI’s scheme are not reduced by *422such capital acquisitions. It is the overall structure of how inflows and outflows of monies under the Indenture that prevents reserves of the kind the County wants from being part of Operating Expenses.
(2) Reports And Prior Actions
Evidence that this Court requested from the County and the Trustee to supplement what had been presented during the trial demonstrates this cash flow structure. It comes from years before any dispute between the County and Indenture Trustee occurred. It is how the County calculated what is defined in the Indenture as “Net Revenues Available for Debt Service.” It is a calculation of funds that will be available during a given period for debt service. As part of a certification for the issuance of additional warrants, the County has been required to certify that required minimum levels of revenues would be available to repay in a given period interest and principal on the warrant obligations. Indenture §§ 10.2(c) & (d), 10.2(I)-(II). “Net Revenues Available for Debt Service” is defined as the total of System Revenues accrued plus interest earned on some of the Indenture Funds less Operating Expenses for the period involved. Indenture § 1.1 at 8.
Two reports from the certifying entity are part of the supplemented record. One is from March 2001 and the other is from September 2002. Both are from Paul B. Krebs & Associates, Inc. in the form of a report, a project overview, one exhibit for income and debt service coverage — a cash flow analysis for purposes of the Indenture — and a second exhibit setting forth the operations and maintenance expenses which are those defined as Operating Expenses under the Indenture (hereinafter individually the Krebs Report and collectively the Krebs Reports). The March 2001 Krebs Report covers the actual financial results for fiscal year 2000, the budgeted items for fiscal year 2001, and the forecasts for the same items for fiscal years 2002 through 2004. The September 2002 Krebs Report has a revised budget for fiscal year 2002 and revised forecasts for fiscal years 2003 through 2005.
On page two of the project overview of the 2001 Krebs Report and on page three of the project overview of the 2002 Krebs Report, the language is virtually the same: “For fiscal year ending ... total operating expenses (as defined in the Trust Indenture) ... amounted to.... ” In other words, what these reports used as total operating expenses was the Indenture’s Operating Expenses. On the same pages in the respective project overviews is language to the effect that in each of the prior years the sewer system has consistently “underrun” its operation and maintenance budget by a considerable margin. Footnote three in each of the Krebs Report’s exhibit for operations and maintenance expenses reflects the operations and maintenance expenses as those incurred to carry on the normal day-to-day operation of the sewer system. The operations and maintenance expenses on the exhibits setting forth the cash flow are the same as the Operating Expenses under the Indenture. Between the two Krebs Reports, the Operating Expenses went from an actual amount for fiscal year 2000 of $36,109,000.00, which is the lowest amount for any fiscal year covered by the reports, to the highest amount for fiscal year 2005, a forecasted amount of $59,721,000.00. Neither of the Krebs Reports reflects a reduction in cash available for “Net Revenue Available for Debt Service” caused by depreciation, amortization, or a reserve for future expenditures.
Included with the Court’s request for supplemental information was a historical record of the actual financial results for the County’s sewer system. One of the *423documents supplied is a compilation, captioned “Jefferson County Sanitary Operations Fund Annual Financial Information,” that is based on audited results for fiscal years 1997 through 2010 and unaudited for fiscal year 2011 and a partial fiscal year 2012. Operating Expenses on this document reflect that the actual results for fiscal year 2000 were again the lowest amount at $36,000,000.00, and those for fiscal year 2010 were the highest at $58,900,000.00. For the budgeted and forecasted fiscal years in the Krebs Reports, this compilation reflects that the actual, audited Operating Expenses did, in fact, “underrun” the budgeted and fore-casted amounts by between under $2,000,000.00 for fiscal year 2001 to over $15,000,000.00 for fiscal year 2005. The actual financial results for fiscal years 2000 through 2005 are consistent with what the Krebs Reports reflected was the historical result: the budgeted and forecasted Operating Expenses were “underrun” by the sewer system. Because the Krebs Reports did not include depreciation, amortization, and a reserve for future expenditures, and its budgeted and forecasted amounts for each fiscal year were less than the actual amounts, the comparison demonstrates that these fiscal years did not include as part of Operating Expenses the depreciation, amortization, or reserve that the County postulates.
This is made more evident by the audited amounts for Operating Expenses for fiscal years 2006 through 2010 and the unaudited amount for fiscal year 2011. They range from a low in fiscal year 2011 of $50,000,000.00 to a high in fiscal year 2010 of $58,900,000.00. Given the well over $100,000,000.00 per year depreciation for the most recent fiscal years reflected on the books of the sewer system as testified to by John S. Young, Jr., information acquired by him from the records of the sewer system while he served as the chief officer of the state court’s receiver for the sewer system, it is apparent that the Operating Expenses for 2010 and 2011 do not include depreciation and amortization.12 Since there is no evidence that a calculated proxy for depreciation and amortization of the nature now proposed by the County has ever been utilized prior to its use to withhold revenues for December 2011, it is equally certain that such a proxy was not included in Operating Expenses for fiscal years 2010, 2011, or any other, earlier fiscal year. Once more, the performance by the County under the Indenture shows that depreciation, amortization, a reserve for future expenditures, and a proxy for them have never been included as part of Operating Expenses. They, therefore, have never been reductions in the determinations under the Indenture of revenues available for distribution under section 11. I, which are required to be paid over to the Indenture Trustee for the Debt Service Fund.
The analysis for what and how distributions are to be made under section II.1 of the Indenture applies with equal strength to the County’s reserve for professional fees and expenses. It does not matter whether such a reserve is contained within Operating Expenses. The revenues *424withheld for such a reserve were neither incurred in the current month, nor a prior one, and were not payable in the current month, nor a prior one. The outcome is the same whether or not they are within the definition of Operating Expenses. Because they are not payable in the current month, those revenues withheld for the estimate are still required to be distributed, after satisfying the payable Operating Expenses, to the Debt Service Fund. Indenture § 11.1.
As a result of ruling that the estimated professional fees and expenses are not to reduce the amount of revenues payable to the Indenture Trustee for the Debt Service Fund, the Court need not decide whether such professional fees and expenses come within Operating Expenses. It suffices to indicate that the Trustee’s proposition is too broad should it be that all professional fees, be they legal, accounting, engineering, or other types, are not, due to having any relationship to the County’s bankruptcy, within Operating Expenses. Added to this is that the Court has insufficient details regarding the composition of this category of expenditures to be able to rule on whether what the category is composed of is or is not, in whole or in part, within Operating Expenses.
C. The Residual
(1) Non-Recourse, Non-General-Limited vs. General And An Extension Curtailed
What remains to be discussed are certain arguments presented by the County regarding its view for how the Indenture treats a reserve for depreciation, amortization, and future expenditures along with the estimated professional fees and expenses. Despite many of the County’s arguments being mooted by the analysis of the distributive scheme of section 11.1 of the Indenture, two need further attention. One is the category arising from reliance on the non-recourse, non-general nature of the County for the Indenture based obligations and the warrant indebtedness.
Its contention is that “any construction of the Indenture that imposes on the County an obligation to subsidize the operation of the System out of County funds beyond the System Revenues or encumbered Indenture funds would cross the boundary between limited and general obligations.” County Trial Brief at 89. More pointedly, the County argues that such an outcome violates Alabama law and threatens the validity of the warrants. Id.
This argument has three prongs. One is section 224 of the Alabama Constitution, as amended by Amendment 342, which establishes a debt ceiling for counties in Alabama. The second is Alabama case law that interprets the Alabama Constitution’s prohibition against municipal subdivisions, such as the County, from becoming indebted in an amount greater than five percent of the assessed value of property within the municipality. The third a legal extrapolation by the County of holdings in two Alabama cases, Taxpayers & Citizens of Georgiana v. Town of Georgiana, 265 Ala. 654, 93 So.2d 493, 497 (1956); White v. Mayor of Decatur, 119 Ala. 476, 23 So. 999, 1000 (1898).
The law aspects of both the first and second prongs of the County’s non-recourse, non-general obligation argument are undisputed. There is a limit to general obligation indebtedness set at five percent of the assessed value of properties within the County. However, the limit applies to general obligation indebtedness which, as already set forth, is not the type of obligation created by the Indenture or the warrants. Likewise and as the County concedes, payments by the County from non-sewer system revenues, including general revenues, do not count as an indebted*425ness for debt limit purposes when there is no mandatory obligation to make payments out of general revenues of the County. County Trial Brief at 40. The County cites in support of this Chism v. Jefferson Cnty., 954 So.2d 1058, 1078 (Ala.2006).
At this point in the County’s argument, a glitch occurs: it is the County’s reading of the Trustee’s position that its use of non-sewer system revenues to comply with obligations under the Indenture makes such a use an Indenture based contracted for obligation. This is not the case. Likewise, the County implicitly assumes that any such use by the County of non-sewer system revenues to avoid a default under the Indenture violates the debt limitations imposed on the County. This assumption is built into the County’s argument despite its citation to Alabama authority for the proposition that a voluntary provision for payment of an operating expense is not an obligation that counts toward the limit on municipal indebtedness. See, e.g., Bankhead v. Town of Sulligent, 229 Ala. 45, 155 So. 869, 871 (1934); Smith v. Town of Guin, 229 Ala. 61, 155 So. 865, 868 (1934).
Lastly for this argument, its third prong is an inapplicable extrapolation of Alabama decisions to the facts of this case involving a pledge limited for repayment purposes to only the revenues of the sewer system. The County uses a quote from Town of Georgiana to the effect that where principal and interest are payable out of the general revenues of a municipality, no part of the general revenues may be used to pay principal or interest until the current, legitimate municipal expenses are paid. Town of Georgiana, 93 So.2d at 497. From this, the argument is extended without further citation of authority to reach this conclusion:
Thus, under Alabama law, every pledge of municipal revenues-whether gross or net, whether recourse or not — is subject to the deduction of necessary expenses.
County Trial Brief at 41. The quoted extrapolation is not supported by Town of Georgiana or the case from which the Town of Georgiana quotes, White, 23 So. at 1000. In both of these cases, the Supreme Court of Alabama was discussing a pledge of general revenues of the municipality, not an obligation repayable from a source that is not the general revenues of the municipality. Town of Georgiana, 93 So.2d at 497; White, 23 So. at 1000.
(2) GASB 34
GASB 34 and three other GASB statements along with Financial Accounting Standards Board Statements, and Accounting Principal Board Opinions were the subject of hours of expert testimony in the trial of this adversary proceeding. They are also the subject of numerous pages of exhibits. All of their usage has been mooted by the Court’s discussion of the distribution framework of the Indenture. Even though mooted, an argument premised on GASB 34 warrants more discussion.
Under GASB 34, there is a modified approach for treatment of capitalized assets that are depreciated over their useful life. In certain circumstances, what are classified as infrastructure assets, such as a sewer system, are not required to be depreciated. Instead, all expenditures made for infrastructure assets that preserve, not those that add onto or improve, the infrastructure assets are to be ex-pensed in the period in which they are incurred. The exclusions are additions and improvements to infrastructure assets that still must be capitalized. GASB 34 ¶¶ 18-26.
Despite conceding that the County has never used this modified approach, it argues that for purposes of determining Op*426erating Expenses that it may now change from a depreciation regimen to the modified approach under GASB 34. One problem is the expert testimony evidences a serious question exists regarding whether the County would be able to meet the requirements for use of the modified approach during the pendency of its chapter 9 case. See GASB 34 ¶¶ 23-24. In particular, the evidence is that for some portions of its sewer system the necessary up-to-date inventory along with the requisite, measured condition assessments does not exist. See GASB 34 ¶ 23(a)-(b). Another is that the County’s changing of its accounting methodologies does not mean that such a change may be the basis to alter the critical, fundamental bargain of the Indenture’s lien and distribution structure. This is more true when one takes into account that the modified approach set out in GASB 34 was not adopted until after the Indenture was entered into by and between the County and the Trustee. A final difficulty is that to the extent the estimated monthly amount of $3,675,689.00 includes expenditures for items that extend, improve, or enhance infrastructure assets, the cost for such items may not be expensed under the GASB 34’s modified approach. GASB 34 ¶ 25.
IF. More Prior History
Before outlining the statutory provisions directly related to the County’s and the Trustee’s disagreement on both Operating Expenses and “necessary operating expenses,” some discussion of one of this Court’s earlier rulings is warranted. In a January 6, 2012, ruling, this Court held that the Pledged Revenues are special revenues under 11 U.S.C. § 902(2) and that they are pledged special revenues within the ambit of § 922(d). Section 922(d) provides that:
Notwithstanding section 362 of this title and subsection (a) of this section, a petition filed under this chapter does not operate as a stay of application of pledged special revenues in a manner consistent with section 92[8] of this title to payment of indebtedness secured by such revenues.
As part of considering numerous arguments presented by the County and the Trustee, among others, this Court’s January 6, 2012, order sets forth that:
pledged special revenues as used in 11 U.S.C. § 922(d) includes all Pledged Revenues as defined in section 2.1 of the Trust Indenture ... in the possession, custody, or control of The Bank of New York Mellon, John S. Young, Jr., LLC, or Jefferson Alabama, as of and on and after the filing of Jefferson County, Alabama’s bankruptcy petition....
It further sets forth that the “automatic stays of 11 U.S.C. § 362(a) and 11 U.S.C. § 922(a) do not operate as a stay of payment of [the] ... Pledged Revenues pursuant to the terms and conditions of the Indenture.” Jan. 6, 2012 Order, No. 11-05736-TBB-9 (Doc. 508) (hereinafter January 6, 2012 Order). In other words, continued payment of Pledged Revenues into the Debt Service Fund and the Reserve Fund, among other funds, and ultimately payment of interest and principal to warrant holders from the Debt Service Fund and the Reserve Fund, are not stopped by the automatic stays of the Bankruptcy Code, 11 U.S.C. §§ 362(a) & 922(a). A more detailed discussion of why this is the case is contained in this Court’s earlier memorandum opinion. In re Jefferson Cnty., Ala., 465 B.R. at 276-85.13
*427The ruling that the continued post-petition payment of the Pledged Revenues is not subject to the imposition of the automatic stays of 11 U.S.C. §§ 362(a) & 922(a) was conditioned on a potential complication should the parties not agree that Operating Expenses complies with the standard of “necessary operating expenses” of § 928(b). What was the possible complication has become one aspect of the dispute between the County and the Indenture Trustee and those that have joined with it in this adversary proceeding. It appears, at least in part, that the parties’ impasse may have been caused by this Court’s caveat that “[Pledged] Revenues may not be fully payable to the Indenture Trustee as a result of 11 U.S.C. § 928(b)” should the Indenture’s definition of Operating Expenses be less than § 928(b)’s determination of “necessary operating expenses.” In re Jefferson Cnty., Ala., 465 B.R. at 286.
One of the reasons this was included in the memorandum opinion issued in conjunction with the January 6, 2012, order is that evidence had been presented indicating that during the Alabama state court receivership period some items of expense that might be part of Operating Expenses were being capitalized instead of being expensed. However and because the issues presented related to the applicability of the automatic stays of §§ 362(a) & 922(a) and whether pledged special revenues only included those special revenues in the possession of the Trustee as of the County’s chapter 9 filing, insufficient evidence was presented regarding, and the focus of the parties’ arguments was not directed at, whether payment of the Indenture specified Operating Expenses was being deviated from and whether such a deviation, if any, caused invocation of 928(b)’s “necessary operating expenses.”
In other words, the focus was on whether the Pledged Revenues were all pledged special revenues under 11 U.S.C. § 922(d). It was not whether payment of Operating Expenses as determined under the Indenture avoids imposition of § 928(b)’s standard of “necessary operating expenses.” This is some of why this Court deferred ruling on whether 11 U.S.C. § 928(b) altered the Indenture’s distributive scheme for Pledged Revenues and reserved any such determination for a later time. The later time is now. It is also why a further review of some of the relevant sections of the Bankruptcy Code is needed.
V. The Codifications
14
(A) All Are Special, But Not All Are Pledged
The portions of the Bankruptcy Code, 11 U.S.C. § 101 et seq., that are *428directly involved in resolution of the dispute over the flow of System Revenues are § 902(2) defining special revenues, § 922(d) limiting the breadth of the automatic stays of §§ 362(a) and 922(a), § 928(a) preserving certain pre-bankrupt-cy consensual liens, and § 928(b) potentially causing revenues subject to such preserved liens to be used to pay a category of operating expenses before payments on obligations secured by a lien on special revenues. An outline of each helps understanding of the issues raised by the County and the Trustee.
This Court has held that the Pledged Revenues are special revenues as defined in 11 U.S.C. § 902(2). In re Jefferson Cnty., Ala., 465 B.R. at 286-87; January 6, 2012 Order. However, it has not so ruled with respect to all of the System Revenues. Special revenues is defined as including:
(A) receipts derived from the ownership, operation, or disposition of projects or systems of the debtor that are primarily used or intended to be used primarily to provide transportation, utility, or other services, including the proceeds of borrowings to finance the projects or systems; (B) special excise taxes imposed on particular activities or transactions;
(D) other revenues or receipts derived from particular functions of the debtor, whether or not the debtor has other functions; or
(E) taxes specifically levied to finance one or more projects or systems, excluding receipts from general property, sales, or income taxes ... levied to finance the general purposes of the debt- or.
11 U.S.C. § 902(2). For the County’s sewer system, all of the monies in this application of payment dispute are special revenues within the portions of § 902(2) quoted.
This arises from the Indenture definition of System Revenues encompassing revenues derived from (a) the sewer system’s operations and the Sewer Tax along with (b) interest earnings on monies held by the Bank of New York Mellon and the County in certain of the sewer system’s accounts including those for some of the Indenture Funds. Indenture § 2.1. A comparison of what comprises System Revenues with the definition of special revenues reveals that each of these categories of System Revenues is within § 902(2)’s specification of special revenues. Compare 11 U.S.C. § 902(2), with Indenture §§ 1.1 & 2.1. Added to this is that no evidence has been presented that indicates that the System Revenues include sums that are not special revenues. At this juncture in the pen-dency of the County’s chapter 9 case, the majority of special revenues and System Revenues at issue are those received by the sewer system as monthly fees, deposits, and charges paid by users of the sewer system.
Although there is an earlier discussion of 11 U.S.C. § 922(d) in the context of the Pledged Revenues, more is warranted to assist understanding the outcome of use of System Revenues for Operating Expenses versus their inclusion as Pledged Revenues. The wording of this subsection is:
(d) Notwithstanding section 362 of this title and subsection (a) of this section, a petition filed under this chapter does not *429operate as a stay of application of pledged special revenues in a manner consistent with section 92[8] of this title to payment of indebtedness secured by such revenues.
11 U.S.C. § 922(d). Even though § 922(d) is a debarment of the automatic stays of 11 U.S.C. §§ 362(a) & 922(a), it is a limited one. It only prevents the staying of “application of pledged special revenues” to payment of debts secured by such revenues. The § 922(d) limitation on the reach of the automatic stays does not apply to all special revenues. It is only for those that are pledged. 11 U.S.C. § 922(d).
Because System Revenues as defined in the Indenture are greater in amount than Pledged Revenues, § 922(d)’s restriction on the stays of 11 U.S.C. §§ 362(a) & 922(a) is only with respect to the Pledged Revenues. One cautionary note is required. This referenced restriction of the automatic stays is when the lien status is viewed solely from the Indenture’s treatment for what are Pledged Revenues. Even though all of the System Revenues are special revenues, Pledged Revenues is the only portion of System Revenues that, when considered only by how they are treated under the Indenture, constitutes “pledged special revenues.” In re Jefferson Cnty., Ala., 465 B.R. at 284-85. This means that what is to be paid under the Indenture as Operating Expenses does not involve consideration of § 922(d)’s limitation on the automatic stays should no other lien or pledge exist. Nor does a determination of Operating Expenses viewed only from the Indenture’s treatment of them involve the 11 U.S.C. § 922(d) limitation of its reach created by the language that application of pledged special revenues be “in a manner consistent with section 92[8] of this title to payment of indebtedness secured.”
The significance, in this case, is that what this Court has called the further restriction on the ambit of 11 U.S.C. § 922(d), the post-bankruptcy consensual lien requirement of 11 U.S.C. § 928(a) and the “necessary operating expenses” standard of 11 U.S.C. § 928(b), does not apply to the System Revenues expended for Operating Expenses should the Indenture be the only pledgeAien creating vehicle. Operating Expenses from such a vantage point would be neither Pledged Revenues under section 2.1 of the Indenture, nor pledged special revenues for 11 U.S.C. § 922(d)’s purposes. This contorted discussion is created by the deferral to another day of the existence, or not, of another pledge or lien against the revenues of the County’s sewer system. Conceptually and despite this overly complex lien discussion, what are Operating Expenses under the Indenture needs to achieve what § 928(b) was designed to ensure. To ascertain whether this is the case, § 928(b)’s purpose and its applicability to special revenue financing must be understood.
(B) Why The Necessary
(1) The Problems, The Corrections, And The Wanting Of Clarity
In 1988, legislation was enacted to amend portions of chapter 9 of the Bankruptcy Code, 11 U.S.C. § 901 et seq. The enactment was the Municipal Bankruptcy Amendments of 1988, H.R. 5347, and S. 1863, from the 100th Congress, 2d session (hereinafter sometimes the 1988 Amendments). Section 922(d) and § 928(a) & (b) were added to chapter 9. 11 U.S.C. §§ 922, 928. Since the 1978 passage of the Bankruptcy Code, 11 U.S.C. § 101 et seq., the use by municipalities of what is called special revenue financing has expanded exponentially. Under this sort of financing, a lien is frequently not obtained against the properties that generate revenues such as a water or sewer system or *430other governmental projects. Due to the laws of many states, a municipality may be prohibited from granting a lien against its system’s or project’s physical assets that generate the revenues to secure repayment of monies borrowed to finance, among other purposes, the construction, rehabilitation, expansion, or improvement of a project or system. Even where there may not be such a prohibition, state statutory or constitutional limits on municipal debt may still preclude the granting of such a lien. To avoid one or both of these restrictions, what has been and continues to be utilized as collateral to secure repayment of monies borrowed is one or more of the revenues generated from operation of the project or system and certain types of tax revenues. H.R. REP. NO. 100-1011 (1988) at 4 (hereinafter the House Report); S. REP. NO. 100-506 (1988) at 6-7 (hereinafter the Senate Report).15 In part, getting around these limitations is why Jefferson County borrowed for its sewer system’s needs using special revenue financing of this sort.
One of the special revenue financing related concerns that developed following the October 1, 1978, enactment of the Bankruptcy Code, 11 U.S.C. § 101 et seq., which over time was accentuated by increased municipal use of special revenue financing, was the impact of 11 U.S.C. § 552 on pre-bankruptcy security agreement created liens against property of a debtor or a debtor’s estate. Simplistically in a bankruptcy case, § 552 was viewed as, at least arguably, stripping in a municipal bankruptcy the pre-bankruptcy liens created under a security agreement with respect to the revenues generated by a municipality’s project or system.
This arises from how § 552 was drafted, which was from the perspective of commercial transactions, not municipal financing. Liens obtained pursuant to a security agreement from a debtor before a bankruptcy is filed covering both a particular property plus any proceeds, profits, offspring, products, and rents, among others, from the property are, if within what § 552(b)(1) & (2) call for, continued as liens against the proceeds, profits, offspring, products, rents, and the like in the after bankruptcy filing period. 11 U.S.C. § 552(a) & (b); United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., 484 U.S. 365, 374, 108 S.Ct. 626, 98 L.Ed.2d 740 (1988). Obtaining a consensual lien against the property from which revenues are generated along with one against the proceeds, profits, offspring, products, rents, and other revenues of similar kind in a commercial financing transaction was and is a generalized practice.
Since in the municipal special revenue financing context, there is often no lien on the underlying property comprising the project or system, many were concerned that 11 U.S.C. § 552(b)’s requisites for the post-bankruptcy preservation of a pre-bankruptcy consensual lien on proceeds, profits, and products, to name a few, are not met in many municipal government special revenue financing transactions and § 552(a) remained a vehicle for the stripping of a pre-bankruptcy security agreement created lien. This was perceived as a possible outcome of § 552(b)’s requirement for the post-bankruptcy preservation of a consensual lien: a pre-bankruptcy lien had to have been obtained against both the underlying property and the proceeds, profits, products, etc. 11 U.S.C. § 552(a) & (b); Senate Report at 5-7; House Re*431port at 4-5. Thus, the need for 11 U.S.C. § 928(a). Senate Report at 5-7; House Report at 4-5.
It is the first subsection of 11 U.S.C. § 928 that preserves pre-bankruptcy created consensual liens against special revenues. It reads:
(a) Notwithstanding section 552(a) of this title and subject to subsection (b) of this section, special revenues acquired by the debtor after the commencement of the case shall remain subject to any lien resulting from any security agreement entered into by the debtor before commencement of the case.
11 U.S.C. § 928(a). The § 928(a) referenced subject to subsection (b) language reads:
(b) Any such lien on special revenues, other than municipal better assessments, derived from a project or system shall be subject to the necessary operating expenses of such project or system, as the case may be.
11 U.S.C. § 928(b). As already mentioned, “necessary operating expenses” is undelineated in the Bankruptcy Code, 11 U.S.C. § 101 et seq. Not having more than the words “necessary operating expenses” creates an ambiguity regarding what these words envelop. “Necessary” may be defined with meanings ranging from something that is absolutely needed to something that is needed, but not essential. Sometimes its usage means essential and other times it may mean basic. Merriam-Webster’s Collegiate Dictionary 776 (10th ed. 1969); J.I. Rodale, The SYNONYM Finder 769 (1978); OxfoRD English Dictionary (3d ed. 1993; online version 2012).
Depending on its usage, the “necessary operating expenses” of a system or project may range from only those absolutely required for the operation of the system or project to those important to the operations, but not absolutely essential. These differences in what may be “necessary’s” usage in § 928(b) involve a matter of degree and timing. The scope to which either or both of these aspects are part of “necessary” is unarticulated in the bankruptcy statute. For instance and at any given time, what is “necessary” as “operating expenses” may include all “operating expenses” or only some depending on whether “necessary” is only those absolutely necessary in the then period of time versus being those needed, yet deferrable to a later period. In this case, some of what is viewed as “necessary” by the County and not seen as so by the Trustee arise from the temporal aspect of “necessary’s” usage. Similarly, “operating expenses” under § 928(b) could be in its accounting sense or it may not have the meaning an accountant would attribute to it. It, too, has a time facet even if it is not used as an accountant would. These are some of the difficulties inherent in the § 928(b) usage of “necessary operating expenses.”
When words of a statute are susceptible to multiple meanings or interpretations, it is appropriate for a court to look to the legislative history of a statute to try to ascribe the intended meaning to such a statutory usage of words. United States v. Great N. Ry., 287 U.S. 144, 154-55, 53 S.Ct. 28, 77 L.Ed. 223 (1932) (observing that the process of statutory construction when a meaning is uncertain involves recourse to legislative history “of the measure and the statements by those in charge of it during its consideration by the Congress”). So, too, when there are no court decisions answering a particular question of law, it is appropriate for a court to review legislative history to ascertain the drafters’ intent. Hi-Tech Pharm., Inc. v. Crawford, 544 F.3d 1187, 1190-91 (11th Cir.2008). It is for these reasons that this *432Court references the legislative history for the 1988 Amendments.16
(2) Resort To Legislative History And Gleaning An Overall Purpose
This Court’s review of the legislative history for the 1988 Amendments is divided into two general categories. One is to learn the overall purpose for the portions of the 1988 Amendments at issue in this case. The other is to delve into the specifics of the what and why of the amendments as they relate to the post-bankruptcy retention of a lien on special revenues. This format is used because sometimes the specifics fog over the overall purpose(s) thereby letting the effects of the technical changes hide the purposes(s) underlying the amendments.
The legislative history includes the report of the Committee on the Judiciary submitted for Senate Bill, S. 1863, and the report of the Committee on the Judiciary submitted for H.R. 5347. It is from these substantially identical bills that the 1988 Amendments emerged. The report for S. 1863 sets forth that:
The purpose of the bill is to clarify the provisions of the Bankruptcy Code applicable to municipalities and to correct unintended conflicts that currently may exist between municipal law and bankruptcy law. The proposed amendments reflect principles that have long been the premise for municipal finance but have not been expressly stated in the Bankruptcy Code. The proposed amendments would dispel the confusion which has resulted from the general statement of Section 901 of the Bankruptcy Code that Sections 547, 552, and 1111(b) are currently applicable to a Chapter 9 case. Those sections were originally drafted with regard to corporate and individual bankruptcies and incorporated by reference in Section 901 of the Bankruptcy Code. Their effect on a municipal bankruptcy due to the unique nature of municipal finance was never considered by the drafters of the Bankruptcy Code.
Senate Report at 1-2. The report of the Committee on the Judiciary of the House of Representatives shows that the purpose for H.R. 5347 was identical to that underlying S. 1863. House Report at 2-5. In the words contained in the report for H.R. 5347, it “remedies the inconsistencies between bankruptcy law and principles of municipal finance to remove the potential for problems that now exist.” House Report at 3. Unfortunately, reference to these parts of the legislative history only discloses in a generalized way the purpose undergirding the sections in the 1988 Amendments contested here. To know the particular purpose for them requires more searching.
Although the potential for lien negation on post-bankruptcy property acquired by a debtor or a bankruptcy estate under 11 U.S.C. § 552(a) has been discussed, the consequences beyond just the loss of the security interest have not. Likewise, § 552’s interrelation with two other parts of the Bankruptcy Code that were principal focuses for eliminating inconsistencies between municipal and corporate finance and avoiding unintended consequences has not been considered. The two other portions are the preference avoidance section, 11 U.S.C. § 547, and the one making non-recourse obligations recourse in certain instances, 11 U.S.C. § 1111(b). House Report at 4-5. Each of these was altered with respect to a municipal debtor’s special revenue financing transactions. See 11 U.S.C. §§ 926(b) & 927.
*433The bigger picture of what was to be accomplished by the 1988 Amendments comes from knowing that the post-bankruptcy loss of a security interest in pledged special revenues via § 552(a) or the § 547 avoidance of a payment to a bond or warrant holder pursuant to a special revenue financing could have made the obligation or avoided transfer unsecured. As an unsecured indebtedness, it was then potentially repayable from the general revenues of the municipal entity. Under this scenario, it might have been changed by the pre-1988 version of the Bankruptcy Code from an obligation repayable solely from the revenues of the system or project or a specified tax into one repayable from the general revenues of the municipality. Essentially, it may have been turned from a nonrecourse into a recourse obligation of the municipal government. Elimination of § llll(b)’s allowing some nonrecourse obligations to be treated as recourse was part of the correction. Section 926(b)’s making transfers of a municipal debtor’s property “to or for the benefit of any holder of a bond or note, on account of such bond or note” unavoidable under § 547 was another. So, too, was the § 928(a) post-bankruptcy preservation of consensual, pre-bankruptcy petition security interests in special revenues. 11 U.S.C. §§ 926(b), 927, 928; House Report at 5; Senate Report at 12-13.
Without these changes, any conversion of nonrecourse obligations to recourse along with any repayment of them from general revenues rather than a specified revenue source that is not the general revenues of the municipality could have caused violations of a state law or constitution imposing limits on debt. These are two of the specifics of the 1988 Amendments, which were designed to forestall what might have otherwise happened to harm a municipal entity debtor. All were designed to retain in a bankruptcy case how special revenue financing had been structured outside a bankruptcy case. House Report at 4; Senate Report at 12-13.
At the same time, the legislative history reflects that Congress intended to protect special revenue financing lenders in specific ways. Section 928(a)’s security interest preservation prevents municipal entities from being able to use pledged system or project revenues for non-system or non-project purposes. This is also one of the factors desired to be achieved by limiting the preference avoidance capabilities of § 547 when it comes to special revenue financing. House Report at 4-5, 7; Senate Report at 5, 8-9. A driving reason underpinning alteration of the applicability of § 552(a) in municipal bankruptcy cases was, in the wording used in the Senate’s report, “to ensure that revenue bondholders receive the benefit of their bargain with the municipal issuer and that they will have unimpaired rights to the project revenues pledged to them.” Senate Report at 12. Earlier in the same report, the “benefit of their bargain” is explicitly described:
[I]n the municipal context, the benefit of the bargain is solely the revenues from the project and never the full faith and credit of the municipality.
Senate Report at 9. The provisions of § 928 in conjunction with the definition of special revenues in § 902(2) “protects the lien on revenues.” Id. As important, is that:
it [§ 928] was not intended to create new rights that otherwise would not exist under state law and constitutional provisions. The proposed amendment only removes that limitation [§ 552(a)’s lien avoidance] in the circumstances described in proposed Section 92[8](a).
Senate Report at 12-13.
These quoted portions from the legislative history relating to the specifics *434are indications that 11 U.S.C. § 928 was not intended to enhance in a bankruptcy case the rights of the parties to special revenue financing agreements that do not already exist under a jurisdiction’s laws and constitution. A corollary to this must be that existing rights under state law and constitutional provisions including those designed to enforce what the parties to a contract agreed to are to be unaltered by the 1988 Amendments unless clearly done and accomplished within what federal laws and the Constitution allow. All of this demonstrates that what was being done by the 1988 Amendments was altering portions of the Bankruptcy Code that would have potentially changed the pre-bank-ruptcy structure of special revenue financing. Put another way and with one potential exception, § 928(b), Congress passed amendments that were designed to keep the framework of special revenue financing unaltered by the provisions addressed by the 1988 Amendments.17
There is another indication that this is the case. For instance and while discussing when the automatic stays of 11 U.S.C. §§ 362(a) & 922(a) are not to interrupt the application of pledged special revenues to payment of secured bonds after payment of operating expenses, what the parties call a net revenue pledge, the following is set forth in the report of the United States Senate Committee on the Judiciary:
The automatic stay should specifically be inapplicable to application of such revenues. The Bankruptcy Court could retain the power to enjoin application of proceeds, however, upon a specific showing of need, for example, where a secured creditor was about to apply proceeds of a gross revenue pledge in a [manner] inconsistent with policies of the proposed new section.
Senate Report at 11 (emphasis added). The report of the U.S. House of Representatives Committee on the Judiciary is more explicit on what are the “policies of the proposed new section.” Its language is:
[N]ew subsection (d) to section 922 states that the automatic stay of Bankruptcy Code section 362 does not operate to stay paying pledged revenues, consistent with new section 92[8] of the Bankruptcy Code, to the revenue bondholders holding liens on such revenues.
House Report at 7. What this shows is that Congress contemplated leaving a pledge of special revenues unaffected unless it is at odds with the policies incorporated in § 928. In particular, this is discussed in the context of a gross revenue pledge, again, one on all special revenues, not a pledge of revenues remaining after payment of the requisite operating expenses, a net revenue pledge. At a minimum, this supports that Congress’s concept is that certain revenue pledges are to be left as contracted for so long as they are implemented in a manner consistent with what was contemplated by the drafters of the 1988 Amendments.
What was envisioned to happen first is the use of special revenues to keep the system or project operating followed by payment of interest and principal to lenders. This is discernable from the following:
New subsection 928(b) ensures that in the case of ... system financing (such as financing improvements to a local electric distribution system by debt secured by a lien on revenues of the entire system), the lien on special revenues will *435be subordinate to the necessary operating expenses of the project or system.
Senate Report at 8 (emphasis added). Virtually the same language is contained in the report of the U.S. House of Representatives Committee on the Judiciary for when the contracted for lien would be subordinated to expenses of the system or project. It sets forth that “[a]n example of system financing would be the financing of improvements to a local electric distribution system secured by a lien on revenues of the entire system.” House Report at 28 (emphasis added). Both reports reference a lien on all special revenues of a system that is a gross revenue pledge. These indicate that the concern was with gross revenue pledges, not net revenue pledges that are truly net revenue pledges.
Still more support for the intended purpose of the 1988 Amendments, to leave special revenue financing unchanged by §§ 547, 552, & 1111(b), exists. Perhaps the most striking is the discussion in the Senate’s report that indicates why the amendments may not be required, but are being made to eliminate any future contest over whether these sections of the Bankruptcy Code can be utilized to alter the distributive scheme of monies that was created outside bankruptcy for special revenue financing. It is:
In the municipal context, therefore, the simple answer to the Section 552 problem is that Section 904 and the tenth amendment should prohibit the interpretation that pledges of revenues granted pursuant to state statutory or constitutional provision to bondholders can be terminated by the filing of a chapter 9 case. Likewise, under the contract clause of the Constitution (article I, section 10), a municipality cannot claim that a contractual pledge of revenue can be terminated by the filing of a chapter 9 proceeding. However, the significant uncertainties under current law make clarification of the law necessary.
Senate Report at 6-7 (citations omitted). This is recognition by the drafters of the 1988 Amendments that serious, legitimate legal justifications exist for why a pre-bankruptcy pledge of special revenues enforceable under state laws may not and should not be undone by the then existing statutory provisions made the subject of the 1988 Amendments. It is also support for the purpose of Congress: to prevent a bankruptcy filing from altering special revenue financing transactions via 11 U.S.C. §§ 547, 552, & 1111(b). Using a different terminology, the overall goal was to retain as much as possible the pre-bankruptcy status of pledged special revenue financing transactions involving municipalities.18
Even more credence that this is the overall purpose of the 1988 Amendments is revealed by a discussion of adding 11 U.S.C. § 927 to the Bankruptcy Code. “New section 927 leaves the legal and contractual limitations of revenue bonds and state law intact without altering Bankruptcy Code provisions with respect to nonre-course financing.” House Report at 7.
Not altering the pre-bankruptcy status of a pledge of special revenues upon the filing of a municipal bankruptcy that might have occurred via then existing §§ 547, 552, & 1111(b) is also recognized by proponents of the 1988 Amendments as the purpose for changing the application of these sections when it comes to special revenue financing. A review of the Report *436of the National Bankruptcy Conference on Proposed Municipal Bankruptcy Amendments (hereinafter the NBC Report) reflects that those desiring the 1988 Amendments sought them for the purpose for which they were enacted and that the 1988 Amendments were enacted with only minor changes to the language proposed by the National Bankruptcy Conference. This National Bankruptcy Conference report was part of the floor speeches of the two members of Congress who introduced the bills in their respective chambers. See 133 Cong. Reo. S16229-S16234 (daily ed. Nov. 12, 1987) (Floor Speech of Sen. De-Coneini); 134 Cong. Reo. H596-H601 (daily ed. Feb. 2, 1988) (Floor Speech of Rep. Edwards).
All of this demonstrates that, subject to one qualification, the purpose for the changes to §§ 547, 552, & 1111(b) brought about by the 1988 Amendments was to make clear that retention of the pre-bank-ruptcy lien status of pledged special revenues should occur in a municipal bankruptcy. This includes leaving intact the priority of payment of monies to those whose claims have been secured by a consensual lien against special revenues. There is no indication in either the bankruptcy statute or the legislative history for the 1988 Amendments that municipal debtors were to be given the ability through § 928(b) to significantly restructure the contractual agreements for the lien against special revenues or the distribution of monies to secured creditors. Quite the contrary is the case. The Senate Report makes this clear:
The intent of Subsection (b) [of § 928] is not to change the priority and intent of the use of the special revenues under the terms of the municipal debt financing documents.
Senate Report at 23.
It is unmistakable that protection against use of §§ 547, 552, & 1111(b) to change municipal special revenue financing terms, including the lien against special revenues, is a critical part of achieving the overall purpose of the 1988 Amendments. The overall purpose was to keep such special revenue financing transactions unaffected by the sections of the Bankruptcy Code amended by the 1988 Amendments. The maintenance of the status quo post-bankruptcy is potentially subject to a limited subordination for certain operating expenses under § 928(b). Keeping this overall purpose in mind allows one to understand more of when and how the 11 U.S.C. § 928(b) exception operates.
(3) When, What, And Scope Of The Necessary AJK/A Not Impairing The Bargain And What Should Not Be Done
(a) During A Case
When 11 U.S.C. § 928(b) comes into play in a municipal bankruptcy is an initial issue comprised of a time element and a standard component. The time element is technically during the pendency of a case from its filing up to confirmation of the municipality’s plan of adjustment of debts. Compare 11 U.S.C. § 928, with 11 U.S.C. § 944. This means the time of § 928(b)’s subordination is measured in months to, hopefully, not more than a few years. The point is that it is not permanent. It is designed to keep the system or project operating pending a final resolution of a municipal bankruptcy case.
The second facet of when involves § 928(b)’s standard of “necessary operating expenses,” which is more complex. As the following discussion illustrates, this complexity evidences some of why the Trustee argues for application of § 928(b)’s subordination only for gross revenue pledges.
*437
(b) The Standard Is Also A Factor With Other Items And An Unknown
(i) The Known
Examination of the legislative history helps knowing some of what are the “necessary operating expenses” of § 928(b). The standard is its most important aspect and is one of the factors for delineating what are items within “necessary operating expenses.” The standard is keeping the system or project operating to generate monies to repay the lenders and to deliver the intended service to customers. House Report at 8; Senate Report at 22 (referring to the costs and expenses “necessary to keep the project or system going and producing special revenues”). In the words of the drafters:
This is important because payment of operating expenses — those necessary to keep the project or system going — must be protected so that the project or system can be maintained in good condition to generate the reve[n]ue to repay bondholders (and, importantly, to provide residents of the municipality with the service the project or system is meant to deliver).
House Report at 8 (emphasis added). Additionally, they must be “necessary and directly related to the project or system generating the special revenues and are not the expenses of the municipality generally or for other systems or projects.” Senate Report at 23. Section 928(b)’s reach is a limited one. It is not inclusive of all operating expenses. That this is the case is expressed in both the House Report and the Senate Report using identical words:
Subsection (b) sets forth a minimum standard for paying operating expenses ahead of debt service where revenues are pledged. It is not intended to displace any broader standard contained in the terms of the pledge or applicable non-bankruptcy law.
Senate Report at 28; House Report at 8 (emphasis added). The identical wording in both of these reports happens to be taken verbatim from the NBC Report. NBC Report at 29-30.19 Of particular note in the legislative history and the NBC Report is that the discussion in each for what is within § 928(b)’s minimum standard includes items that are to be paid, not those that are not. The bolded “payment” and “paying” portions of the immediately preceding quotations relating to keeping the system operating and the minimum standard are each with respect to items that are to be paid.
From this legislative history, the following is part of the perimeter of what is contained within § 928(b)’s “necessary operating expenses.” It includes for a given period of time those that are (1) expended to keep the system or project operating in the sense that the system or project is kept in good repair and generating the special revenues, not improvements or enhancements, (2) directly related to the project or system, not unrelated, (3) some, but not all operating expenses, which flow from § 928(b) being a minimum standard, and (4) being paid, which is different from those that may be incurred and paid in a later time period. Senate Report at 22; House Report at 8; NBC Report at 21-24, 29-30.
(ii) The Unknown Not Included
Whether there may be another item within the boundary of what is “necessary operating expenses” remains to be discussed. It is expenditures for items *438that under generally accepted accounting principles are for capital items.20 This category is raised by the County as a basis for including certain of the items that are disputed by the Trustee. The County cites the NBC Report as support for capital expenditures being within “necessary operating expenses.” The precise language is:
Moreover, the phrase “operating expenses” should not be construed to exclude capital expenses or expenditures, because they may be as necessary as ordinary operating expenses to maintain the source of revenue from which bonds are to be paid.
NBC Report at 24. Despite this language being in the NBC Report, which was partially read into the record by Senator De-Concini along with S.1863 on November 12, 1987, 133 CONG. REC. at S31824, and fully read into the record along with H.R. 3845 by Representative Edwards on February 8, 1988, 134 CONG. REC. at H600, it is not contained in the Senate Report or the House Report. Each of these reports was submitted in September 1988, which is months after the NBC Report was made part of the record on introduction of the two bills in the respective chambers of the Congress of the United States. Senate Report at 1 (dated September 12, 1988); House Report at 1 (dated September 30, 1988).
Furthermore, a careful review of the NBC Report where the discussion of capital expenses and capital expenditures is set forth reveals that it was in the context of a gross revenue pledge, not a net revenue pledge. See NBC Report at 21-24; 134 CONG. REC. at H599-H600; 133 CONG. REC. at S31824. As part of the discussion of this topic, the NBC Report includes this:
In very general terms, a net revenue pledge would survive, and a gross revenue pledge would be treated as if it were a net revenue pledge.
NBC Report at 22; 134 Cong. Rec. at H599; 133 Cong. Rec. at S31824. Because (a) the capital expenses/capital expenditures verbiage quoted is not in either the Senate Report or the House Report despite their extensive, verbatim inclusion, without citation, of large parts of the NBC Report, and (b) the NBC Report’s contents on these classifications is in the context of a gross revenue pledge, it is, at best, questionable whether the legislative history supports inclusion of capital expenses/capital expenditures as part of “necessary operating expenses” for pledges of special revenues.
Another complicating factor is that the content of what the NBC Report references as capital expenses/capital expenditures is subject to debate. For instance, no indication is given regarding whether these expenditures are for fixed assets, which should be distinguished from expenditures for items that may be capital expenditures, but not for fixed assets. It may also be that what is being referenced is a relatively small dollar amount expended for what is a capital item that may be expensed under a de minimis standard. This reference may also be to items that under accounting principles are truly expenses, but large in dollar amount. In fact, it may be that what the NBC Report classifies as capital expenses or capital expenditures does not have the meaning one would attribute to them under generally accepted accounting principles. None of *439this is known or knowable from the contents of the NBC Report. What is known is that there is no inclusion of this portion of the NBC Report in either the Senate Report or the House Report and the subordination discussion for § 928(b) occurs in the context of gross revenue pledges, not net revenue pledges. Senate Report at 8-9, 22-23; House Report at 7-8.
Under case law for the use of legislative history, this is just the situation when no significance should be accorded to what was excluded from both the Senate Report and the House Report. See Circuit City Stores, Inc. v. Adams, 532 U.S. 105, 119-20, 121 S.Ct. 1302, 149 L.Ed.2d 234 (2001) (“Legislative history is problematic even when the attempt is to draw inferences from the intent of duly appointed committees of the Congress. It becomes far more so when we consult sources still more steps removed from the full Congress....”); Kelly v. Robinson, 479 U.S. 36, 50-51 & n. 13, 107 S.Ct. 353, 93 L.Ed.2d 216 (1986) (“[N]one of those statements was made by a Member of Congress, nor were they included in the official Senate and House Reports. We decline to accord any significance to these statements.”). This Court does the same. Accordingly in this County-Trustee fight, expenditures for items that are capitalized are not included within the scope of “necessary operating expenses.”
(c) The Reserve Is Excluded
Even more significantly, unbridled inclusion of costs that under generally accepted accounting principles are capitalized, whether in the context of a gross revenue or a net revenue pledge, is capable of undoing what the 1988 Amendments were designed to prevent.21 In this case, an expansion of “necessary operating expenses” as posited by the County eviscerates the protections for pledged special revenues that have been codified by the 1988 Amendments. The County’s reserve portion causes a reduction in monies that would otherwise be distributed to the warrant holders in the magnitude of $3,675,689.00 per month from what they had been under the Indenture’s formula. The fact that there is insufficient evidence for how much of the reserve is for the acquisition of capital items is immaterial: the County’s notification letters make the calculated reserve a proxy for depreciation and amortization. It is not for the sort of day-to-day expenses required to keep the sewer system operating for the relatively short time between the filing of the County’s bankruptcy and a final resolution of its case.
As a substitute for what is the actual depreciation and amortization, it is not within “necessary operating expenses” because it does not represent the payment of any monies for a current operating expense. Depreciation and amortization are recognition as an operating expense, in a current period, of a portion of an expenditure that was made in a prior period. As such, they are not current expenditures of monies that under any definition of “necessary operating expenses” keeps the sewer system operating. They are not an expenditure, let alone one that is being paid in a given period. Under one of the known factors for what is within “necessary operating expenses,” that a cost or an expense actually be paid, the reserve is for this additional reason not part of “necessary operating expenses.”
Over the course of a year, these sorts of County urged allocations could reduce monies that would otherwise be applied as pledged special revenues by tens of millions of dollars. Should this Court accept *440the County’s view of § 928(b), the reduction in payments over the life span of this case could be in an aggregate sum well in excess of $100,000,000.00 from what it otherwise might be.
If the legislative history for the 1988 Amendments demonstrates nothing else, this is not what was intended by, nor contemplated for, § 928(b). In effect, adopting the County’s view as the standard embedded in § 928(b) allows an end run around what was the overall purpose for the 1988 Amendments. This occurs because it would significantly alter the agreed scope of the lien against special revenues along with the contracted for distribution of pledged special revenues to a degree beyond what the legislative history indicates was the purpose of the 1988 Amendments. This is why keeping focused on the overall purpose for the 1988 Amendments is critical. Failure to do so in this case could lead to a result not embraced by Congress, nor made part of the 1988 Amendments. Although this is one aspect for why the County’s proposed application of § 928(b) and its perception of what should be included within “necessary operating expenses” is incorrect, another exists.
(C) Mutuality and Business Judgments
All of the factors, what is ascertainable and unknown, and the problems with fixing the precise contents and contours of “necessary operating expenses” militate against any item-by-item determination by a court of those costs and expenses that make up “necessary operating expenses.” This view is enhanced when one recognizes the variability of municipal projects and systems. Some may be entirely new with little initial maintenance or repairs. Others may be partly new with greater maintenance and repairs needed than that required by a completely new project or system. Many will implicate technical areas with respect to which judges and lawyers have little knowledge and even less real world experience. The degree in variation of what may be minimally required among projects and systems to achieve the purpose underlying § 928(b) is potentially exponential. These are some of why the business judgment rule has been adopted by courts, see Fed. Deposit Ins. Corp. v. Stahl, 89 F.3d 1510, 1517 (11th Cir.1996), and is why this Court will not be inveigled into doing any item-by-item type of analysis for § 928(b). Such a review is also unnecessary in this case because a pledge of all of the special revenues from the County’s sewer system is not at issue.
This leaves determining what is considered the sort of pledge of special revenues that is immune from application of 11 U.S.C. § 928(b)’s subordination. What is known in this case is that the Pledged Revenues do not constitute a gross revenue pledge. It is a pledge of System Revenues left following payment of Operating Expenses. See supra Part III.A. Along the continuum of types of pledges from what is a net revenue pledge to that which is a gross revenue pledge, it is easy to know whether a particular one is at the point where a gross revenue pledge is found. Somewhere on the other side of the continuum may be found a net revenue pledge of the sort that allows absolutely all possible operating costs to be paid ahead of principal and interest. How pledges in between these two points are to be dealt with for § 928(b)’s purposes is not as readily evident. This is especially true when for 11 U.S.C. § 928(b)’s purposes neither type of pledge is mentioned by name. See 11 U.S.C. §§ 902(2), 922(d), 926, 927, & 928.
Joined with this is that a rule like that espoused by the Trustee — that § 928(b)’s subordination does not come into play unless a gross revenue pledge is involved — is *441susceptible to manipulation. For instance, one might pledge revenues of a system or project that pays some operating expenses, but leaves less than the minimum amount needed to pay “necessary operating expenses” under any fixing of what its standard may be. This is why what is contemplated as “necessary operating expenses” needs to be considered along with what the Indenture defines as Operating Expenses. Otherwise, clever drafting of a special revenue pledge may take it out of being a gross revenue pledge, yet leave insufficient monies to fund the operation of the system or project to the extent Congress contemplated by its 1988 Amendments.
This potentiality may also be why the NBC Report’s wording is that “[i]n very general terms, a net revenue pledge would survive, and a gross revenue pledge would be treated as if it were a net revenue pledge.” NBC Report at 22 (emphasis added); 134 Cong. Rec. at H599; 133 Cong. Reo. at S31824. Even if it is not, this quote from the NBC Report is a foundation upon which the Trustee asserts that § 928(b) is only applicable to a gross revenue pledge. As the NBC Report’s “very general terms” wording demonstrates, its footing is not the absolute that it is argued to be.
Recalling once more the overall purpose of the 1988 Amendments and the standard set by § 928(b) allows one to learn how they work in harmony. What this Court has identified as the overall purpose is leaving pledges of special revenues in municipal special revenue financing transactions unaltered unless a pledge would cause a system or project to fail to meet the minimum for § 928(b)’s subordination to be invoked. The standard is that which allows a project or system to be in good condition to enable it to keep “going” to “generate revenues to repay bondholders” and to provide the services to the system’s or project’s customers. House Report at 8; Senate Report at 23. It is not a standard that requires the best conditions, it is not one that contemplates that all possible costs of operation should be incurred, and it is not one that was designed to supercede the overall purpose of the 1988 Amendments other than in a lowest denominator sort of way. Id.
It is a minimal standard designed with the types of pledges in mind that would not allow payment of operating expenses needed to keep the system “going.” House Report at 8; Senate Report at 23. Unless there is another source of revenues dedicated to pay operational costs of the system or project, gross revenue pledges certainly fail to comport with this minimum. When it comes to pledges of special revenues that allow payment of at least some operating expenses ahead of debt, the consideration should be whether the contracted for pledge allows the system during the pendency of the municipal bankruptcy to continue to operate, be in good condition, and generate revenues for debt repayment. It is not that it is the best possible operation, the best maintained, or the best of any category of possible criteria.
Because pledges that are of the type allowing payment of operating expenses ahead of principal and interest secured by special revenues are negotiated by and between the municipality and the lender, pledges of this sort entail the business judgments of both parties regarding, among other factors, consideration of the needs for keeping the project or system operating and in good condition, and able to serve both the customers’ and the lender’s needs. In the structuring of special revenue based borrowing, all of these are of concern to both sides of the transaction. The municipality needs the system to remain in a condition that allows it to serve *442the purpose for which the project or system was designed and for it to generate the requisite revenue to fund the system’s/project’s day-to-day operations and timely payment of debt service. Concomitantly, the lender is concerned that the system remain in good condition so that it will generate sufficient revenues to enable it to be repaid timely. At the time of formulating the pledge of special revenues and the distributive format for them, the municipality and the lender have a commonality of interests exercised by the terms incorporated into the contracts between them.
It is this mutual exercise of business judgment that is incorporated into a special revenue financing transaction that should not be second guessed in a municipal bankruptcy absent clear evidence of an unreasonable exercise22 or that it is a certainty that the § 928(b) standard is not met. See Stahl, 89 F.3d at 1517. In other words, for pledges that are not gross revenues, a court should defer to the agreed to pledge and distributive design representing the business judgments of the parties that is expressed in the contract between them. See, e.g., In re Pomona Valley Medical Group, Inc., 476 F.3d 665, 670 (9th Cir.2007) (“We have never had the occasion to define the contours of the business judgment rule in the bankruptcy context. However, courts are no more equipped to make subjective business decisions for insolvent business than they are for solvent businesses, so we have no difficulty concluding that its formulation in corporate litigation is also appropriate here.”); Stahl, 89 F.3d at 1517; Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043, 1046-17 (4th Cir.1985) (recognizing the applicability of the business judgment rule in the bankruptcy context); Hensley v. Poole, 910 So.2d 96, 104 (Ala.2005). In its essence, this format preserves the overall purpose of the 1988 Amendments and implements the 11 U.S.C. § 928(b) standard as the legislative history indicates it should be done.
This procedure simultaneously allows a court to avoid item-by-item comparisons of costs and expenses associated with operating a system or project about which it will know little, if anything at all. Although to a lesser degree than for other types of bankruptcy cases, see 11 U.S.C. §§ 901(a), 903, & 904, it also minimizes use of § 928(b) as a possible means to avoid other sections of the Bankruptcy Code that have more fully developed parameters and requirements. See, e.g., 11 U.S.C. §§ 364(c)-(e) & 901(a). Once more knowing that this is the case requires keeping forefront the overall purpose sought to be achieved along with the limited application that § 928(b) is to be accorded.
(D) The Certainty: § 928(b) Does Not Apply
The Indenture, including the various supplemental indentures, defines Operating Expenses to include (1) all reasonable and necessary expenses of efficiently and economically administering and operating the County’s sewer system, (2) the expenses of maintaining the sewer system in good repair and good operating condition, and (3) fees and charges of the Indenture Trustee. It excludes (1) depreciation, amortization, and interest and payments *443on certain swap agreements, (2) expenditures that are under generally accepted accounting principles properly chargeable to a fixed capital account when they are for maintaining the sewer system in good repair and in good operating condition, and (3) expenditures that are extraordinary items under generally accepted accounting principles when they are for administration and operation of the sewer system. By way of example, the Indenture sets forth as part of its definition of Operating Expenses a nonexclusive listing of items included. This listing is for the costs of “all items of labor, materials, supplies, equipment (other than equipment chargeable to fixed capital account), premiums on insurance policies and fidelity bonds ... fees for engineers, attorneys and accountants (except where chargeable to fixed capital account) and all other items.... ” Indenture § 1.1 at 9. So long as those items within Operating Expenses are both incurred in the current month or prior one and due for payment, they are to be paid in the then current month. Indenture § 11.1. The Indenture’s Operating Expenses is quite broad and is designed to allow the County’s sewer system to continue to operate to meet the requisite operating expenses.
The review by application of the business judgment rule is one in gross, not particulate. The Indenture payment scheme for Operating Expenses is one that the parties agreed would be sufficient to keep the County’s sewer system in good operating condition and good repair. This Court need not second guess that determination for § 928(b)’s application. Even more, what was agreed to in the Indenture has enabled the sewer system to keep operating along with payment of all of the Operating Expenses plus payments of interest and principal on the warrants. The evidence is clear that this has been the case for the over fifteen years the Indenture’s calculation of Operating Expenses has been utilized to determine what costs and expenses were to be paid.23
For application of § 928(b) purposes, any deficiency in revenues to pay obligations beyond the Operating Expenses and the monies actually paid toward the warrant obligations is complicated by the County’s not raising sewer system rates or otherwise increasing sewer system revenues since 2008. More basically put, some of the inability of the sewer system to meet its Indenture obligations is the result of not having revenue enhancements, be it by rate increases or otherwise. This is yet one more reason for why this Court should not go behind what was agreed to in the Indenture. To do otherwise would allow a special revenue financing borrower to use a default in a revenue enhancement obligation, i.e., a rate adjustment requirement, to justify imposition of § 928(b). The outcome of all of this is that 11 U.S.C. § 928(b) is inapplicable as a means to subordinate the 11 U.S.C. § 928(a) preservation of the pledge of special revenues under the Indenture. As a result, the Pledged Revenues are to be paid by the County to the extent and as required under the terms of the Indenture to the Indenture Trustee.24
*444VI. Overview Revisited—
Case Summary
The overview of this Court’s ruling is that the Operating Expenses as determined under the Indenture do not include (1) a reserve for depreciation, amortization, or future expenditures, or (2) an estimate for professional fees and expenses. At the end of each monthly period, as is determined under the Indenture, the monies remaining in the Revenue Account following payment of the Operating Expenses that were (1) incurred in the then current month or any prior month and (2) due and payable in the then current month or a prior month are to be remitted in the priority and manner as set forth in Article XI of the Indenture without withholding of any monies for depreciation, amortization, reserves, or estimated expenditures that are the subject of this litigation. Additionally, 11 U.S.C. § 928(b) is inapplicable to the pledge of revenues under the Indenture and the distributive scheme in Article XI of the Indenture. A separate order incorporating this Court’s rulings will be entered.
. The stores of cash appear to be potentially in excess of $200,000,000.00. As of the end of fiscal year 2011, The Bank of New York Mellon, as indenture trustee, held in various accounts and funds over $188,000,000.00 which includes about $74,700,000.00 in at least four construction funds. All of these monies are claimed as restricted by The Bank of New York Mellon, as indenture trustee. In addition to these and as of the end of fiscal year 2011, there was another $58,600,000.00 in what is referenced as "Released Escrow Funds” held by the County. The information made available to the Court indicates that the "Released Escrow Fund” has dwindled to somewhere in the range of $35,000,000.00 to $45,000,000.00 as of the end of April 2012. Based on information supplied during the various hearings before the Court, the monies held by The Bank of New York Mellon, as the indenture trustee under the indentures governing the warrant borrowings by the County, appear to not have significantly changed.
. This calculation was done due to the County's realization that use of depreciation based on the County’s sewer system's books and records, currently in the range of $130,000,000.00 per year or up to a little over $10,800,000,000.00 per month, results in no monies ever being available to repay the sewer system's warrant indebtedness. One of the County's notification letters sets forth that "if we used the depreciation and amortization numbers from ... [the County's exhibit] (between $128 million and $130 million per year, meaning between $10-$ 11 million per month), there would be nothing to remit [to the Trustee for debt service]." In lieu of this, the County calculated what it called a reserve by making a ten year estimate of "costs of maintaining the system and keeping it compliant with state and federal environmental laws and regulations.” Trustee Ex. P-13.
. A more detailed history of the County's path to bankruptcy and its sewer system related debts is set forth in In re Jefferson Cnty., Ala., 465 B.R. 243, 250-58 (Bankr.N.D.Ala.2012).
. Net revenue pledges come in varying forms. The range is from one that is a pledge of revenues after payment of all costs and expenses to one that pays some, but less than all costs and expenses. This matter of degree of payment of costs and expenses that are operating expenses under any definition, be it contractual or statutory, has significance when § 928(b)'s subordination of pledged special revenues is at issue. See infra Part V.B.(3)V.D.
. Incorporated as part of each supplemental indenture is the definition of "operating expenses” as it is determined in the Indenture.
. Indenture Funds is defined as meaning the Debt Service Fund, the Rate Stabilization Fund, the Depreciation Fund, the Reserve Fund, and the Redemption Fund. Indenture § 1.1 at 5.
. There is a caveat not applicable to what this Court needs to decide in this adversary proceeding. Some of the revenues that are excluded from the lien created under part I of section 2.1 of the Indenture or by the section 1.1 definition of System Revenues may become subject to the lien by the additional security provision of part III of section 2.1 or other means.
. A portion of the revenues that would otherwise be required to be deposited into the Revenue Account are permitted to be held in another account or accounts until expended for the uses or purposes intended. These are monies received by the sewer system as grants, borrowed funds, deposits and certain payments by contractors, and customer deposits. Indenture § 11.1. The existence of these other accounts and the ultimate disposition of funds in these accounts does not impact on the resolution of the issues currently before the Court.
. Pledged Revenues is not necessarily the balance of the System Revenues left in the Revenue Account after payment of Operating Expenses. It may be in some months that it is and in others that it is not. For any given period and due to the possible inclusion of monies in the Revenue Account that are not subject to the lien and pledge granted under section 2.1 of the Indenture, the balance of the Revenue Account after payment of Operating Expenses that are also Pledged Revenues may be either equal to or less than the remaining Revenue Account balance. This is not a factor cited by the parties in their disputes. However, the County has taken the position in its brief that monies "not within one of these grants [those of Indenture section 2.1] are not subject to the Trustee’s lien and are not sources from which the County’s non-recourse obligations can or should be satisfied.” County Trial Brief at 14. The County is correct that such monies are not subject to section 2.1's grant unless within the three categories of grants of section 2.1. It is incorrect that'monies not subject to the lien provisions of section 2.1 are not and should not be available to pay the "County’s [sewer system’s] non-recourse obligations.” The Sewer Tax and certain other taxes are excluded from the lien grant of section 2. 1, but are System Revenues that are required to be applied to pay Operating Expenses. Indenture §§ 1.1 at 13; 11.1.
.There is also a Subordinate Debt Fund. Its existence and how it is funded does not alter the required analysis or resolution of the disputes among the parties.
. Due to this distribution framework, some of the revenues that could be distributed to the warrant holders may not be Pledged Revenues or, based solely on the Indenture, pledged special revenues for §§ 922(d) & 928(a) purposes. Those that the County argues are Operating Expenses in the form of reserves or estimates for various future expenditures or for depreciation or amortization would still be distributed on a monthly basis under section 11.1 of the Indenture. Under the Indenture, Operating Expenses are not part of the Pledged Revenues and, unless they are otherwise outside the Indenture pledged, they are not pledged special revenues under the Bankruptcy Code. This means those revenues that are distributed to the Debt Service Fund that are, under the County's argument, Operating Expenses, yet not payable, are potentially not pledged special revenues under §§ 922(d) & 928(a). If so, the result may be that § 928(b) would have no applicability to this portion of revenues paid to the Debt Service Fund. More simply, the County’s argument that the withheld monies are within Operating Expenses could make § 928(b) unavailable as a method to alter the distributive flow of revenues under the Indenture.
. This is not from Mr. Young's testimony in this adversary proceeding. It is from his testimony during hearings held in November 2011 regarding, among other things, whether the bankruptcy case filed by the County dispossessed an Alabama court’s receiver of possession and control over the County’s sewer system. The amount of depreciation was given as approximately $128,000,000.00 per year, which is consistent with the $128,000,000.00 to $130,000,000.00 figures used by the County in its January 2012 notification of withholding monies from the December 2011 and January 2012 distributions to the Indenture Trustee.
. Portions of this Court's January 6, 2012, order and the associated memorandum opinion are being appealed by the County and the Trustee. One of the rulings appealed by the County is this Court's determination that the Pledged Revenues as pledged special revenues *427are not subject to the automatic stays of 11 U.S.C. §§ 362(a) & 922(a).
. Courts have used various frameworks to assign the burden of proof in bankruptcy cases. Some cases, such as In re Romagnolo, have looked beyond the pleadings and allocated the burden of proof according to the nature of relief sought. Romagnolo v. United States (In re Romagnolo), 190 B.R. 946, 947 (Bankr.M.D.Fla.1995) (placing the burden of proof on the government regarding the dis-chargeability of a tax debt even though the debtor had commenced the declaratory action); see also Hillsborough Holdings Corp. v. Celotex Corp. (In re Hillsborough Holdings Corp.), 166 B.R. 461, 468 (Bankr.M.D.Fla.1994) (placing the burden of proof on the party seeking to pierce the corporate veil even though the debtor had commenced the declaratory action). Within this framework, the County bears the burden to show 11 U.S.C. § 928(b)’s application because the County has withheld System Revenues and would therefore bear the burden of proof regardless of the procedural posture of this adversary proceeding. Likewise, other courts, such as this Court in In re Stone, have recognized that the burden of proof is placed on the party claiming an exception in a statutory provision. Stone v. Stone (In re Stone), 199 B.R. 753, *428780-81 (Bankr.N.D.Ala.1996) (citing Hill v. Smith, 260 U.S. 592, 595, 43 S.Ct. 219, 67 L.Ed. 419 (1923)). Within this framework, the County bears the burden because it is attempting to invoke the “necessary operating expense” exception in § 928(b). Regardless of the method of analysis, the County bears the burden of proof on this issue.
. These are, respectively, the House of Representatives Committee on the Judiciary Report on H.R. 5347 (100th Congress, 2d Session) and the Senate Committee on the Judiciary Report on S. 1863 (100th Congress, 2d Session).
. In In re Jefferson Cnty., Ala., 465 B.R. at 281-86, a more detailed discussion of the 1988 Amendments is set forth than is presented in this memorandum opinion.
. This should not be read to mean that, if applicable, other sections of the Bankruptcy Code, 11 U.S.C. § 101 et seq., not changed by the 1988 Amendments may not be available to modify the contractual relations between parties to municipal special revenue financing agreements.
. Again, this is only with respect to the specific sections addressed by the 1988 Amendments. It does not mean that other sections of the Bankruptcy Code, 11 U.S.C. § 101, et seq., may not be available to otherwise alter aspects of pledged special revenue transactions involving municipalities. See, e.g., 11 U.S.C. §§ 363(c)-(e), 506(c), 901(a), & 1129(b)(1) — (b)(2)(B).
. In addition to this portion, large parts of the Senate Report and the House Report are word for word the same as what is in the NBC Report.
. The Court’s reference to generally accepted accounting principles is for more certainty in distinguishing between capitalized versus non-capitalized expenditures. It is not to be read as an indication that § 928(b) incorporates generally accepted accounting principles.
. See supra note 20.
. Any determination of "unreasonableness” should be based on the case law standards for when a court does not allow the business judgment rule to preclude further inquiry. See, e.g., Fed. Deposit Ins. Corp. v. Stahl, 89 F.3d 1510, 1517 (11th Cir.1996); In re Pomona Valley Medical Group, Inc., 476 F.3d 665, 670 (9th Cir.2007); Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043, 1046-47 (4th Cir.1985); Hensley v. Poole, 910 So.2d 96, 104 (Ala.2005).
. The Court is not unmindful of the numerous criminal convictions involving previous Jefferson County commissioners, former employees of the County, and businesses and employees of businesses involved in the sewer system’s projects and the funding for its projects. However, no evidence has been presented that overrides the fifteen year -track record under the Indenture resulting in payment of the sewer system’s costs and expenses in a fashion that has allowed it to operate to serve its customers and pay principal and interest, to the extent paid, to warrant holders.
. This is also a case in which a particulate comparison would yield the same outcome. *444In outline form, the definition of Operating Expenses includes all of the day-to-day expenses for, not just the operation and administration of the sewer system, but also those added ones required to make it operate both efficiently and economically. Likewise, it includes all of the day-to-day expenses of maintaining the system in good repair and in good operating condition, not just the necessary ones. Depreciation and amortization are excluded as they are from “necessary operating expenses” under this Court’s ruling. Even though possibly less than the amount of the capital expenditures excluded from "necessary operating expenses,” the same is the case when it comes to capital expenditures chargeable to a fixed capital account. They are excluded from "necessary operating expenses” and Operating Expenses. The interest and payments made for certain qualified swap agreements have nothing to do with sewer system operations, administration, or maintenance. They are monies used to meet obligations under swap agreements that were purportedly designed to mitigate the effect of interest rate swings, not expenditures even remotely related to the day-to-day operations of the sewer system. Excluding consideration of extraordinary items from Operating Expenses, this comparison evidences that the Operating Expenses to be paid under the Indenture is a higher one than the minimum envisioned for § 928(b). Should the $833,333.00 per month for estimated professional fees and expenses not be the extraordinary items the Trustee asserts and not be capitalized, they would come within the definition of Operating Expenses. If they are extraordinary items, they would still be excluded from Operating Expenses and "necessary operating expenses” as estimated sums, not sums being paid in a current period. As a capitalized expenditure, this sum would not count as an Operating Expense or a "necessary operating expense.” Either way, the Operating Expenses to be paid within a given month exceed the minimal standard of § 928(b). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495315/ | MEMORANDUM OPINION
THOMAS B. BENNETT, Bankruptcy Judge.
This adversary proceeding came before this Court for trial on September 10, 2012. The issue before the Court is whether a state court judgment against Debtor Lynda Cunningham is nondischargeable under the provisions of 11 U.S.C. § 523(a).
FINDINGS OF FACT AND PROCEDURAL HISTORY
In order to assist him in the management of his affairs, Plaintiff James Cunningham, Jr. enlisted the assistance of his son, Glynn Cunningham, whom he trusted. As part of the sought assistance, James had over $140,000 of his monies placed into two (2) certificates of deposit showing James and Glynn as joint holders. In particular, on August 4, 2006, James and Glynn established a joint certificate of deposit (“CD”) with AmSouth Bank (now Regions Bank) in the amount of $90,000. On May 17, 2007, at his father’s request, Glynn obtained another CD at the same bank in his name with his father as the payable on death (“POD”) beneficiary using $54,000 he received from his father. On June 13, 2007, James cashed in the $90,000 CD plus interest and allowed Glynn to acquire a new CD in Glynn’s name with James as the payable on death beneficiary. On August 16, 2007, without his father’s knowledge or consent, Glynn changed the POD beneficiary on both CDs from James to his wife, Lynda Cunning*447ham. Lynda accompanied Glynn to Regions Bank when he made these changes and was aware of what he was doing. James contends that he had only entrusted Glynn to manage his investments for him and did not authorize his removal from the accounts or the POD beneficiary change.
Glynn Cunningham died on April 9, 2008. On April 28, 2008, Lynda withdrew the money from both CDs (at the time, the balance was slightly over $140,000) and established new CDs solely in her name. On October 9, 2008, James’ attorney sent Lynda a demand letter requesting the reimbursement of the funds. On October 10, 2008, the next day, Lynda withdrew all of the funds from Regions Bank and deposited them at a credit union solely in her name.
Later in 2008, James filed suit in the Circuit Court of Morgan County, Alabama. Although James lost in his attempt at a pre-judgment attachment of the monies in dispute, on September 3, 2010, he received a judgment against Lynda in the Morgan County Circuit Court in the amount of $140,613.44 for money had and received and unjust enrichment. Unfortunately for James, his daughter-in-law began spending these monies in October 2008, and by the September 3, 2010 judgment date, she had spent all of the monies that came from the CDs. After James filed a garnishment action against her, Lynda filed a Chapter 13 petition on October 19, 2011. James filed an adversary proceeding on November 18, 2011, arguing that Lynda’s debt should not be discharged pursuant to § 523(a)(2), (4), and/or (6).
DISCUSSION
Section 523(a)(4) provides that an individual debtor may not discharge any debt “for fraud or defalcation while acting in a fiduciary capacity, embezzlement, or larceny.”1 Section 523 must be narrowly construed, and the creditor has the burden of proving by a preponderance of the evidence that an exception to discharge applies. See Bullock v. BankChampaign, N.A. (In re Bullock), 670 F.3d 1160, 1164 (11th Cir.2012); Griffith v. United States (In re Griffith), 206 F.3d 1389, 1396 (11th Cir.2000).
To determine whether a debt is dischargeable under § 523(a)(4), courts apply the federal common law definitions of larceny and embezzlement. See, e.g., Ormsby v. First Am. Title Co. (In re Ormsby), 591 F.3d 1199, 1205 (9th Cir.2010); Bankston Motor Homes v. Dennis (Matter of Dennis), 444 B.R. 210, 217 (Bankr.N.D.Ala.2011). As one bankruptcy court explained, if state rather than federal definitions applied, “dischargeability might be rendered nonuniform because of the various state definitions.” Cent. Investors Real Estate Corp. v. Powell (In re Powell), 54 B.R. 123, 125 (Bankr.D.Or.1983).
For purposes of nondischarge-ability under § 523(a)(4), “larceny” is defined as “the fraudulent taking and carrying away [of] property of another with intent to convert such property to the taker’s use without the consent of the owner.” Dennis, 444 B.R. at 217 (internal citations *448and quotations omitted); see also 4 Collier on Bankruptcy ¶ 523. 10 (16th ed. 2009). “Embezzlement,” on the other hand, is “the fraudulent appropriation of property belonging to another by a debtor who was entrusted with the property or into whose hands the property has lawfully come.” HOC, Inc. v. McAllister (In re McAllister), 211 B.R. 976, 988 (Bankr.N.D.Ala.1997); Collier § 523.10. Embezzlement differs from larceny only in that the initial taking of the property was lawful, or with the owner’s consent. Schaffer v. Dempster (In re Dempster), 182 B.R. 790, 802 (Bankr.N.D.Ill.1995); Collier § 523.10.
As noted above, both embezzlement and larceny require that the creditor prove the property did not rightfully belong to the debtor. In cases like this one involving a state court judgment against the debtor in favor of the creditor on the issue of the ownership of the funds, bankruptcy courts may apply principles of issue preclusion to prevent a debtor such as Lynda Cunningham from arguing that she was the rightful owner of the money. See, e.g., Meis v. Meis (In re Meis), 200 B.R. 166, 169 (Bankr.N.D.Ohio 1996). Here, collateral estoppel is appropriate because the precise issue of the ownership of the funds was necessary to the state court’s determination of James Cunningham’s claims for money had and received and unjust enrichment and was actually litigated in that court. See Gray v. Gray (In re Gray), 322 B.R. 682, 689 (Bankr.N.D.Ala.2005) (citing Wheeler v. First Ala. Bank of Birmingham, 364 So.2d 1190, 1199 (Ala.1978)). The state court’s judgment is therefore conclusive on this issue. Id.
Both larceny and embezzlement also require that the creditor prove fraudulent intent on the part of the debtor. See OnBank & Trust Co. v. Siddell (In re Siddell), 191 B.R. 544, 552 (Bankr.N.D.N.Y.1996). Fraudulent intent may be inferred from surrounding circumstances and the conduct of the accused. See, e.g., Kaye v. Rose (Matter of Rose), 934 F.2d 901, 904 (7th Cir.1991); In re Hendry, 428 B.R. 68, 78 (Bankr.D.Del.2010), aff'd sub nom., Hendry v. Hendry, BR 06-11364 BLS, 2012 WL 1118208 (D.Del. Apr. 3, 2012). Once the creditor presents circumstantial evidence of an intent to deceive, a debtor “cannot overcome that inference with an unsupported assertion of honest intent.” Hendry, 428 B.R. at 78 (internal quotations and citations omitted). “Instead, the court should consider whether the [debtor’s] actions appear so inconsistent with [her] self-serving statement of intent that the proof leads th[e] court to disbelieve the debtor.” Id. (internal quotations and citations omitted).
In Hendry, the court held that the facts and circumstances of the case, including the ongoing litigation over ownership of the funds at issue there, were sufficient to infer fraud where the only evidence the debtor produced was a self-serving statement that he believed he was entitled to the money. 428 B.R. at 78; see also Meis, 200 B.R. at 170 (court found debtor’s testimony that her mother-in-law intended to give her $92,000 after her separation from her husband incredible and excepted funds from discharge under § 523(a)(4)). In addition, fraudulent intent may be imputed to an “innocent” spouse where that spouse knows of the other spouse’s misconduct and participates in the wrongful use or enjoyment of the property of another. See, e.g., Synod of South Atlantic Presbyterian Church v. Magpusao (In re Magpusao, 265 B.R. 492, 498 (Bankr.M.D.Fla.2001); Taylor Freezer Sales of Arizona v. Oliphant (In re Oliphant), 221 B.R. 506, 511 (Bankr.D.Ariz.1998)).
In this case, the Plaintiff has shown by a preponderance of the evidence, *449see, e.g., Bullock, 670 F.3d at 1164, that Lynda Cunningham’s conduct meets the requirements for nondischargeability on the basis of larceny under § 523(a)(4). The state court held that the funds belonged to James Cunningham, not Lynda, and that holding is conclusive on that issue. The evidence presented at trial shows that Lynda wrongfully obtained James’ funds without his consent or knowledge and deposited them into her account with the intent to use them for herself.2 The Court can easily infer the necessary fraudulent intent from Lynda’s actions. First, the requisite intent is shown by Glynn’s removing James from their joint accounts and making Lynda the POD beneficiary without James’ consent, which is imputed to Lynda because she had actual knowledge of Glynn’s actions and assisted him. Second, Lynda moved the monies to another bank to an account in only her name after receiving the demand letter from James’ attorney for the return of the funds. Finally, while knowing of James’ claim to the monies, Lynda spent the entire amount before James’ state court action against her was resolved, even though she claimed monthly expenses of only about $2,000 in her Chapter 13 petition. See Hendry, 428 B.R. at 78. Lynda’s testimony that she thought her father-in-law wanted her to have the money is simply not credible. See Meis, 200 B.R. at 170. Indeed, the only evidence she has presented in support of her position is a self-serving assertion of honest intent. See Hendry, 428 B.R. at 78. This assertion is insufficient to defeat the strong inference of fraudulent intent in this case. Accordingly, Lynda Cunningham’s debt to James Cunningham, Jr. in the amount of $140,513.44 is nondischargeable under § 523(a)(4).3
. The phrase "while acting in a fiduciary capacity” only modifies the "for fraud or defalcation” portion of § 523(a)(4) and not the "embezzlement, or larceny” part. See, e.g., Hosey v. Hosey (In re Hosey), 355 B.R. 311, 323 (Bankr.N.D.Ala.2006); In re Nee, 50 B.R. 268, 272 (Bankr.D.Mass.1985). Therefore, contrary to Lynda Cunningham’s argument, a court need not find a fiduciary relationship in order to hold that a debt is nondischargeable on the basis of embezzlement or larceny. See Transamerica Commercial Fin. Corp. v. Littleton (In re Littleton, 942 F.2d 551, 555 (9th Cir.1991)); Applegate v. Shuler (Matter of Shuler), 21 B.R. 643, 644 (Bankr.D.Idaho 1982).
. Even if the Court accepted Lynda’s argument that she came into the funds lawfully, James’ October 2008 demand for the funds put her on notice that there was, at the very least, a serious question as to her ownership of the funds, and the state court’s decision definitively determined that the funds belonged to James, which would mean Glynn— with Lynda's knowledge, consent, and assistance — embezzled the funds within the meaning of § 523(a)(4) when they altered the structure of the CDs. Also, Lynda’s transfer of the CD monies into accounts solely in her name would constitute larceny. As a practical matter, however, whether the conduct constitutes larceny or embezzlement is largely irrelevant for purposes of § 523(a)(4) “since either factual scenario can be used to prove that the debt is non-dischargeable; therefore, it would not benefit the debtor to show that he or she was guilty of larceny rather than embezzlement (or vice versa).” Adamo v. Scheller (In re Scheller), 265 B.R. 39, 54 (Bankr.S.D.N.Y.2001).
. Given the Court’s ruling that Lynda Cunningham's debt is nondischargeable pursuant to § 523(a)(4), the Court need not consider the Plaintiff’s arguments that it is nondis-chargeable pursuant to §§ 523(a)(2) and (6), and those issues are therefore moot. Further, as the Court noted at trial, as long as this remains a Chapter 13 case, § 523(a)(6) does not apply. See, e.g., In re Roberts, 366 B.R. 200, 204-05 (Bankr.N.D.Ala.2007). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495317/ | *464
MEMORANDUM OF DECISION ON DEFENDANTS’ MOTION TO DISMISS
FRANK J. BAILEY, Bankruptcy Judge.
Procedural History
Judith Hiller, daughter of 91-year old Phyllis Hiller, sued Phyllis in state court in 2006 because Phyllis, by exercise of a special power of appointment, appointed a remainder interest in her home to Andrew Hiller. Andrew is Judith’s bother and Phyllis’s son. Judith believes the remainder interest is owed to her and her alone; she also contends that she is in any event entitled to recompense from Phyllis for monies she invested to improve the house. Her three-count complaint was dismissed; on appeal, the order of dismissal was affirmed as to two counts, for breach of contract and promissory estoppel, but vacated as to the third, for unjust enrichment, and remanded for further proceedings. Phyllis then filed a petition for relief under chapter 7 of the Bankruptcy Code. Judith, on the strength of her still-unadju-dicated claim, is her only possible creditor; Phyllis listed no other creditor in her schedules. Judith then filed the present adversary complaint against Phyllis,1 also in three counts. Count I seeks dismissal of the bankruptcy case under 11 U.S.C. § 707(b)(1) as a bad faith filing. Count II is an objection to discharge under 11 U.S.C. § 727(a)(2)(A), the factual basis of which is unclear. And Count III is an objection to discharge under 11 U.S.C. § 727(a)(5) for failure to explain satisfactorily a loss of assets, specifically, of the funds that Phyllis used to pay for her and Andrew’s defense of the state court action. The adversary proceeding is now before the Court on a motion by Phyllis and Andrew under Fed. R. Civ. P. 12(b)(6) to dismiss each of the three counts for failure to state a claim on which relief can be granted. Judith opposes the motion.
Standard of Review
When presented with a Rule 12(b)(6) motion, the Court must “accept as true all well-pleaded facts set forth in the complaint and draw all reasonable inferences therefrom in the pleader’s favor.” Artuso v. Vertex Pharmaceuticals, Inc., 637 F.3d 1, 5 (1st Cir.2011). Subject to certain exceptions, a complaint need only contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Id, citing Fed.R.Civ.P. 8(a)(2).
Although there is no need for “detailed factual allegations,” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007), the complaint must “contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal [556 U.S. 662], 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Twombly, 550 U.S. at 570, 127 S.Ct. 1955). Accordingly, a complaint must include more than a rote recital of the elements of a cause of action; it must include “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id “If the factual allegations in the complaint are too meager, vague, or conclusory to remove the possibility of relief from the realm of mere conjecture, the complaint is open to dismissal.” [S.E.C. v.] Tambone, 597 F.3d [436] at 442 [ (1st Cir.2010) ] (citing Twombly, 550 U.S. at 555, 127 S.Ct. 1955).
Artuso, 637 F.3d at 5. The First Circuit’s approach to the plausibility standard has been usefully distilled as follows:
*465[T]o determine whether the factual allegations in the complaint are sufficient to survive a motion to dismiss, the Court “employ[s] a two-pronged approach.” “The first prong is to identify the factual allegation and to identify statements in the complaint that merely offer legal conclusions couched as facts or are threadbare or conclusory“A plaintiff is not entitled to ‘proceed perforce’ by virtue of allegations that merely parrot the elements of the cause of action.” The second prong is to assess whether the factual allegations “allow [ ] the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” If they do, “the claim has facial plausibility.” “The make-or-break standard ... is that the combined allegations, taken as true, must state a plausible, not a merely conceivable, case for relief.”
Juarez v. U.S. Bank Nat Ass’n, Trustee, 2011 WL 5330465, *2 (D.Mass.2011) (internal citations omitted).
Facts
The complaint alleges as follows.
Judith Hiller is the daughter of the defendant and debtor, Phyllis Hiller. Phyllis resides at 211 School Street, Westford, Massachusetts (“the Property”). In late 2000 and early 2001, Phyllis and Judith retained the services of an attorney to prepare certain estate planning documents. One of these, which they executed, was an irrevocable trust (“the Trust”) of which Judith was trustee and Judith and Andrew were equal beneficiaries. At that time, Phyllis transferred the School Street Property to the Trust but retained for herself a life estate.2 She also retained a power to appoint the Property to a limited class of persons, including Judith and Andrew but not herself. She also retained the right to pay for all repairs and maintenance of the Property or to have the trustee, Judith, do so on her behalf.
In the years immediately after the Property was transferred to the Trust, Judith spent approximately $150,000 of her own money and countless hours of her time on substantial renovations to the Property. Judith’s expectation and understanding at the time was that the Property had been transferred to her — that is, she believed herself to be the only beneficiary of the Trust — in exchange for the time and money she was spending renovating the Property. Judith did not understand at the time that, under the terms of the Trust, her brother was an equal beneficiary of the trust, even though he was contributing neither time nor money to the renovation. Judith also did not understand that the Trust gave Phyllis the power to “appoint” the property of the Trust to someone other than Judith: that is, to Andrew.
The relationship between Judith and Phyllis deteriorated in 2004, and in 2006 Judith moved out of the Property.3 In 2006, Judith commenced the state court action against both Phyllis and Andrew, seeking to enforce what Judith contended was her agreement with Phyllis that the Property would be conveyed to Judith, subject to Phyllis’s life estate, in exchange for (among other things) Judith’s remaining in the property with Phyllis and super*466vising and paying for the renovation of the Property. Judith also asserted an alternative claim on a theory of quantum meru-it/unjust enrichment to recover the value of the time and money Judith had put into the Property.
At that time, Phyllis had more than $100,000 in her bank account, as well as some valuable gold coins. These were available to Phyllis for living expenses, to supplement her income.
A sensible resolution of the lawsuit, and one which would have cost Phyllis almost nothing, would have been for Phyllis to exercise her power under the Trust to appoint the Property to Judith, so that the Property would pass entirely to Judith upon Phyllis’s death. This would have had no adverse effect on Phyllis, would not have affected Phyllis’s life estate in the Property, would have given Judith what Judith contended Judith was entitled to, and would have preserved Phyllis’s limited assets so that they were available to Phyllis for living expenses. However, Andrew saw an opportunity in the dispute between Phyllis and Judith. He manipulated the emotions of his elderly mother, Phyllis, and persuaded her to react to the lawsuit by appointing the entire Property to him.
Even though, as a result of the Property being appointed to him, Andrew was now the only person who stood to benefit from defending the lawsuit — as opposed to settling it in the manner described above— Andrew also persuaded Phyllis to spend her own limited resources vigorously defending the lawsuit. One law firm was retained to represent both Phyllis and Andrew. On behalf of Phyllis and Andrew, that law firm managed to get dismissed, on summary judgment (which dismissal was affirmed on appeal), the claim that, had Judith prevailed, would have required Phyllis to appoint the Property to Judith. This outcome, achieved at great expense, was of absolutely no benefit to Phyllis but of substantial benefit to Andrew.
Phyllis has paid at least half, and perhaps all, of the legal fees to defend the state court action. Given who stood to benefit from a successful defense of that action, Andrew should have paid all of the legal fees to defend that lawsuit.
Judith’s other claim, for recovery under the theory of quantum meruit/unjust enrichment, was also dismissed on summary judgment, but that dismissal was reversed on appeal. Trial of that matter was scheduled for April 27, 2011. On March 30, 2011, Phyllis filed a voluntary petition for relief under Chapter 7 of the Bankruptcy Code. Judith is the only creditor listed on Phyllis’s schedule. Judith’s claim in the state court action is the only debt that Phyllis seeks to discharge.
One important reason for Phyllis’s bankruptcy filing was that she was concerned that if she lost the state court action, Judith might seek to enforce the judgment against Phyllis’s interest in the Property and throw her out of the Property, leaving her with no place to live. However, even if Judith obtained a judgment against Phyllis in the state court action, it would be unenforceable against her life estate in the property. That interest is protected by the automatic homestead exemption afforded by MASS. GEN. LAWS ch. 188, § 4, up to $125,000, which amount exceeds the actuarial value of Phyllis’s life estate. Therefore, one of the primary reasons for Phyllis to file the bankruptcy petition — to retain the ability to live in her house should she lose the state court action — was baseless. Phyllis has virtually no assets other than her life estate in the Property and her ability to appoint the remainder interest in the property to Judith. Therefore, she can gain nothing by filing her bankruptcy petition.
*467The real reason that Phyllis’s bankruptcy petition was filed is that, once again, Andrew manipulated his elderly mother into believing that the bankruptcy filing was the only way she could be sure of being able to remain in the Property for the remainder of her life. This bankruptcy process, which will be of no practical benefit to Phyllis even if she obtains a discharge, but which is nevertheless being paid for by Phyllis, was filed at Andrew’s urging and primarily, if not solely, for his benefit.
The schedules that Phyllis filed in connection with her bankruptcy petition contain a number of material misstatements and omissions. These include the following:
a. On Schedule A, the schedule of real property, Phyllis listed only the actuarial value of her life estate in the property. In fact she also has a power of appointment which she can exercise in favor of Judith, her only creditor. It should be considered an asset and should have been listed on Schedule A.
b. On her Statement of Financial Affairs at question 14, Phyllis was required but failed to list certain property “owned by another person that the debtor holds of controls”: specifically, the property whose legal title is held by Judith, as trustee, and whose beneficial interest is held by Andrew. Phyllis controls this property. She has the power to appoint it to Judith or Andrew, the power to use Trust assets for maintenance and repair of the Property, and the power to authorize the trustee to mortgage the Property.
c. On Schedule B, the schedule of personal property, Phyllis failed to list the value of certain gold coins, which she owned at least as late as December 2007 and still owns.
d. Also on Schedule B, Phyllis failed to list a debt owed to her by Andrew. Phyllis has been paying all or a portion of the legal fees to defend the state court action, even though all or most of those fees should be the responsibility of Andrew, the only person who stands to benefit from a successful defense of that action.
These are the facts as Judith has alleged them.
Count I: For Dismissal of the Bankruptcy Case Pursuant to § 707(b)(1)
In Count I, which incorporates all the foregoing allegations of fact, Judith contends simply that the bankruptcy petition was not filed in good faith and therefore, pursuant to 11 U.S.C. § 707(b)(1), should be dismissed. Although Fed. R. Bankr.P. 1017(e)(1) requires a party moving to dismiss under § 707(b)(1) to state with particularity the circumstances alleged to constitute abuse, nowhere in Count I or in the complaint more generally has Judith indicated precisely how the alleged facts show bad faith or where the bad faith lies. In her Rule 12(b)(6) Motion, Phyllis argues that the complaint does not allege bad faith on the part of Phyllis, only that Andrew manipulated Phyllis into filing for his own benefit; undue influence on the part of Andrew is not bad faith on the part of Phyllis.4 In response to the motion to dismiss, Judith argues that § 707(b)(1) re*468quires dismissal of an individual’s chapter 7 case where the granting of relief would be an abuse of the provisions of chapter 7, that in determining whether the granting of relief would be such an abuse, the court must consider (i) whether the debtor filed the petition in bad faith or (ii) whether the totality of the circumstances of the debt- or’s financial situation demonstrates abuse, 11 U.S.C. § 707(b)(3), that the filing was in bad faith because its purpose was to protect Phyllis’s right to dispose of her property according to her current estate plan, and that the totality of the circumstances demonstrates abuse because it shows that Phyllis has the ability to pay the judgment that Judith seeks against her. She may pay the debt, Judith alleges, by reappointing the Property to Judith or by authorizing Judith, as trustee of the Trust, to mortgage the Property to pay off the debt to her. Recognizing that the totality of the circumstances theory was not pleaded in the complaint, Judith moved, both in her response to the Rule 12(b)(6) hearing and orally at the hearing on that motion, for leave to amend her complaint accordingly. She contends that, where no responsive pleading has been filed, she has an absolute right to amend. Phyllis has voiced no objection to amendment.
a. Adversary Complaint as Vehicle for Request to Dismiss for Abuse under § 707(b)
A request to dismiss a case under § 707(b) is generally made by a motion filed in the bankruptcy case.5 The use of an adversary complaint instead of a motion raises two concerns. First, it is procedurally more cumbersome than a simple motion, and unnecessarily so. Second, where the parties to the adversary proceeding are limited to the creditor and the debtor, other parties with an interest in the matter — the chapter 7 trustee, other creditors, and the United States trustee — may be inappropriately excluded. Neither of these concerns warrants requiring Judith to start over with a motion. If anything, her choice of an adversary complaint merely affords Phyllis perhaps more process than would otherwise be required. As for other parties, there are no other creditors in this case; and the chapter 7 trustee and United States trustee, though not named as parties, were at least served with the complaint when it was filed, as Fed. R. Bankr.P. 1017(e) requires, and neither has responded with a request to intervene or be heard. In addition, the subject matter of this count is related to the objections to discharge in Counts II and III, and therefore there is efficiency in joining all three counts in one proceeding. Phyllis has not objected to the process employed. For these reasons, I will not strike Count I as procedurally inappropriate.
b. The Merits
I begin with the relevant statute and rules. Under § 707(b)(1), the court “may dismiss a case filed by an individual debtor under this chapter [chapter 7 of title 11] whose debts are primarily consumer debts ... if it finds that the granting of relief would be an abuse of the provisions of this chapter.” 11 U.S.C. § 707(b)(1). In certain cases, a presumption of abuse arises. See 11 U.S.C. § 707(b)(2). The parties agree that no presumption of abuse arises in this case. When a presumption of *469abuse does not arise, the court, in considering whether the granting of relief would be an abuse of the provisions of chapter 7, “shall consider (A) whether the debtor filed the petition in bad faith; or (B) the totality of the circumstances ... of the debtor’s financial situation demonstrates abuse.” 11 U.S.C. § 707(b)(3). Recourse to § 707(b) is limited. One such limitation is that when the debtor is a so-called “below-median debtor,” only the judge or the United States trustee may file a motion to dismiss under § 707(b). 11 U.S.C. § 707(b)(6) (“Only the judge or United States trustee ... may file a motion under section 707(b), if the current monthly income of the debtor ... as of the date of the order for relief, when multiplied by 12, is equal to or less than — in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner.”).
Phyllis’s Rule 12(b)(6) motion focuses on the ultimate question of whether the granting of relief would be an abuse of the provisions of chapter 7. To establish that abuse, Judith alleges that Phyllis filed the petition in bad faith and that the totality of the circumstances, especially Phyllis’s ability to pay, establishes abuse. Neither the concept of bad faith nor the totality of the circumstances test has clearly-defined parameters, which makes them ungainly in the context of a Rule 12(b)(6) motion. Even without reaching the issue of abuse, however, it appears for two reasons that Judith does not have a claim on which relief can be granted.
First, it appears to be undisputed that Phyllis’s current monthly income as of the date of the order for relief, when multiplied by 12, is equal to or less than the Massachusetts median family income for a single earner.6 If so, then under § 707(b)(6), only a judge or the United States trustee, but not a creditor, may file a motion to dismiss under § 707(b). In short, Judith, a creditor, appears to be statutorily precluded from moving for dismissal under § 707(b). However, this particular deficiency in Count I is not apparent from the complaint itself and was not raised as cause for dismissal in Phyllis’s Rule 12(b)(6) motion. Judith is entitled to be heard on this basis for dismissal, which the Court is raising now for the first time.
Second, § 707(b) applies only to the chapter 7 cases of individual debtors “whose debts are primarily consumer debts.” 11 U.S.C. § 707(b)(1). “Consumer debt” means “debt incurred by an individual primarily for a personal, family, or household purpose.” 11 U.S.C. § 101(8) (defining consumer debt for purposes of the Bankruptcy Code). Phyllis’s only debt is her alleged liability to Judith in the state court action on a theory of quantum meru-it/unjust enrichment to recover the value of the time and money Judith invested to improve the Property. It is doubtful that the alleged liability to Judith is “consumer debt” within the meaning of the statute. Judith has not expressly so alleged and has not addressed the “consumer debt” requirement in her response to the Rule 12(b)(6) motion, but neither has Phyllis invoked that requirement as a basis for her Rule 12(b)(6) motion. The parties simply have not addressed the issue.
*470Therefore, instead of addressing the poorly-defined parameters of bad faith and totality of the circumstances as they apply to the unusual circumstances of this case, the Court will issue an order to show cause why Count I should not be dismissed for each of the two reasons articulated above: (i) under § 707(b)(6), Judith may not file a motion under § 707(b); and (ii) Phyllis’s debts are not primarily consumer debts.
Count II: For Denial of Discharge under § 727(a)(2)(A)
In Count II, Judith simply states that, “based on the foregoing facts” — that is, the allegations recapitulated above — “Phyllis has failed to disclose all of the assets which she owned or over which she had control as of March 30, 2011,” the date of her bankruptcy filing. “Accordingly, [Phyllis’s] discharge should be denied pursuant to § 727(a)(2)(A).” Phyllis argues that this count should be dismissed for two reasons. First, an objection to discharge under § 727(a)(2)(A) sounds in fraud and therefore requires pleading with particularity, but Judith has not plead this count with particularity; her complaint does not give adequate notice of Judith’s basis or bases for nondischargeability. Second, Phyllis argues that Judith has not alleged that Phyllis had actual intent to hinder, delay, or defraud her, which § 727(a)(2)(A) requires. Judith responds that the gravamen of this count is Phyllis’s failure to disclose a number of significant assets to the Bankruptcy Court: (i) the power of appointment over the Property; (ii) the powers reserved to Phyllis in the Trust, “including the power to mortgage the property to pay for debts related to maintenance and upkeep of the property, inasmuch as the property was placed in trust by Phyllis and is thus in a so-called “self-settled” trust; and (in) “the debt owed to Phyllis by Andrew, to the extent Phyllis has been paying the legal fees for the state court action.” Judith adds that though this count is pleaded under subsection 727(a)(2)(A), it may more properly be asserted under subsection 727(a)(4)(A) (denial of discharge for knowing and fraudulent making of a false oath in the bankruptcy case); to the extent that the Court concludes that this count should have been asserted under § 727(a)(4)(A), she asks for leave to amend the complaint. Judith does not attempt to show that the above-cited incidents of nondisclosure do in fact state a claim under § 727(a)(2)(A), but she does state that § 727(a)(2)(A) “may be applicable to the extent Phyllis has paid the legal fees for Andrew in the state court action.”
I begin by considering this count under the subsection invoked in the complaint, § 727(a)(2)(A). It requires denial of discharge where
the debtor, with intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title, has transferred, removed, destroyed, mutilated or concealed, or has permitted to be transferred, removed, destroyed, mutilated, or concealed,
(A) property of the debtor, within one year before the date of the filing of the petition; or
(B) property of the estate, after the date of the filing of the petition.
11 U.S.C. § 727(a)(2)(A). To state a claim under this subsection, a complaint must (i) allege that the debtor committed one of the predicate acts and specify which of the predicate acts was committed (transfer, destruction, concealment, etc.), (ii) specify the property in issue and indicate whether it was property of the estate or property of the debtor, (iii) specify that the transfer occurred in the applicable time period, and (iv) allege that the debtor committed the predicate act with the necessary specific intent. Because this subsection sounds in *471fraud, the requirements must be pleaded with particularity. The complaint must put the debtor on clear notice of the charge of fraud against which she must defend.
Count II fails to satisfy these requirements in a number of ways. First, it does not specify the acts or assets in question. The complaint elsewhere does allege acts that might constitute concealment as to specified assets, but Count II does not indicate whether those, or some or all of them, are the basis of this count. Judith’s response to the motion to dismiss partially rectifies this deficiency by identifying three incidents of nondisclosure on which Count II is based; but her response still does not indicate that this nondisclosure constituted “concealment” or one of the other predicate acts listed in § 727(a)(2)(A). Second, neither in Count II nor elsewhere in the complaint does Judith allege that Phyllis’s failures of disclosure were committed with the necessary specific intent: intent to hinder, delay, or defraud a creditor or an officer of the estate charged with custody of property under this title. Nor is an allegation of fraudulent intent implicit in the allegation of failure to disclose. The alleged falsity of each of the alleged nondisclosures is dependent on a conclusion of law that is hardly self-evident, even to an attorney but all the more to a lay person: that after exercise of the power of appointment, Phyllis continued to have a power of appointment over the remainder interest; that after exercise of the power of appointment, the trust had a res to which the retained powers might apply; that a voluntary payment of the fees of another, without more, gives the donor an enforceable right to obtain repayment of those fees— that a gift is not a gift. Moreover, in her response to the Motion to Dismiss, Judith still has not made an allegation of intent to hinder, delay, or defraud. In fact, she has made no attempt at all to show that three cited incidents of nondisclosure do in fact state a claim under subsection 727(a)(2)(A). For these reasons, I conclude that Count II fails to state a claim under § 727(a)(2)(A).
Next Phyllis states that § 727(a)(2)(A) “may be applicable to the extent Phyllis has paid the legal fees for Andrew in the state court action.” Phyllis payment of the legal fees is not one of the grounds pleaded as a basis for Count II; as currently stated, Count II is based only on failures to disclose, and she has not moved to amend the complaint. In addition, Judith nowhere makes two allegations that would be necessary for the payment of the legal fees to constitute a basis for nondis-chargeability under § 727(a)(2)(A): that Judith’s payment of fees occurred in a relevant time period, and that they were made with intent to hinder, delay, or defraud. For lack of these allegations, the complaint does not, in Count II or elsewhere, state a claim under § 727(a)(2)(A) on the basis of the payment of fees.
In the alternative, Judith asks that the Court consider her allegations of nondisclosure as stating a claim under subsection 727(a)(4)(A), under which a debtor will be denied a discharge where “the debtor knowingly and fraudulently, in or in connection with the case, made a false oath or account.” 11 U.S.C. § 727(a)(4)(A). In order for Judith’s allegations of nondisclosure to state a cause of action under this subsection, they would need to include allegations that the debtor’s failures of disclosure were made knowingly and fraudulently. The complaint includes no such allegations, and Judith does not now contend that the omission was an oversight or seek leave to amend the complaint. Therefore, Count II does not state a claim *472under § 727(a)(4)(A) and must be dismissed.
Count III: For Denial of Discharge under § 727(a)(5)
In Count III, Judith alleges (in addition to the facts recited above) that “Phyllis Hiller has failed to explain a loss of assets.... Phyllis’s cash and cash-equivalents have been used to fund the defense of a lawsuit primarily, in not entirely, for the benefit of Andrew. Accordingly, [Phyllis’s] discharge should be denied pursuant to 11 U.S.C. § 727(a)(5).” Phyllis contends that this count should be dismissed for two reasons: first, it is premature because no one has asked her to explain any loss of assets; and second, the allegation itself explains what happened to the assets: they were used to defend a lawsuit. In response, Judith does not answer either of the reasons offered for dismissal. Instead she says that she has not had an opportunity to conduct discovery on this count. Notably, she adds:
[I]f discovery reveals (as appears likely) that Phyllis has exhausted her assets paying for a lawsuit to benefit only Andrew, this would certainly constitute a failure to satisfactorily explain the loss of those assets; “I spent virtually all my money defending a lawsuit for the benefit of my son” is not, in this context, an acceptable explanation.
Section 727(a)(5) states: “The court shall grant the debtor a discharge, unless ... (5) the debtor has failed to explain satisfactorily, before determination of denial of discharge under this paragraph, any loss of assets or deficiency of assets to meet the debtor’s liabilities.” 11 U.S.C. § 727(a)(5). In relevant part, it requires a failure to explain satisfactorily a loss of assets. That is not what Judith complains of. Rather, what she alleges, the gravamen of the count as pleaded, is a failure or inability to justify the loss. As Phyllis points out, Judith knows what happened to the assets. In fact she identifies the assets in question by the manner in which they were lost: those cash and cash equivalents that were used to defend the lawsuit for the benefit of Andrew. What she contends is that the use of the funds for this purpose was not justified; that is, the funds were not used for a valid or appropriate purpose. Justification is beyond the scope of subsection (a)(5). An explanation must be satisfactory, but in subsection (a)(5), satisfactory modifies explanation, not loss. Provided the debtor knows what happened to the assets and her explanation is convincing, it will be satisfactory. A debtor need only account for the loss, tell how it happened. She need not also defend the manner of loss. Even if the manner of loss were wholly reprehensible — such as a fraudulent transfer, or utter and spiteful waste — a truthful and convincing explanation would suffice and would obviate cause for denial of discharge under this subsection. In contrast, subsection (a)(2) does permit denial of discharge for certain losses of assets — by the debtor’s transfer, removal, or destruction of an asset with intent to hinder, delay, or defraud; it expressly does inquire into the manner of disposition.7 11 U.S.C. § 727(a)(2)(A). In short, what Judith alleges is not within the scope of subsection (a)(5) and therefore fails to state a claim on which relief can be granted.8
*473Conclusion
For the reasons set forth above, the Court will allow the Rule 12(b)(6) motion as to Counts II and III and, as to Count I, issue an order to show cause why they should not be dismissed because (i) under § 707(b)(6), Judith may not file a motion under § 707(b) and (ii) Phyllis’s debts are not primarily consumer debts.
. Andrew, too, is named as a defendant, but the complaint seeks no relief against him.
. The irrevocable trust and the deed were not attached to the complaint. For the time being, I simply reproduce, and make no determination of the validity of, the subsidiary conclusions of law — whether drawn from these documents or otherwise — in Judith's factual allegations.
. Though the complaint does not say so, Judith had been living at the Property with Phyllis for some time.
. Phyllis also argues that, for various reasons, the alleged omissions from Phyllis’s schedule do not state a basis on which the court could find bad faith. However, at the hearing on the Rule 12(b)(6) Motion, Judith, in articulating the basis of Count I, did not mention the omissions. The omissions are therefore irrelevant to Count I, and Phyllis’s arguments about them are moot.
. See Fed. R. Bankr.P. 9014(a) ("In a contested matter in a case under the Code not otherwise governed by these rules, relief shall be requested by motion[.]”), 1017(e) ("The court may dismiss ... an individual debtor's case for abuse under § 707(b) only on motion”), and 1017(f)(1) (subject to certain exceptions not applicable here, "Rule 9014 [specifying procedure for contested matters] governs a proceeding to dismiss ... a case”).
. This fact is not alleged in the complaint, but at the hearing on this motion, Phyllis’s counsel stated that Phyllis passed the so-called "means test” with flying colors, such that no presumption of abuse arose in her case. Judith did not contest this statement and likely would have done so had it enabled her to take advantage of the presumption of abuse in § 707(b)(2). Phyllis's uncontested Chapter 7 Statement of Current Monthly Income and Means-Test Calculation bears out her attorney's contention that her income is dramatically below the Massachusetts median.
. Judith has not suggested that, in the alternative, the facts on which Count III is based would support an objection to discharge under § 727(a)(2)(A). Nor has she alleged that Judith’s payment for defense of the state court action was done with intent to hinder, delay, or defraud a creditor, which subsection (a)(2)(A) would require.
. Having so concluded, I need not address Phyllis’s argument that this count is premature. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495318/ | OPINION AND ORDER
BRIAN K. TESTER, Bankruptcy Judge.
The proceeding before the court is Doral Bank’s (“Doral”) Opposition to Second Amended Plan of Reorganization [Dkt. No. 190] and Debtor’s Reply to Doral Bank’s Opposition to Second Amended Plan of Reorganization [Dkt. No. 203]. For the reasons stated below, the confirmation of the Debtor’s Second Amended Plan of Reorganization (“Plan”) [Dkt. No. 177] is hereby DENIED.
In its opposition, Doral asserts that Debtor’s Plan should not be confirmed, because the Plan contains the same substantive deficiencies and issues as the Debtor’s first Plan, filed on May 18, 2012. Their argument is three-fold. First, the Plan violates the absolute priority rule and does not satisfy the cramdown requirements of 11 U.S.C. § 1129(b)(2)(B)(ii) in that it is not fair and equitable to dissenting creditors. Specifically, Doral points out that Debtor proposes to retain almost all of her pre-petition property and pay less than 0.05% of their claims to the general unsecured creditors. Further, the Debtor’s Plan does not qualify for the new value exception under the absolute priority rule because the new value does not come from an outside source, but rather from the Debtor herself.1 Second, the Debtor cannot claim a tacit acceptance of the Plan because a logical and literal reading of 11 U.S.C. § 1129(a)(10) requires an active acceptance of the Plan by unimpaired classes in order to satisfy the cramdown requirements in 11 U.S.C. § 1129(b)(2)(B)(ii). Third, the Plan fails to comply with the confirmation requirements under 11 U.S.C. § 1129(a) because:
(a) [the] Plan’s projections are unrealistic and thereby do not reflect the historical reality of Debtor’s prior revenues, not accounts, for probable contingencies within the Debtor’s business.
(b) the Plan’s projections demonstrate that Debtor will not generate sufficient income to satisfy her Plan obligations while retaining her property. More specifically, the Debtor plans to contribute $14,790 monthly rental income generated by her realproperties. However, Doral points out that the majority of the Debtor’s income comes from the 100 Fortaleza St. building, which generates only $9,000 per month. The majority of the tenants hold leases for no greater than one (1) year each with the Plan lacking any contemplation on turnover periods between tenants. *476Yet, the Debtor proposes repayment terms of up to thirty (30) years and thus demonstrates repayment uncertainty. Further, Debtor’s projections do not contain a provision for payment of ordinary maintenance and repairs for any of her income producing rental properties.
(c) the Plan includes an additional $2,000.00 in professional services income that was never disclosed to the creditors nor to the court in the previous plan to be approved under 11 U.S.C. § 363(b)(1). Further, Doral points out that the Debtor never supplied concrete evidence demonstrating certainty of such contractual agreement.
(d) the Plan fails to provide to the unsecured creditors at least an amount equal to the Debtor’s disposal income during the next five years in accordance with 11 U.S.C. § 1129(a)(15). More specifically, the Debtor proposes to pay unsecured creditors approximately 0.492% of the total claims, yet the Debtor failed to demonstrate that such distribution at least equals the Debtor’s disposal income during the next five years.
(e) the Plan failed to comply with additional requirements as mandated by 11 U.S.C. § 1129(a)(l)-(2). More specifically, that the Debtor did not obtain court approval for the use of certain real property outside the ordinary course of business as required by 11 U.S.C. § 363(b)(1) and Fed. R. Bankr.P. 6004. Further, the Debtor seems to request a discharge upon Plan confirmation in violation of 11 U.S.C. § 1141(d)(5), which does not allow a discharge until all Plan payments are complete.
(f)the Plan failed to comply with 11 U.S.C. § 1129(a)(8). More specifically, the Debtor has not filed a § 1129 statement demonstrating acceptances or rejections of the Plan by all unimpaired classes.
Conclusively, Doral requests the court to reject the Plan because it violates the requirements of 11 U.S.C. § 1129(a)(1),(2), (8), (11), (15), and (b)(2)(B).
In her rebuttal, the Debtor contends that the Plan is not speculative because the $14,790 from her real property will come from not only the Fortaleza Street and the Condado Comelot properties, but also properties in Hawaii.2 Further, the Debtor contends that the projections included a provision of $700 per month for any necessary repairs and extraordinary maintenance.3 Lastly, her professional service contract is from a life long friend, who had previously offered her such position. Debtor also contends that she complied with the following:
(a) 11 U.S.C. § 1129(a)(15) because she is proposing a 5.64% rather than a 0.492% distribution to unsecured creditors;
(b) 11 U.S.C. § 1129(a)(l)-(2) because Doral’s allegations have no merit;4
(c) 11 U.S.C. § 1129(a)(8) because she disclosed in the § 1129 statement that she will be going forward with her Plan under § 1129(b).
The Debtor further contends that the absolute priority rule does not apply to *477individual chapter 11 cases and even if it does, she is excepted by providing new value. Specifically, the Debtor contends that the court should adopt a broad interpretation of the absolute priority rule as opposed to a narrow interpretation. Under the broad interpretation of the rule, 11 U.S.C. § 1115 includes prepetition property specified in section 541 as well as post-petition earnings. Therefore, the exemption added in 11 U.S.C. § 1129(b)(2)(B)(ii) abolished the absolute priority rule in individual chapter 11 cases. The Debtor further added that even if the court adopts the narrow view, the new value exception applies because she is voluntarily contributing all her valuable exempt assets such as her vehicles and post-petition wages to fund her Plan. Thus, the Debtor is providing new value to the estate in order to contribute to the Plan.
This court joins courts in its sister circuits, in particular the Fourth Circuit5 and the Ninth Circuit,6 in adopting the narrow view of the absolute priority rule.
I. Factual Background
On September 26, 2011, Debtor Lee Min Ho Chen filed a voluntary chapter 11 petition for reorganization. Subsequently, on May 18, 2012, Debtor filed her first amended disclosure statement, which was approved by the court on July 20, 2012. On September 24, 2012, the court held a hearing concerning the valuation of Debt- or’s real property and granted Debtor an extension until October 10, 2012 to file an amended plan of reorganization. On the same day, the court scheduled a hearing on October 31, 2012 to consider the confirmation of the Plan. Debtor filed her second amended plan of reorganization on October 10, 2012. On October 24, 2012, Doral filed its Opposition in support of the denial of Debtor’s second amended Plan.
11. Legal Analysis and Discussion
A. Absolute Priority Rule
The arguments presently before the court center on the question of whether the absolute priority rule applies in chapter 11 bankruptcy cases of individual debtors after BAPCPA. Because the approval of the Debtor’s second amended Plan hinges on this instant question, the court shall begin its analysis here.
Recognizing the sharp circuit splits on this question, the circuits struggled with two interpretations of the post-BAPCPA code. Some courts held that the rule does not apply to individual chapter 11 debtors based on the so-called “broad” view of property of the estate that an individual debtor may retain under a confirmed plan pursuant to 11 U.S.C. § 1129(b)(2)(B)(ii). See In re Tegeder, 369 B.R. 477, 479-481 (Bankr.D.Neb.2007); In re Roedemeier, 374 B.R. 264, 273-276 & nn. 15-19 (Bankr.D.Kan.2007); In re Shat, 424 B.R. 854, 862-868 (Bankr.D.Nev.2010); SPCP Group, LLC v. Biggins, 465 B.R. 316, 320-324 (M.D.Fla.2011); Friedman v. P+P, LLC (In re Friedman), 466 B.R. 471 (9th Cir. BAP 2012); see also In re Johnson, 402 B.R. 851, 852-853 (Bankr.N.D.Ind.2009) (dicta that individual chapter 11 debtor’s plan need not satisfy the absolute *478priority rule of 11 U.S.C. § 1129(b)(2)(B)(ii)); In re Hockenberry, 457 B.R. 646, 660-661 & n. 14 (Bankr.S.D.Ohio 2011) (collecting cases on issue, but not reaching the issue because case decided on other grounds). While other courts held that the absolute priority rule still applies and thereby adhering to the so-called “narrow” view of property of the estate that an individual debtor may retain in a chapter 11 plan. See In re Arnold, 471 B.R. 578, 587-88 (Bankr.C.D.Cal.2012); In re Gbadebo, 431 B.R. 222, 227-230 (Bankr.N.D.Cal.2010); In re Mullins, 435 B.R. 352, 359-361 (Bankr.W.D.Va.2010); In re Gelin, 437 B.R. 435, 440-443 (Bankr.M.D.Fla.2010); In re Stephens, 445 B.R. 816, 820-821 (Bankr.S.D.Tex.2011); In re Walsh, 447 B.R. 45, 47-49 (Bankr.D.Mass.2011); In re Maharaj, 449 B.R. 484, 491-494 (Bankr.E.D.Va.2011); In re Draiman, 450 B.R. 777, 820-822 (Bankr.N.D.Ill.2011); In re Kamell, 451 B.R. 505, 507-512 (Bankr.C.D.Cal.2011); In re Lindsey, 453 B.R. 886, 891-905 (Bankr.E.D.Tenn.2011); In re Karlovich, 456 B.R. 677, 679-682 (Bankr.S.D.Cal.2010); In re Lively, 467 B.R. 884 (Bankr.S.D.Tex.2012); see also In re Friedman, 466 B.R. at 484-492 (Jury, J., dissenting). Taking both interpretations into consideration, this court finds the reasoning and the logic behind the narrow approach the most compelling. Therefore, this court concludes that the absolute priority rule still applies to individual chapter 11 debtors.
Congress established chapter 11 of the Bankruptcy Code to create a statutory system for business reorganization and thus providing American businesses with a second chance.7 In essence, reorganization provides for changes in a business’ debt obligations. Thus, the ultimate goal of reorganization is to transform a business to a new operating model and prepare it for future success. United States v. Whiting Pools, Inc., 462 U.S. 198, 203, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983) (citing H.R.Rep. No. 95-595, p. 220 (1977), 1978 U.S.C.C.A.N. 5963). However, although chapter 11 provides a business with a second chance, this second chance is far from absolute. Rather, “[cjhapter 11 strikes a balance between a debtor’s interest in reorganizing and restructuring its debts and the creditors’ interest in maximizing the value of the bankruptcy estate.” Florida Department of Revenue v. Piccadilly Cafeterias, Inc., 554 U.S. 33, 51, 128 S.Ct. 2326, 171 L.Ed.2d 203 (citing Toibb v. Radloff, 501 U.S. 157, 163, 111 S.Ct. 2197, 115 L.Ed.2d 145 (1991)). This balance serves “[c]hapter ll’s twin objectives of preserving going concerns and maximizing property available to satisfy creditors.” Id. at 50, 128 S.Ct. 2326 (quoting Bank of America National Trust & Savings Assn. v. 203 North LaSalle Street Partnership, 526 U.S. 434, 453, 119 S.Ct. 1411, 143 L.Ed.2d 607 (1999)).
Consequently, more entities than individuals file chapter 11 cases. Warren, Chapter 11: Reorganizing American Businesses at 4. (“About 90 percent of the chapter 11 filers are legal fictions, mostly corporations, with a few LLCs and partnerships thrown in.”) Regardless, individuals as well may file chapter 11 cases. The trade-off of filing a chapter 11 case is that although there are fewer restrictions to file, only a few make it out of a chapter 11 case with an approved plan. Chapter 11 filings facilitate an on-going conversation between the debtor and the creditors, and thereby a general consensus majority *479of the creditors must confirm such plan.8 creditors, debtors rarely can succeed in confirming such plan since “[cjonfirmation is the final settlement of the rights of the parties.” Id. at 134.
In order for a plan to be confirmed with general consensus, the plan must meet the sixteen requirements under 11 U.S.C. § 1129(a). 11 U.S.C. § 1129(a)(l)-(16). Amongst these requirements, section 1129(a)(8) mandates a voting requirement and therefore, “[w]ith respect to each class of claims or interests — (A) such class has accepted the plan; or (B) such class is not impaired under the plan.” 11 U.S.C. § 1129(a)(8). Further, “[a] class of creditors has accepted a plan under the Code if such plan has been accepted by creditors ... that hold at least two-thirds in amount and more than one-half in number of the allowed claims of such class held by creditors ... that have accepted or rejected such plan.” Kane v. Johns-Manville Corp., 843 F.2d 636, 646 (2d Cir.1988) (internal quotations omitted);ll U.S.C. § 1126(c) (1982). On the contrary, “[a] class is impaired if the plan does not provide it with full payment in cash of its claims on the date the plan becomes effective.” In re Bonner Mall P’ship, 2 F.3d 899, 905 n. 17 (9th Cir.1993); 11 U.S.C. § 1124(3) (A).
Regardless, even if section 1129(a)(8) is not met, the bankruptcy court shall still confirm such chapter 11 plan if the following three conditions are met: (1) the plan must meet all other requirements for confirmation to be met; (2) that the plan is fair and equitable; and (3) the plan does not discriminate unfairly to those that have been impaired and to those that have yet to accept the plan. 11 U.S.C. § 1129(b)(1). This is commonly known as a “cramdown” since the plan is forcibly crammed down the throats of objecting and silent classes of creditors. Id.; In re Seasons Partners, LLC, 439 B.R. 505, 516 (Bankr.D.Ariz.2010); Till v. SCS Credit Corp., 541 U.S. 465, 468-69, 124 S.Ct. 1951, 158 L.Ed.2d 787 (2004).
In determining what constitutes fair and equitable, the plan must meet the absolute priority rule. The absolute priority rule demands that the holder of any claim of interest that is junior to the claims of an impaired class may not receive or retain the plan on account of such junior claim or interest in any property. 11 U.S.C. § 1129(b)(2)(B)(ii); Norwest Bank Worthington v. Ahlers, 485 U.S. 197, 202, 108 S.Ct. 963, 99 L.Ed.2d 169 (1988). In other words, the absolute priority rule “restricts the debtor-in-possession’s use of the cramdown by requiring that equity holders retain no ownership in the reorganizing business unless superior classes either have accepted the plan or received payment in full ... [Therefore] [i]f the DIP wants to confirm a plan that includes retaining equity ownership, it will either have to pay the creditors in full or negotiate for their cooperation.... ” In re Arnold, 471 B.R. 578, 593 (Bankr.C.D.Cal.2012).
11 U.S.C. § 1129(b)(2)(B)(i)-(ii) provides for two options in guiding what constitutes fair and equitable for the unsecured class of creditors:
(b)(1) Notwithstanding section 510(a) of this title, if all of the applicable requirements of subsection (a) of this section other than paragraph (8) are met with respect to a plan, the court, on request of the proponent of the plan, shall confirm the plan notwithstanding the requirements of such paragraph if the plan does not discriminate unfairly, and is fair and equitable, with respect to each *480class of claims that is impaired under, and has not accepted, the plan.
(2) For the purpose of this subsection, the condition that a plan be fair and equitable with respect to a class includes the following requirements:
(B) With respect to a class of unsecured claims—
(i) the plan provides that each holder of a claim of such class receive or retain on account of such claim property of a value, as of the effective date of the plan, equal to the allowed amount of such claim; or
(ii) the holder of any claim or interest that is junior to the claims of such class will not receive or retain under the plan on account of such junior claim or interest any property, except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section.
11 U.S.C. § 1129(b). Summarily, this provision mandates that in order for a plan to be approved, a plan may not give property to holders of any junior claims of interests “... unless all classes of senior claims either received full value of their claims or gave their consent.” In re DBSD North America, Inc., 634 F.3d 79, 88 (2d Cir.2011).
Prior to the 2005 BAPCPA, the absolute priority rule was a judicially created doctrine to reflect the common law principle that creditors would be paid ahead of equity. This is to provide some protection to the creditors in case of business dissolution. In re Arnold, 471 B.R. 578, 595-96 (Bankr.C.D.Cal.2012). In essence, “[t]he absolute priority rule is central to the law of corporate reorganizations because it is the source of substantive rights as well as the procedural protections that each participant in reorganization enjoys. Parties can insist that the priority rights they enjoyed outside of bankruptcy be respected inside. Nevertheless, every junior party, including the shareholders, can invoke elaborate procedures before their rights are compromised. The absolute priority rule allows the senior parties to insist on full payment, but it also grants all junior parties those procedural protections necessary for a just reorganization.” Id.
In light of the above historical considerations, the court now addresses the question of whether Congress in enacting BAPCPA abrogated the absolute priority rule for chapter 11 individual debtors by amendment of section 1129(b)(2)(B)(ii) and its addition of section 1115 to the Bankruptcy Code.
1. Post-BAPCPA Reconciliation of Sections 1129(b)(2)(B) and 1115
Section 321(c) of the 2005 BAPCPA provided an exception for the absolute priority rule for individual chapter 11 debtors by adding the following statutory language, “except that in a case in which the debtor is an individual, the debtor may retain property included in the estate under section 1115, subject to the requirements of subsection (a)(14) of this section.” 11 U.S.C. § 1129(b)(2)(B)(ii). Therefore, this provision raises the inquiry into defining the phrase “property included in the estate under section 1115” or just what kind of property and how much of such property can an individual debtor in a confirmed chapter 11 reorganization plan retain. In re Walsh, 447 B.R. 45, 48 (Bankr.D.Mass.2011); In re Lindsey, 453 B.R. at 891-892. In interpreting this phrase, the court looks to the statutory language of § 1115, which provides:
(1) all property of the kind specified in section 541 that the debtor acquires af*481ter the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first; and
(2) earnings from services performed by the debtor after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first.
11 U.S.C. § 1115(a).
Section 1115 can be interpreted in two ways: (1) narrowly, to include only the additional post-petition property already brought into the chapter 11 case by section 1115(a) or (2) broadly, to include not only the additional post-petition property but also all of the property brought into the chapter 11 case by section 541 including the property that the debtor already had prior to her filing of bankruptcy. The consequences of adopting either method can be stated as follows: “[t]he first construction would greatly limit the impact of the new exception under § 1129(b)(2)(B)(ii), but the second would exempt an individual chapter 11 debtor from the main facet of the absolute priority rule, allowing him or her to retain both pre- and post-petition property under a plan even though a class of unsecured creditors would not be paid in full.” In re Arnold, 471 B.R. 578, 597 (Bankr.C.D.Cal.2012) (citing In re Roedemeier, 374 B.R. 264, 274 (Bankr.D.Kan.2007)).
While “[i]t is emphatically the province and duty of the judicial department to say what the law is[,]” the court must interpret this statutory provision in accordance with legislative intent upon the passage of BAPCPA. Marbury v. Madison, 1 Cranch 137, 5 U.S. 137, 177, 2 L.Ed. 60 (1803). Regardless, courts are sharply divided on this interpretation whether in the plain language view or the ambiguous view. Courts have held that plain language view can support either the narrow or the broad view. See In re Friedman, 466 B.R. at 482 (plain language reads in support of the broad view); SPCP Group, LLC v. Biggins, 465 B.R. at 320-323 (plain language reads in support of the narrow view); In re Karlovich, 456 B.R. 677, 680-81 (Bankr.S.D.Cal.2010). Similarly, courts have also held that an ambiguous reading supports either the broad or narrow view. See In re Shat, 424 B.R. at 867 (ambiguous reading supports the broad view); In re Gbadebo, 431 B.R. at 229 (ambiguous reading supports the narrow view).
When interpreting and applying the Code and the Rules, analysis necessarily begins with the text. Lamie v. U.S. Tr., 540 U.S. 526, 534, 124 S.Ct. 1023, 157 L.Ed.2d 1024 (2004) (“The starting point ... is the existing statutory text.”). The Supreme Court provided further guidance in two types of statutory interpretation, whether plain or ambiguous. Where the statute’s language is plain, “... the sole function of the courts is to enforce it according to its terms.” United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 241, 109 S.Ct. 1026, 103 L.Ed.2d 290 (1989). Therefore, “courts must presume that a legislature says in a statute what it means and means in a statute what it says there.” Connecticut National Bank v. Germain, 503 U.S. 249, 253-254, 112 S.Ct. 1146, 117 L.Ed.2d 391 (1992). On the contrary, where the statute’s language is ambiguous, “... then, this first canon is also the last: judicial inquiry is complete.” Id. (citation and internal quotation marks omitted). Specifically, “[c]ourts are to scrutinize the statute as a whole and ‘not look merely to a particular clause in which general words may be used, but ... in connection with the whole statute ... and the objects and policy of the law, as indicated by its various provisions, and give to it such a construction as will carry into *482execution the will of the Legislature.’ ” In re Lindsey, 453 B.R. at 893 (quoting Azarte v. Ashcroft, 394 F.3d 1278, 1288 (9th Cir.2005) (internal citations omitted)).
This court agrees with the courts in Arnold and Roedemeier in that taking section 1129(b)(2)(B)(ii) and section 1115 together, the interpretation could read either narrowly or broadly. Thus the language is ambiguous as evidenced by the sharp split of courts advocating for either readings. In re Arnold, 471 B.R. 578, 598 (Bankr.C.D.Cal.2012); In re Roedemeier, 374 B.R. at 274.
In making its inquiry, this court agrees with the Arnold court, a reading of section 1115(a) requires a grammatical analysis. In pertinent part, section 1115(a) states:
In a case in which the debtor is an individual, property of the estate includes, in addition to the property specified in section 541—
(1) all property of the kind specified in section 541 that the debtor acquires after the commencement of the case but before the case is closed, dismissed, or converted to a case under chapter 7, 12, or 13, whichever occurs first; and
(2) earnings from services performed by the debtor after the commencement of the ease but before the case is closed, dismissed, or converted to a case under chapter 7,12, or 13, whichever occurs first.
11 U.S.C. § 1115(a).
Upon examination of the subject, the predicate, the transitive verb, the direct object of the sentence9, the Arnold court concludes that courts adopting either the broad or narrow view agree that “these assets are included as property of the estate included under section 1115 for purposes of the exception to the absolute priority rule for individual Chapter 11 debtors under § 1129(b) (2) (B) (ii). ” In re Arnold, 471 B.R. 578, 600 (Bankr.C.D.Cal.2012).
Moreover, section 1115(a) includes a third category of assets: “the property specified in section 541,” which ultimately raises the question at hand of narrow or broad interpretation. The Arnold court contemplated on the grammatical meaning of the prepositional phrase “in addition to” that preceded the wording of this third category of assets. Ultimately, “[sjince prepositions link a noun or pronoun to another word in a sentence, the question before the court is this: to what word is the noun, “the property specified in section 541” linked in § 1115(a), i.e., “property of the estate,” another noun, which reflects the broad view; or is it linked to “includes,” a verb, which reflects the narrow view.” Id.; 11 U.S.C. § 1115(a).
A literal reading of the sentence demonstrates that “in addition to” served as an adverbial phrase since it modifies the verb “includes” in the sentence to answer not what kind or which one but rather “to what extent is property included as property of the estate under § 1115(a).” In re Arnold, 471 B.R. 578, 602 (Bankr.C.D.Cal.2012). This court therefore agrees with the Arnold court in that through a grammatical examination of the statutory language of section 1115, a narrow interpretation is the correct interpretation. Therefore, the absolute priority rule is applicable to individual chapter 11 debtors and therefore the rule limits the debtor’s *483retention of property to those explicitly stated in § 1115(a)(1) and (2).
2. Legislative History Considerations
The legislative history of BAPC-PA also strongly favors a narrow reading of section 1115. Close examination of the BAPCPA House Judiciary Committee Report demonstrated that its primary purpose is “to improve bankruptcy law and practice by restoring personal responsibility and integrity in the bankruptcy system and ensure that the system is fair for both debtors and creditors.” H.R.Rep. No. 109-31, part 1 at 2 (2005), 2005 WL 832198, at *2. Therefore, the purpose of BAPCPA was really to have debtors repay more and not less. In re Friedman, 466 B.R. at 490 (Jury, J., dissenting) (citing In re Kamell, 451 B.R. at 508). This principle is reflected in the Congressional four general factors for enacting BAPCPA.10
Regardless, although limited, the existing legislative history indicates that a narrow view should be adopted in order to fulfill the BAPCPA’s goal of fighting against opportunistic filings and abuse. Thus, this court cannot ignore the legislative intent and thereby allow the Debtor to fully abrogate the absolute priority rule for individual chapter 11 cases.
3. Policy Considerations
Policy considerations also weigh heavily in a narrow reading. The narrow reading fits perfectly with the policy reasoning of striking a fine-tuned balance between the rights of a chapter 11 debtor and her creditors. In re Kamell, 451 B.R. at 512. Reading section 1115 broadly discords this fine-tuned balance, the broad reading allows the debtor to engage in a cramdown without any negotiations with creditors in possibly seeking their consent and thereby soliciting their votes for a reorganization plan. In re Gbadebo, 431 B.R. at 230. In essence, the broad reading shortcuts creditors’ protection under the absolute priority rule and thereby chills future lending for fiscally responsible Americans hoping for a second chance in fulfilling their American dream.
Further, reading section 1115 broadly will actively permit highly leveraged individuals ineligible of chapter 13 protection regardless of debt to file for chapter 11 reorganization to retain all of their prepet-ition property. This endangers the equality core of chapter 11 bankruptcy and “does unnecessary violence to well-established jurisprudence.” In re Kamell, 451 B.R. at 511; In re Friedman, 466 B.R. at 490, 491 (Jury, J. dissenting) (“the broad view taken by the Panel destroys the careful balance between an individual chapter 11 debtor’s interest in reorganizing and restructuring of his or her debts and the creditor’s interest in maximizing the value of the bankruptcy estate.”) Thus, a chapter 11 debtor is not simply a chapter 13 debtor with larger debts, rather, chapter 11 debtors are authorized to operate their business with possible five (5) year extensions to the benefits of unsecured creditors. Id. at 491.
Hence, public policy weights strongly, along with a grammatical reading of the statutory language and a literal reading of the legislative language, that a narrow reading should be adopted. Therefore, *484this court, in an effort to preserve the integrity of the Bankruptcy Code, adopts the narrow reading of section 1115.
B. New Value Exception
Courts have construed the new value exception or the new value corollary to find that an interest holder in a chapter 11 debtor whose plan violates the absolute priority rule may nonetheless in some instances retain such pre-petition property interest because that interest holder provides “new value” to the debtor in the form of new capital or other similar fresh contributions. Case v. Los Angeles Lumber Prod. Co., 308 U.S. 106, 121, 60 S.Ct. 1, 84 L.Ed. 110 (1939); In re H.T. Pueblo Properties, LLC, No. 11-24718 MER, 2011 WL 6962754 (Bankr.D.Colo. Dec. 30, 2011); In re Trikeenan Tileworks, Inc., BK 10-13725-JMD, 2011 WL 2898955 (Bankr.D.N.H. July 14, 2011).
Although the Supreme Court did not issue any guidance on whether this exception continues to exist after the enactment of the Bankruptcy Code, courts in this circuit have considered this exception under the Bankruptcy Code. In re Trikeenan Tileworks, Inc., BK 10-13725-JMD, 2011 WL 2898955 (Bankr.D.N.H. July 14, 2011); In re CGE Shattuck, 1999 BNH 046 (Bankr.D.N.H.1999). Therefore, arguendo, that such exception exists, the debtor must demonstrate that the contributed capital is “new, substantial [and] necessary for success of the plan, reasonably equivalent to the value retained, and in the form of money or money’s worth.” Matter of 203 N. LaSalle St. P’ship, 126 F.3d 955, 963 (7th Cir.1997); In re Draiman, 450 B.R. 777, 822 (Bankr.N.D.Ill.2011). Courts have emphasized that in order for individual chapter 11 debtors to meet these requirements the new value must come from a source other than the debtor. In re Rocha, 179 B.R. 305, 307 (Bankr. M.D.Fla.1995) (“The difficulty with extending the new value exception to an individual is that the new value must come from an ‘outside’ source, meaning it cannot come from the [d]ebtor himself.”); In re Cipparone, 175 B.R. 643, 643 (Bankr.E.D.Mich.1994) (“The court holds that the ‘new value’ exception to the absolute priority rule is inapplicable because the proposed contribution comes from the debtors themselves rather than from an outside source.”); In re Harman, 141 B.R. 878, 888 (Bankr.E.D.Pa.1992) (“We also question whether the particular property contributed by the [d]ebtors, particularly the Husband’s future wages, are sufficiently ‘outside’ of the [djebtors’ normal ‘operations’ as to constitute new value.”). Summarily, the first step towards the inquiry of qualification under this exception starts with the question whether the new value must come from an outside source.
III. Conclusion
Because this court adopts the narrow view of section 1115, the prepetition property is unaffected by section 1115 for purposes of section 1129(b)(2)(B)(ii) and therefore cannot be retained unless senior classes of claims are paid in full or unless all senior classes vote to accept the proposed plan. In her second amended Plan, the Debtor retained her interest in almost all of her prepetition assets without meeting either one of the requirements as stated above. More specifically, the Debtor proposes to leave her interest in most of the prepetition property unimpaired while upon confirmation of the Plan, to pay the general unsecured creditors a low percentage of their claims. Debtor’s proposition is therefore impermissible since neither of section 1129(b)(2)(B)’s options is satisfied.
With the Debtor violating the absolute priority rule, the court subsequently examines whether the Debtor qualifies for *485the new value exception. The Debtor contends that her proposed new value as provided in the Plan consists of the sale of her two vehicles. While unclear as to whether the Debtor is also contending that her post-petition wages be included, this court shall address the merit of such nonetheless. Unfortunately, none of the above are derived from a source other than the Debt- or herself. Therefore, the Debtor fails to adequately fulfill the first step of the exception’s inquiry, i.e. coming from an outside source.
Based on the foregoing, the Debtor fails to meet the requirements of the absolute priority rule and does not enjoy any exceptions thereto. Thus the Debtor’s second amended Plan of Reorganization cannot be confirmed. Further, based on the conclusion just stated, this court will not delve unnecessarily into the merits of the other arguments raised by either party. Accordingly, approval of the Debtor’s second amended Plan of Reorganization is DENIED. Debtor will show cause as to whether the captioned case should be converted or dismissed within fourteen (14) days.
SO ORDERED.
. The Debtor's proposed new value as provided in the Plan consists of the sale of her two vehicles, in particular, her 2005 BMW 330i and 2004 Mercedes Benz CLK-500.
. Debtor points out the income generated from these properties will be able to cover not only the repayments but also the majority of the maintenance charges.
. Debtor clarified that maintenance has been continuous at the Fortaleza street location and that prior safety hazards have been fixed, therefore, further improvements will not be necessary to generate the necessary income.
.Debtor in her reply did not discuss why Doral’s contentions have no merit.
. "Because we conclude, based on our analysis of the specific and broader context of the BAPCPA, that Congress did not intend to repeal the absolute priority rule for individual debtors in Chapter 11 cases...." In re Maharaj, 681 F.3d 558, 574 (4th Cir.2012) (internal citations and quotations omitted).
. In re Arnold, 471 B.R. 578, 590 (Bankr.C.D.Cal.2012) (Court declined to follow the BAP opinion and adopted the narrow view of the absolute priority rule); see generally In re Kamell, 451 B.R. 505 (Bankr.C.D.Cal.2011); In re Gbadebo, 431 B.R. 222 (Bankr.N.D.Cal.2010).
. 11 U.S.C. § 1101 et seq.; 5 Norton Bankr.L. & Prac.3d § 91:1; Elizabeth Warren & Jay Westbrook, Success of Chapter 11: A Challenge to the Critics, 107 MICH. L.REV. 603 (2009).
. Elizabeth Warren, Chapter 11: Reorganizing American Businesses at 133 (2008).
. In re Arnold, 471 B.R. 578, 600 (Bankr.C.D.Cal.2012) ("The 'property of the estate’ (subject) ‘includes’ (transitive verb) all post-petition property of the debtor (direct object/collective noun) and all earnings from the debtor’s postpetition services (direct object/collective noun)”).
. BAPCPA. H.R.Rep. No. 109-3(1), part 1 at 3-5 (2005), 2005 WL 832198, at *2-3, 2005 U.S.C.C.A.N. (The congress recognized that (1) bankruptcy relief may be too readily available and is no longer used as a last resort; (2) significant losses are usually associated with bankruptcy filing and these losses are passed on to fiscally responsible Americans; (3) the present bankruptcy system has loopholes and must be revised to prevent opportunistic filings and abuse; and (4) the current bankruptcy system does not have a clear mandate requiring debtors to repay their debts.) | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495319/ | DECISION ON VALUATION METHODOLOGY FOR TPC LENDERS’ COLLATERAL
ROBERT E. GERBER, Bankruptcy Judge.
This contested matter arises in the jointly administered chapter 11 cases of Motors Liquidation Company (formerly known as General Motors Corporation) (“Old GM”) and its affiliates (collectively, the “Debtors”). But this dispute is between General Motors LLC (“New GM”) — the purchaser of the majority of Old GM’s assets in the July 2009 asset sale (the “363 Sale”) — and certain secured creditors (the “TPC Lenders”) 1 that held liens on two of Old GM’s assets prior to the 363 Sale.
The TPC Lenders seek a valuation of their collateral in accordance with the July 2009 sale order (the “Sale Order”),2 which will determine the extent to which they are entitled to payment in cash, in contrast to New GM securities. But New GM and the TPC Lenders cannot agree on which of two alternative valuation methodologies, discussed below, is the proper one. New GM contends that the “fair market” method should be utilized, while the TPC Lenders argue that the “value in use” method should be. They agree, however, that a determination of the threshold issue of the appropriate methodology will facilitate settlement, or at least advance the ultimate resolution of the controversy.
For the reasons below, the Court determines that the “fair market” method is the proper one. The Court’s Findings of Fact3 and Conclusions of Law in connection with this determination follow.
Findings óf Fact
1. Background
On June 1, 2009 (the “Commencement Date”), Old GM and a few other Old GM affiliates filed for relief under chapter 11 of the Bankruptcy Code. On the Commencement Date, Old GM filed a motion *487(the “Sale Motion”), pursuant to section 363 of the Bankruptcy Code, seeking to sell the bulk of its assets to an entity that later became New GM, free and clear of any liens and other interests.4 Liens would then attach to the proceeds of the 363 Sale.
Under the Sale Motion, while the entity that later became New GM was the stalking horse bidder, the sale procedures proposed a sale open to higher or better offers by anyone else.5 Under the sale transaction as then proposed, a sale to New GM was not the only permissible outcome.
2. The TPC Properties
Included as part of the property to be sold under the 363 Sale Motion was a transmission manufacturing plant in White Marsh, Maryland (the “Maryland Facility”) and a service parts distribution center in Memphis, Tennessee (the “Tennessee Facility” and with the Maryland Facility, the “TPC Properties”). On the Commencement Date, the TPC Lenders held liens on the TPC Properties that aggre-gately secured $90.7 million in debt. The lien on the Maryland Facility secured $63.9 million, and the lien on the Tennessee Facility secured $26.8 million.
3. TPC Lenders’ Limited Objection to the 363 Sale
Shortly before the hearing on the Sale Motion, the TPC Lenders filed a limited objection6 to the Sale Motion. While not objecting in principle to the 363 Sale, the TPC Lenders sought either (1) that their claims be satisfied in full, or, alternatively, (2) that existing rights in the TPC Properties be unaffected by the 363 Sale, and that they receive adequate protection for their interests.
After a series of negotiations, the TPC Lenders and Old GM agreed to protective provisions under which the proposed sale could go through while protecting the TPC Lenders’ lien rights, discussed below. No bids higher or better than that of the entity that became New GM were forthcoming, and a sale to the entity that became New GM was approved.
L The Sale Order
The protective provisions that previously were negotiated thereafter were included in the Sale Order that the Court ultimately approved. Thus the Sale Order provided, in relevant part, that “the TPC Lenders shall have an allowed secured claim in a total amount equal to the fair market value of the TPC Properties] on the Commencement Date under section 506 of the Bankruptcy Code (the ‘TPC Value’)....”7 And as adequate protection for the TPC Lenders’ secured claim, New GM agreed to place $90.7 million in cash into an interest-bearing escrow account (the “Escrow Account”).
*488The Sale Order also provided, in substance, that, promptly after the TPC Value was determined, the TPC Lenders would receive an amount of cash equal to their secured claim, including interest, from the Escrow Account.8
5. Entry of the Sale Order and Failed Negotiations Thereafter
On July 5, 2009, after approving the 363 Sale over others’ objections, the Court entered the Sale Order. Under the Sale Order, the TPC Properties were transferred free and clear of liens from Old GM to the entity now known as New GM, and the $90.7 million was placed into the Escrow Account.9
After entry of the Sale Order, the TPC Lenders filed a proof of claim. Thereafter, New GM and the TPC Lenders attempted to reach a consensual agreement with respect to the TPC Value to determine the amount required to be disbursed out of the Escrow Account on account of the TPC Lenders’ claim.
In connection with these negotiations, New GM and the TPC Lenders obtained their own appraisals for the TPC Properties. New GM obtained an appraisal that utilized the “fair market” standard. But the TPC Lenders obtained two appraisals — one that utilized the “fair market” standard and another that utilized the “value in use” standard. Using the “fair market” standard, New GM valued the TPC Properties at $30,575 million, and the TPC Lenders valued the TPC Properties at $42 million. But using the “value in use” standard, the TPC Lenders valued the TPC Properties at $64.9 million.
Discussion
The issue is effectively one of contractual interpretation — of a provision that the parties agreed would go into the Sale Order. The controversy calls for interpretation of the clause “fair market value of the TPC Properties] on the Commencement Date under section 506 of the Bankruptcy Code,” as used in ¶ 36 of the Sale Order— and as that interpretation might be informed by section 506 of the Code or other statutory provisions, or by any relevant caselaw.10
A. Textual Analysis
*489As usual,11 the Court starts with textual analysis. The language in question has three components: (1) “fair market value”; (2) “on the Commencement Date”; and (3) “under section 506 of the Bankruptcy Code.” Each of these components at least initially must be considered in the Sale Order’s interpretation.12
The first is “fair market value.” New GM argues that the plain meaning of the Sale Order compels the utilization of the “fair market” standard because the Sale Order includes the exact phrase “fair market value.”13 That has surface appeal, but is overly simplistic; without more, the phrase “fair market value” is open to more than one interpretation. And as Collier observes, “the determination of fair market value will depend on the particular market and means selected to gauge the value of the item in question.”14 Thus, “fair market value” does not by itself determine the valuation methodology, because “fair market value” does not specify a market nor a means, and other metrics may be significant as well. At the least, to interpret “fair market value,” the other components of the Sale Order, each of which may act as a clarifier, or a metric, must be considered as well.
The second component is “on the Commencement Date” — a time marker that informs both “fair market value” and “under section 506 of the Bankruptcy Code.” Obviously, it dictates the date as to which the valuation should be considered.15 It also provides the context in which the phrase “under section 506 of the Bankruptcy Code” should be considered, and has the potential for dictating more than these two things in instances where the potential use of the collateral changes over time.
The third and final component — “under section 506 of the Bankruptcy Code”— incorporates statutory language (and, as a practical matter, any relevant caselaw construing the statutory language), into the order’s effectively contractual language— “fair market value”' — upon which the parties agreed. The two phrases, as the TPC Lenders correctly argue,16 must be “read together.”
But beyond these things, textual analysis is unhelpful. And ultimately it is inconclusive. It fails to answer the underlying question.
B. Section 506 and Related Caselaw
As is apparent from the above, textual analysis of the order itself is insufficient to decide the controversy. The Court instead must look to the language of section 506 and any available mechanisms to apply it.
Section 506(a) governs the allowance of a secured claim. After providing, in relevant part, that an allowed claim of a creditor secured by a lien is a secured claim “to the extent of the value of such creditor’s *490interest in the estate’s interest in such property” (and is an unsecured claim to the extent that the value of such creditor’s interest is less than the amount of such allowed claim), section 506(a) provides:
Such value shall be determined in light of the purpose of the valuation and of the proposed disposition or use of such property, and in conjunction with any hearing on such disposition or use or on a plan affecting such creditor’s interest.
Thus key considerations are (1) the purpose of the valuation and (2) the proposed disposition or use of the collateral.17 The Court considers these in turn
1. “The Purpose of the Valuation ”
With respect to the first of these considerations — the purpose of the valuation— the two sides effectively are in agreement. New GM contends that:
The purpose of the valuation is to fix the TPC Lenders’ secured claim in the context of a Section 863 sale of the TPC Properties] or, more specifically, to fix the TPC Lenders’ claim to escrow proceeds pursuant to the terms and procedures dictated by the Sale Order.18
The TPC Lenders’ understanding of the purpose does not differ materially. They argue that the purpose here is:
the allowance of the TPC Lenders’ secured claims and determination of the extent to which the TPC Lenders are entitled to recover from the escrow account established under the Sale Order cash in an amount equal to the value of the TPC Properties].19
Thus, both parties agree that the purpose of the valuation is to determine the value of the TPC Properties so that an amount of cash equal to this value can be released from the Escrow Account and paid to the TPC Lenders on account of their claim.
But notwithstanding that agreement, the valuation methodology issue requires more in the way of analysis. That is so because the parties’ common understanding as to the “purpose of the valuation” does not lead to a specific valuation methodology. In fact (and understandably), the two sides pay very little attention to section 506(a)’s reference to the “purpose of the valuation”; it brings little to the table. In most, if not all, analyses under section 506(a) of the Bankruptcy Code (and certainly here), the “purpose of the valuation” will be, at least in some form, to determine the amount in which a secured claim should be allowed. That is, after all, section 506(a)’s purpose. Ultimately, the “purpose” prong of section 506(a) does not resolve this dispute.
2. “Proposed Disposition or Use of Such Property ”
The second factor to be considered, as noted above, is the “proposed disposition or use of such property”- — ie., the collateral. As previously noted,20 the relevant time for that determination is “on the Commencement Date.”
On the Commencement Date, as the TPC Lenders quite correctly note, Old GM was operating both the Maryland Facility *491and the Tennessee Facility as “integral parts of the General Motors business.”21 But section 506 does not refer to the “existing” use of the property to be valued. Rather, it refers to the “proposed disposition or use” of that property.22 On the Commencement Date, Old GM proposed a 363 Sale when it filed the Sale Motion. In fact, the TPC Lenders acknowledge this fact. They observe in briefing that on the Commencement Date, Old GM “announced its intention to sell the two facilities to New GM, on an arm’s length basis and for fair consideration, as part of a going-concern sale of the overwhelming majority of Old GM’s business and assets.”23
In that context, New GM argues that the 363 Sale was a “disposition” — because Old GM and New GM were (and still are) two distinct legal entities, and Old GM sold the TPC Properties to New GM.24 But the TPC Lenders argue that New GM’s appraisals are based on a “fiction that New GM did not retain and continue to operate the property, but instead abandoned the properties and attempted to sell empty properties to a third party.”25 Because of Old GM’s relationship with New GM, the TPC Lenders argue that this Court should acknowledge the “continued use and operation [of the TPC Properties] as part of the General Motors business, first under Old GM and then under New GM.”26
Contentions of that character are not unreasonable, but ultimately the Court cannot agree with them. While we now know, with the benefit of hindsight, that New GM was the winning bidder, the sale procedures proposed “on the Commencement Date” proposed a sale, and, significantly, a sale open to higher and better offers by anyone else.27 Under the sale transaction as proposed on the Commencement Date, a sale to New GM was not the only permissible outcome. The Court well knows, of course, based on evidence it heard at the sale hearing, that just as no private financing for keeping Old GM alive was available (making the U.S. and Canadian governments the only available lenders), no private buyers who’d be willing to pay more than the U.S. and Canadian Governments’ credit bids turned up. But the proposed sale was structured as bankruptcy sales traditionally are, making the property available for whomever might make the highest and best offer. The Court’s factual findings support the New GM view.
However, while the Court has found, as facts, that the situation was as just described and described in the preceding Findings of Fact on the Commencement Date, the Court believes that it should also examine any potentially relevant caselaw— along with the language of the Sale Order and section 506, and the facts as the Court has found them — to determine the extent to which caselaw might inform the Court’s determination on these issues. The case-law, to the extent it is on point (which is so only to a limited degree), supports, or at least does not contradict, New GM’s view.
To provide assistance as to the meaning of “disposition or use,” both sides address a decision by the U.S. Supreme Court in a chapter 13 case, Associates Commercial *492Corporation v. Rash.28 In Rash, a chapter 13 debtor attempted to cram down a plan that allowed the debtor to retain his truck over the objections of a secured creditor that possessed a lien on it.29 Of course, Rash involved a continuing use, and not a sale, but as the creditor’s secured claim needed to be valued, and there is a dearth of more relevant authority, both sides understandably address it anyway.
Describing the debtor’s “disposition or use” of the collateral — the truck — as being of “paramount importance,” the Rash court considered the debtor’s two possible choices under the Bankruptcy Code: to either (1) surrender the truck to the creditor or (2) retain the truck under the cram down option.30 The Rash court then considered the respective consequences that these choices would have on the secured creditor.31 If the debtor had chosen to surrender the truck, the secured creditor would have liquidated the truck and received the truck’s liquidation value. But because the debtor instead chose to use the truck, and the debtor’s continued use of the truck required the secured creditor to continue holding a lien, the Supreme Court held that the liquidation value of the truck should not be used, because the liquidation value “attribute[d] no significance to [these] different consequences.”32 Instead, the Supreme Court decided to utilize a “replacement value” standard, which the Court defined as “the price a willing buyer in the debtor’s trade, business, or situation would pay a willing seller to obtain property of like age and condition.”33
Post-Rash case law suggests that Rash can be applied to the provisions of all three reorganization chapters — 11, 12, and 13— because these chapters all treat secured claims similarly.34 But Rash has no material significance in this ease, because its facts are so distinguishable from those here. The TPC Lenders, unlike the secured creditor in Rash, agreed to Old GM’s “disposition or use of’ the TPC Properties by not objecting to the sale itself,35 and by then consenting to the Sale Order. Additionally, Old GM, unlike the debtor in Rash, did not retain the collateral, and the TPC Lenders, unlike the secured creditor in Rash, did not retain their liens on the TPC Properties.
Of course, this Court said Rash had “no material significance” to this case, rather than saying that Rash had no significance whatever. Even though Rash is so inap-*493posite, its underlying thought process is still instructive — as it invites the Court to consider how the TPC Lenders would have been affected if Old GM, instead of participating in the 363 Sale, had chosen an alternative option. Ideally, any methodology analysis would be sufficiently principled to account for different scenarios, and provide for any varying consequences.
Here, considering the matter in Rash terms, there were three principal options. First, Old GM could have proposed on the Commencement Date that the TPC Properties be surrendered to the TPC Lenders. In this hypothetical situation, the TPC Lenders would have liquidated the TPC Properties and their secured claim would have been valued at the TPC Properties’ liquidation value. But because the TPC Lenders did not receive control of the TPC Properties, each side, understandably, recognizes that the fair market value would not be the value on liquidation.36
The second option would have been for Old GM to retain the property, as it did with respect to a very limited subset of its property, principally property with environmental problems, or that otherwise was unwanted by New GM. This scenario would have provided the strongest basis for an application of the TPC Lenders’ contentions, as this would indeed involve a “use,” as contrasted to a “disposition.” But this too is an option that was not chosen.
The third option was a sale, and this of course is what happened. And after the sale, New GM turned out to be the winning bidder — though as the prospective sale was structured at the outset, that was not the only possible result.
Recognizing that, the TPC Lenders still disagree with New GM, arguing that the correct valuation methodology must regard the 363 Sale as it was proposed on the Commencement Date to have taken place between Old GM and New GM — New GM specifically- — -and not between Old GM and an unspecified purchaser. But the Court finds such a characterization to be unpersuasive. In fact, Old GM did not limit the 363 Sale to New GM. And if Old GM had instead sold the TPC Properties to another purchaser, the consequences from the perspective of the TPC Lenders would be exactly the same. In this alternative scenario, the TPC Lenders would have relinquished their liens on the TPC Properties, and would have received cash from the alternative purchaser. But they would have been affected the same way, and the transaction that generated the cash to pay them down would still have been a sale, as contrasted to a continuing use.37
S. The Resulting Standard: “Fair Market Value” or “Value in Use”?
In that context, New GM argues that the correct valuation methodology is “fair *494market value” as it is defined by Black’s Law Dictionary: the “price that a seller is willing to accept and a buyer is willing to pay in the open market and in an arm’s-length transaction.”38 That definition is consistent with the definition of “fair market value” as defined by The Dictionary of Real Estate Appraisal, and as set forth in the TPC Lenders’ appraisal.39
Thus, the parties seem to agree on the definition of the “fair market value” standard. But the TPC Lenders argue that the correct valuation method should be the “value in use” (or “use value”) standard as defined by The Dictionary of Real Estate Appraisal:
The value a specific property has to a specific person or a specific firm as opposed to the value to persons or the market in general. Special purpose properties such as churches, schools and public buildings, which are seldom bought and sold in the open market, can be valued on the basis of value in use. The value to a specific person may include a sentimental value component. The value in use to a specific firm may be the value of a plant as a part of an integrated multiplant operation.40
The “value in use” standard differs from the “fair market value” standard in that the “value in use” standard refers to a “specific person or a specific firm.”41 More precisely, these two standards differ in the respects that an appraisal made under the “fair market value” standard deducts for (1) functional obsolescence,42 (2) external obsolescence,43 and (8) tax advantages that would only be obtained by either the seller or the buyer — here Old GM or New GM.44
The Court can easily see uses for the “value in use” mechanism under other scenarios — most obviously where the property has not been subjected to a sale process (especially one subject to higher and bet*495ter offers), and remains in the hands of its original owner or a successor by means other than a sale. But the Court does not see the “value in use” method as appropriate here,45 where the TPC properties were the subject of a sale.46
Conclusion
For the foregoing reasons, the “fair market” standard is the correct valuation methodology.
. As of the Petition Date, the TPC Lenders were comprised of, collectively, Wells Fargo Bank Northwest, N.A., as agent, on behalf of Norddeutsche Landesbank Girozentrale (New York Branch) as administrator, Hannover Funding Company, as CP Lender, and Deutsche Bank, AG, New York Branch, HSBC Bank USA, ABN AMRO Bank N.V., Royal Bank of Canada, Bank of America, N.A., Citicorp. USA, Inc., Merrill Lynch Bank USA, and Morgan Stanley as purchasers.
. The Sale Order had the lengthy formal name of Order (I) Authorizing Sale of Assets Pursuant to Amended and Restated Master Sale and Purchase Agreement with NGMCO, Inc., A U.S. Treasury Sponsored Purchaser; (II) Authorizing Assumption and Assignment of Certain Executory Contracts and Unexpired Leases in Connection with the Sale; and (III) Granting Related Relief (ECF #2968).
.To avoid unnecessarily lengthening this decision, record citations are limited to the most important matters, and are omitted for undisputed facts, except where record matter is quoted.
. See Sale Motion (ECF # 92).
. See id. at ¶¶ 15 (“Subject to [Court] approval and the submission of any higher or better offers, the Sellers have reached an agreement with the Purchaser (together with the Sellers, the 'Parties') as embodied in the proposed MPA.”) (footnote omitted); ¶ 49 ("The sale of the Purchased Assets pursuant to the MPA is subject to higher or better offers.”). Detailed procedures for consideration of any higher or better offers were set forth in ¶ 49 of the motion.
. "Limited” objections are a common device used in the bankruptcy community when the objector does not seek outright denial of the motion, but instead seeks protective provisions, clarifications, reservations of rights or similar lesser relief incident to the granting of the underlying motion.
. Sale Order at ¶ 36.
. If the value of the TPC Lenders’ secured claim turned out to be less than $90.7 million, the TPC Lenders could assert an allowed unsecured claim against Old GM's estate equal to the difference between $90.7 million and the value of the TPC Lenders' secured claim, though subject to a maximum of $45 million. If, however, the value of the TPC Lenders' secured claim were to exceed $90.7 million, the TPC Lenders could assert an additional secured claim against Old GM's estate equal to the Escrow Account’s shortfall.
. Neither Old GM nor New GM made a statement as to what portion of the consideration paid as part of the 363 Sale was attributable to the TPC Properties.
. In briefing, New GM contended that the TPC Lenders' decision to appraise the TPC Properties under both a "fair market value” standard and "value in use” standard suggested that the TPC Lenders did not truly believe that the "value in use” standard was appropriate. But at oral argument, both parties agreed to refrain from reliance upon parol evidence or extrinsic evidence. Hrg. Tr. (ECF # 10086) ("Hrg. Tr.”) at 27 (TPC Lenders confirmed that they were not seeking to rely on parol evidence); id. at 34 (New GM confirmed that it was not seeking to rely on parol evidence).
But even if the TPC Lenders' decision to employ two appraisals were admitted as parol evidence, this fact would have little significance — because it is unclear whether the TPC Lenders used both standards because they did not truly believe that the "value in use” standard was correct, or were simply trying to be careful. For each of these reasons the TPC Lenders’ decision to employ more than one type of appraisal does not affect this analysis.
. See, e.g., In re Motors Liquidation Co., 462 B.R. 494, 500 & n. 33 (Bankr.S.D.N.Y.2012)
. See TRW Inc. v. Andrews, 534 U.S. 19, 31, 122 S.Ct. 441, 151 L.Ed.2d 339 (2001) (quoting Duncan v. Walker, 533 U.S. 167, 174, 121 S.Ct. 2120, 150 L.Ed.2d 251 (2001)) ("It is 'a cardinal principal of statutory construction’ that 'a statute ought, upon the whole, to be so construed that, if it can be prevented, no clause, sentence, or word shall be superfluous, void, or insignificant.’ ”).
. See New GM Opening Br. (ECF # 9494) at ¶ 24 (“No other valuation standard is mentioned in the Sale Order.”).
. 4 Collier on Bankruptcy ¶ 506.03[6] (16th ed. 2010).
. Hrg. Tr. at 21 (both parties agree that the relevant date here is the Commencement Date: June 1, 2009).
. TPC Lenders' Opening Br. (ECF # 9493) at ¶ 32.
. See, e.g., In re SW Boston Hotel Venture, L.L.C., 479 B.R. 210 (1st Cir. BAP 2012) ("SW Boston Hotel Venture ") (quoting and then applying section 506(a) to determination of secured creditor’s allowed claim after sale of part of its collateral during the course of a chapter 11 case).
. New GM Opening Br. at ¶ 33.
. TPC Lenders Opening Br. at ¶ 34 (arguing that this purpose is similar to the valuation purpose present in this Court’s decision in In re Urban Communicators PCS, 379 B.R. 232, 241 (Bankr.S.D.N.Y.2008)).
. See page 488-89, supra.
. TPC Lenders Opening Br. at 1135.
. See Bankruptcy Code section 506(a) (emphasis added).
. TPC Lenders Opening Br. at ¶ 35.
. New GM Opening Br. at ¶ 37.
. TPC Lenders Reply Br. (ECF #9116) at ¶ 6.
. TPC Lenders Opening Br. at ¶ 42.
. See n. 5, supra.
. 520 U.S. 953, 117 S.Ct. 1879, 138 L.Ed.2d 148 (1997).
. See id. at 957, 117 S.Ct. 1879.
. See id. at 962, 117 S.Ct. 1879.
. See id. at 962-63, 117 S.Ct. 1879 ("When a debtor surrenders the property, a creditor obtains it immediately, and is free to sell it and reinvest the proceeds.... If a debtor keeps the property and continues to use it, the creditor obtains at once neither the property nor its value and is exposed to double risks: The debtor may again default and the property may deteriorate from extended use.”).
. Id. at 962, 117 S.Ct. 1879.
. Id. at 959 n. 2, 117 S.Ct. 1879.
. See In re Bell, 304 B.R. 878, 880 n. 1 (Bankr.N.D.Ind.2003).
. This was hardly a tactical blunder on their part, however, and in any event would have made no difference. There were hundreds of other objections to the sale, which this Court ultimately overruled, in its lengthy opinion approving the sale. See In re General Motors Corp., 407 B.R. 463 (Bankr.S.D.N.Y.2009), stay pending appeal denied, 2009 WL 2033079 (S.D.N.Y.2009) (Kaplan, J.), appeal dismissed and aff'd, 428 B.R. 43 (S.D.N.Y.2010) (Buchwald, J.) and 430 B.R. 65 (S.D.N.Y.2010) (Sweet, J.), appeal dismissed, No. 10-4882-bk (2d Cir. Jul. 28, 2011). And even if they had objected to the sale itself, the underlying character of the sale would of course have been the same.
. See New GM Reply Br. (ECF # 9797) at ¶ 10; TPC Lenders Opening Br. at ¶ 47.
. Likewise, the Court has also considered the potential significance of the very recent 1st Circuit BAP decision in SW Boston Hotel Venture, see n. 17, supra, decided after the briefing and argument on this controversy. That case, like this one, involved a 363 sale in the course of a chapter 11 case, and a need to determine the size of a lender’s secured claim. But it is otherwise inapposite. SW Hotel Venture dealt with different issues— there, most significantly, when the lender should be deemed to be oversecured, in the context of a claim for postpetition interest, see 479 B.R. at 219-23, ultimately concluding that the lender was oversecured on the petition date, see 479 B.R. at 223, and not just on the later date on which the collateral was sold. It did not involve, much less address, a situation where the collateral to be valued was sold to a purchaser that might be argued to be a successor to the debtor, and hence involve a continuing "use,” as contrasted to a "sale,” of the collateral that had been sold.
. New GM Reply Br. at ¶ 3 (citing Black's Law Dictionary 1587 (8th ed. 2004)).
. See TPC Lenders Tennessee Appraisal at 2-3; see also TPC Lenders Maryland Appraisal at 3 (citing The Dictionary of Real Estate Appraisal (4th ed. 2002) ("The most probable price which a property should bring in a competitive and open market under all conditions requisite to a fair sale, the buyer and seller each acting prudently and knowledgeably, and assuming the price is not affected by undue stimulus. Implicit in this definition is the consummation of a sale as of a specified date and the passing of title from seller to buyer under conditions whereby: buyer and seller are typically motivated; both parties are well informed or well advised, and acting in what they consider their best interests; a reasonable time is allowed for exposure in the open market; payment is made in terms of cash in United States dollars or in terms of financial arrangements comparable thereto; and the price represents the normal consideration for the property sold unaffected by special or creative financing or sales concessions granted by anyone associated with the sale.”)).
. See TPC Lenders Tennessee Appraisal at 2 (citing The Dictionary of Real Estate Appraisal (4th ed. 2002)).
. Id.
. Functional obsolescence deductions address improvements that a generalized buyer in the industry would not value. Hrg. Tr. at 11-12. One example of a functional obsolescence would be the value of an air-conditioning system that was built into the Tennessee Facility, because the appraiser determined that a generalized buyer would not place value on the system.
. External obsolescence deductions originate from the economic conditions at the time of the valuation and, using the same example, might include the construction — and other costs — of replacing the air-conditioning system in the Tennessee Facility. Id.
. An example of this would be a tax abatement offered to Old GM and New GM, but not a generalized buyer.
. Reaching that conclusion would be easier if the TPC Properties had been sold separately, and not as part of the much larger sale here. But that difference is insufficient to cause the Court to reach a different conclusion; the TPC Properties were nevertheless conveyed as part of a sale. Similarly, while the Court is also mindful that the U.S. and Canadian Governments were able to credit bid for the assets that were purchased, and others would have had to outbid them with cash, the right to credit bid is a basic right of secured lenders, which can be denied only for cause. See Bankruptcy Code section 363(k); RadLAX Gateway Hotel, LLC v. Amalgamated Bank, - U.S. -, 132 S.Ct. 2065, 2070 & n. 2, 182 L.Ed.2d 967 (2012).
. Likewise, the Court has considered, but ultimately rejected, the TPC Lenders’ contention that a ruling against them would give New GM a windfall. The result here is simply what normal valuation analyses would yield. The parties presumably could have agreed that if New GM were the winning bidder, the TPC Properties would be valued using the “value in use” mechanism, but they did not do so. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495320/ | OPINION1
MARY D. FRANCE, Chief Judge.
Before the Court is the motion of Wells Fargo Bank (“Wells Fargo” or the “Bank”) requesting the Court to dismiss a Complaint filed by Mildred C. Linsenbach (“Debtor”) on the basis that the Complaint fails to state a claim upon which relief can be granted. In her Complaint, Debtor alleges that the Bank violated the automatic stay as well as the Pennsylvania Fan-Credit Extension Uniformity Act (“FCEUA”), 73 P.S. § 2270.1 et seq.2 and the Pennsylvania Unfair Trade Practices and Consumer Protection Law (“PUTPCPL”), 73 P.S. § 201-1 et seq. Debtor also alleges that Debtor is a representative plaintiff of a class injured by the actions of Wells Fargo. For the reasons set forth below, Wells Fargo’s motion to dismiss will be granted.
I. Procedural History
Debtor filed a Chapter 13 bankruptcy petition on May 30, 2012 and the within adversary proceeding on June 11, 2012. On July 11, 2012, Wells Fargo filed its motion dismiss Debtor’s Complaint for failure to state a claim upon which relief can be granted. Wells Fargo filed a declaration by its counsel Jon C. Sirlin (“Sirlin”) with exhibits in support of the motion. On August 8, 2012, the Court issued an order directing Debtor to file an answer to the motion to dismiss and a brief in support of the answer by August 29, 2012. On August 30, 2012, Debtor filed an answer to Wells Fargo’s motion to dismiss, but did not file a brief.
II. Background
As set forth in Sirlin’s declaration, on May 24, 2012, Capital One Bank (“Capital One”) caused Wells Fargo to be served with a writ of execution and attachment under the Pennsylvania Rules of Civil Procedure.3 In a letter dated May 25, 2012, Wells Fargo advised Debtor that the Bank had been served with a writ of execution attaching her account.4 Debtor was notified that she would receive her $300 statu*525tory exemption under Pennsylvania law and that the balance of the account, $869.82, would be held subject to the attachment. On May 29, 2012, Debtor filed a voluntary Chapter 18 petition. Debtor notified Wells Fargo of the bankruptcy filing on May 30, 2012 by fax sent to several Wells Fargo locations. No evidence was presented, however, that Debt- or notified Capital One of her bankruptcy filing, nor did Debtor request Capital One to direct Wells Fargo to release the garnishment. Debtor also placed phone calls to Wells Fargo’s Legal Processing Department and the branch manager of the Hershey branch on June 7 and 8, 2012 notifying the Bank of the filing of her petition.
On June 8, 2012, Debtor filed the within Complaint against Wells Fargo. Capital One, the creditor that caused the writ of execution to be issued, was not named as a defendant. On June 11, 2012, counsel for Wells Fargo received from counsel for Capital One a letter dated June 7, 2012 enclosing an unsigned copy of a praecipe to settle and discontinue the garnishment as to Wells Fargo. The same day counsel for Wells Fargo notified the Bank to release the garnishment.5
III. Discussion
A. Motion to Dismiss under Fed. R.Civ.P. 12(b)(6)
Under Fed.R.Civ.P. 12(b)(6), a complaint may be dismissed for “failure to state a claim upon which relief can be granted.” In deciding a motion to dismiss under Rule 12(b)(6), a court must treat the facts alleged in the complaint as true, construe the complaint in the light most favorable to the non-moving party, draw all reasonable inferences that can be drawn therefrom in favor of the non-moving party, and ask whether, under any reasonable reading of the complaint, the non-moving party may be entitled to relief. Kehr Packages, Inc. v. Fidelcor, Inc., 926 F.2d 1406, 1410 (3d Cir.), cert. denied, 501 U.S. 1222, 111 S.Ct. 2839, 115 L.Ed.2d 1007 (1991).
In order to “survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.’ ” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007)). However, “the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions.” Iqbal, 129 S.Ct. at 1948-49. Although a complaint need only consist of a “short and plain statement of the claim showing that the pleader is entitled to relief,” to survive a motion to dismiss, the complaint must include “more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Iqbal, 129 S.Ct. at 1949 (quoting Twombly, 550 U.S. at 555, 127 S.Ct. 1955).
Iqbal established a two-step process to determine whether relief should be granted under Rule 12(b)(6). First, a court must identify pleadings that are conclusory and, therefore, not entitled to a presumption of truth. Second, a court must assume that well-pleaded factual allegations are true. Examining the factual allegations alone, the court must then determine whether those allegations give rise to a plausible claim for relief.
B. Count I — Violation of the Automatic Stay
Upon filing a bankruptcy petition, a stay arises under Section 362(a) of *526the Bankruptcy Code. 11 U.S.C. § 362(a). If an individual is injured “by any willful violation of a stay” she is entitled to recover actual damages and, “in appropriate circumstances, may recover punitive damages.” 11 U.S.C. § 362(k). To demonstrate that there has been a violation of the stay, a debtor must show that: (1) the action taken by the “offending party” was in violation of the automatic stay; (2) the action taken was willful; and (3) the violation caused actual damages. See In re Miller, 447 B.R. 425, 433 (Bankr.E.D.Pa.2011); In re Frankel, 391 B.R. 266, 271 (Bankr.M.D.Pa.2008). Here, Debtor alleges that Wells Fargo violated the stay by serving as Capital One’s agent in the collection of a prepetition debt and by refusing to release the funds garnished by Capital One before Debtor filed her petition. The undisputed facts do not support the first allegation, and the second allegation is incorrect as a matter of law.
On May 25, 2012, Wells Fargo sent to Debtor a letter explaining that her bank account had been garnished the prior day. The letter advised her that certain amounts in her account were being held under the writ and that a check for the amount of her exemption under Pennsylvania law was enclosed. Wells Fargo enclosed a copy of the writ attaching Debtor’s account and suggested that she contact her attorney. Debtor’s counsel contacted Wells Fargo several times demanding access to the remaining funds, but there is no allegation in the Complaint that Debtor contacted the judgment creditor, Capital One, to obtain a release of the garnishment.
Debtor does not specify which provisions in § 362(a) Wells Fargo is alleged to have violated. One possible basis is § 362(a)(1). The filing of a bankruptcy petition stays “the commencement or continuation, including the issuance of employment of process, of a judicial, administrative, or other action or proceeding against the debtor that was or could have been commenced before the commencement of the case ..., or to recover a claim against the debtor that arose before the commencement of the case....” 11 U.S.C. § 362(a)(1). The continuation of a garnishment action to collect a debt that arose before the bankruptcy filing is subject to the stay. Myers v. Miracle Finance, Inc. (In re Myers), 402 B.R. 370, 372 (Bankr.M.D.Ala.2009). Unlike Pennsylvania, many states permit judgment creditors to garnish a debtor’s wages, which would provide for a continuing deduction from a debtor pay check until the judgment was satisfied. In this case, there was no continuing garnishment, thus no violation of § 362(a)(1). All funds garnished had been deposited in Debtor’s Wells Fargo account before she filed her bankruptcy petition.
Without identifying the provision, Debt- or implies that the actions of Wells Fargo violated § 362(a)(3), which operates as a stay of “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.” 11 U.S.C. § 362(a)(3). The failure of Wells Fargo to immediately release the funds has been characterized by Debtor as a violation of the automatic stay.
Debtor’s assertion is incorrect as a matter of law. First, Wells Fargo was not acting as the agent of Capital One, as alleged by Debtor. Wells Fargo is not a creditor and has not attempted to collect a debt; it is a garnishee. Debtor fails to distinguish between the actions that a creditor may be required to take in response to the filing of a bankruptcy petition and those required of a garnishee. Under Pennsylvania law, service of a writ attaches a debtor’s property that is in the possession of the garnishee. Pa. R. Civ. P. *5273111(b). Following service of a writ of execution on a garnishee, a judicial lien arises in favor of the creditor/garnishor that is perfected on the date of service of the writ. See In re R.H.R. Mechanical Contractors, Inc., 358 B.R. 202, 210 (Bankr.E.D.Pa.2006). Service of the writ subjects the garnishee to injunctive orders of the writ restraining the garnishee from turning over the debtor’s property — in this case, the funds on deposit — to the debtor. Pa. R. Civ. P. 3111(c). The writ was served on Wells Fargo before Debtor filed her petition. If the Bank had released the funds in the account to Debtor before she filed for bankruptcy it would have been liable for contempt and required to pay the amount on deposit to Capital One. Pa. R. Civ. P. 3111(d).6 Wells Fargo’s refusal to release the funds until authorized by Capital One was required under Pennsylvania law.
Debtor’s specific allegation that the May 25 letter to Debtor “was an attempt to collect an alleged debt for a consumer transaction” demonstrates a misunderstanding of Wells Fargo’s role as a garnishee. The letter sent to Debtor pre-petition was in compliance with a judgment creditor’s duty under Pennsylvania law to forward promptly a copy of the writ to the judgment debtor. See Pa. R. Civ. P. 3140(a). The letter simply explained why a freeze had been placed on Debtor’s account and recommended that she contact her attorney. By sending the May 25 letter, Wells Fargo was not acting as an agent for the judgment creditor.
The Court concludes that Debtor’s counsel focused his efforts on Wells Fargo to obtain a release of the account, rather than Capital One, because he incorrectly assumed that Wells Fargo was the agent of Capital One. The distinction between the actions required by the garnishing creditor and the garnishee is discussed in In re St. Vincent, No. 10-B-76118, 2011 WL 1258479 (Bankr.N.D.Ill. April 1, 2011). In St. Vincent, a judgment creditor issued a citation on Chase Bank to discover debtors’ assets, the process authorized under Illinois state law to enforce a judgment against third parties. In response to the citation, the bank placed an administrative hold on the debtors’ bank account. Thereafter, the debtors filed their bankruptcy petition. The debtors’ counsel notified the judgment creditor’s attorney of the bankruptcy filing and demanded that it compel Chase Bank to release the account. Counsel also notified Chase Bank of the bankruptcy filing and demanded it release the debtors’ funds. Chase initially refused to release the funds without a court order, but after the judgment creditor obtained an order dismissing the citation proceeding, Chase lifted the hold placed on the debtors’ account.
The debtors in St. Vincent argued Chase Bank’s refusal to release the funds in the account violated the automatic stay. The bankruptcy court observed that Chase Bank was not pursuing a judicial action against the debtors and, to the contrary, was “an involuntary respondent to the citation proceedings. It neither commenced the proceedings nor had any power to stop them.” Id. at *2 (emphasis in original). Here, Debtor alleges that Wells Fargo was attempting to collect a debt for Capital One when it failed to release the account immediately upon demand. But plainly, this is not what occurred. Wells Fargo *528was complying with the order of a state court and returned the funds to Debtor once Capital One released the attachment.
Even as to judgment creditors, courts are split on the issue of whether the automatic stay requires a creditor holding a debtor’s property seized pre-petition to initiate turn over of a debtor’s property. Some courts require immediate surrender of the property, others permit the creditor to seek relief from the stay or move for adequate protection. Compare In re Giles, 271 B.R. 903 (Bankr.M.D.Fla.2002) (holding that if a creditor’s lien may be destroyed when collateral is released, creditor must be provided with adequate protection), and Miller v. Montgomery Kolodny Amatuzio Dusbabek (In re Miller), 2011 WL 6217342, *3 (Bankr.D.Colo. December 14, 2011) (holding that “the better view” is that creditor may refuse to release garnished funds to protect lien rights without violating automatic stay), with Bank of America v. Adomah (In re Adomah), 368 B.R. 134, 139 (E.D.N.Y.2007) (holding that garnishee bank was under a duty to immediately release funds claimed as exempt), and Roche v. Pep Boys, Inc. (In re Roche), 361 B.R. 615, 621-22 (Bankr.N.D.Ga.2005) (holding that garnishing creditor has an affirmative duty to release pre-petition garnishment).
This Court believes that the view of the Miller and Giles courts is the correct one. As the court stated in Giles, “[t]he right of adequate protection cannot be rendered meaningless by an interpretation of § 362(a)(3) ... that would compel turnover even before an opportunity for the court’s granting adequate protection.” Giles, 271 B.R. at 906-07 (citing In re Bernstein, 252 B.R. 846, 850 (Bankr.D.D.C.2000)(internal quotation omitted)). The bankruptcy court in Giles relied on the Supreme Court’s reasoning in Citizens Bank of Md. v. Strumpf, 516 U.S. 16, 116 S.Ct. 286, 133 L.Ed.2d 258, (1995), in which the debtor asserted that an administrative hold placed on an account by the bank, which was seeking to exercise setoff rights, violated the automatic stay. The Supreme Court observed that the freeze on a debtor’s account took nothing from the debtor and protected the rights of the bank. A bank account does not “consist[] of money belonging to the depositor and held by the bank.” Id. at 21, 116 S.Ct. at 290. It is “nothing more or less than a promise to pay, from the bank to the depositor.” Id. A debtor’s right to payment is an asset, but a temporary refusal to pay is not a violation of the automatic stay. See also In re Perdew, 227 B.R. 865, 868 (Bankr.S.D.Ind.1998) (“neither the imposition of the hold on the Debtor’s account, nor the Bank’s inability to remove the hold” within seven days of Debtor’s filing of a bankruptcy petition was a violation of the automatic stay) (citing Strumpf).
In the within case, Wells Fargo’s refusal to release the garnishment preserved the rights of both Capital One and Debtor. Well Fargo’s refusal to release the garnishment without the consent of Capital One or a court order directing release of the funds was not a willful violation of the automatic stay. Accordingly, Debtor’s motion for damages for violation of the automatic stay will be dismissed.
C. Count II — Claims under the Pennsylvania Fair Credit Extension Uniformity Act and the Pennsylvania Unfair Trade Practices and Consumer Protection Law
Debtor’s claims for violation of FCEUA and UTPCPA must be dismissed as well. Debtor’s claims under these state statutes are derived from the same actions alleged to have violated the automatic stay. Having found Debtor’s claim for violation of *529the automatic stay to be without merit, I likewise find Debtor’s state claims to be baseless.
Even if Debtor had stated a claim for violation of the automatic stay, her state law claims must be dismissed because they are preempted by the Bankruptcy Code. See In re Chaussee, 399 B.R. 225, 234 (9th Cir. BAP 2008) (holding that state law claims for violation of the Bankruptcy Code are preempted); In re Abramson, 313 B.R. 195, 197 (Bankr.W.D.Pa.2004) (“the Bankruptcy Code preempts state law claims that are based upon allegations that the defendant violated the Bankruptcy Code”); In re Henthorn, 299 B.R. 351, 354 (E.D.Pa.2003) (Bankruptcy Code preempted claims for violation of UTPCPL); In re Brundage, No. 05-2310, 2005 WL 2206076, at *4 (E.D.Pa. Sept. 9, 2005) (“bankruptcy court was justified in finding federal preemption of [debtor’s] claim for treble damages” under UTPCPL); Diamante v. Solomon & Solomon, P.C., No. 1:99CV1339, 2001 WL 1217226, at *2 (N.D.N.Y. Sept. 18, 2001) (“the Bankruptcy Code preempts state law claims that are based upon allegations that the defendant violated the Bankruptcy Code”).
Here, Debtor claims that Wells Fargo “engaged in an unlawful attempt to collect a consumer debt” and thus violated the Bankruptcy Code’s automatic stay provisions. Debtor asserts that by unlawfully attempting to collect a consumer debt, Wells Fargo violated FCEUA and UTPC-PA. Thus, Debtor state law claims are based on alleged violations of the automatic stay provisions of the Bankruptcy Code. Because the Court finds the decisions noted above to be persuasive, the Court holds that Debtor’s claims under FCEUA and UTPCPA are preempted by the Bankruptcy Code.
D. Count III — the Class Action
Debtor has failed to allege a cause of action against Wells Fargo that survived the motion to dismiss; therefore, the issue of whether Debtor is a representative plaintiff of an injured class is moot. Even if Debtor’s claims had not been subject to dismissal for failure to state a claim upon which relief can be granted, Debtor failed to properly and sufficiently plead a class action.
Paragraph 25 of Debtor’s Complaint states that Debtor is “one of many petitioners in bankruptcy that have received similar notice after having filed Chapter 13 Petitions. Plaintiffs attorney can provide such exhibits upon request to Wells Fargo’s corporate counsel, and upon exercise of discovery.” This bald assertion fails to meet the pleading requirements of Fed. R.Civ.P. 23.
To plead a class action under Fed. R.Civ.P. 23, a debtor must demonstrate that her cause of action meets all of the following requirements: 1) the class is so numerous that joinder of all members is impracticable; 2) there are questions of law or fact common to the class; 3) the claims or defenses of the representative parties are typical of the claims or defenses of the class; and 4) the representative parties will fairly and adequately protect the interest of the class. Fed.R.Civ.P. 23(a). See Rex v. Owens ex rel. State of Okl., 585 F.2d 432, 435-36 (10th Cir.1978) (“A party seeking class action certification must demonstrate, under a strict burden of proof, that all of the requirements of 23(a) are clearly met.”). Here, Debtor fails to sufficiently address any of these requirements. Thus, the Court could not have reasonably inferred that Debtor was a representative of a class allegedly harmed by Wells Fargo. Therefore, Count III of Debtor’s Complaint also is dismissed.
*530IY. Conclusion
Debtor’s Complaint is dismissed for failure to state a claim upon which relief may be granted. Count I of Debtor’s Complaint is dismissed because Debtor’s claim that Wells Fargo violated § 362(a) of the Bankruptcy Code is insufficient as a matter of law. Count II of Debtor’s Complaint is dismissed because Debtor failed to assert any basis for a state law claim other than a violation of the automatic stay, which the Court determined was without merit. Even if the claim for violation of the automatic stay had not been dismissed on the merits, state law claims for violation of the automatic stay are preempted by the Bankruptcy Code. In the absence of an underlying substantive claim against Wells Fargo, Count III of Debtor’s Complaint asserting a class action is dismissed.
An appropriate order will be entered.
. Drafted with the assistance of Vera Kanova, Judicial Extern, Juris Doctor Candidate 2013, The Pennsylvania State University-Dickinson School of Law.
. Debtor referred to the FCEUA as the "Pennsylvania Fair Trade Extension Uniformity Act,” but the statutory reference in the Complaint was to FCEUA. Therefore, the Court assumes that Debtor is asserting claims under the Fair Credit Extension Uniformity Act.
. The original writ was dated April 19, 2012 and addressed to Wells Fargo's predecessor, Wachovia Bank. The copy attached as an exhibit to Wells Fargo's motion states that the writ was reissued.
.In a letter dated June 6, 2012, attached as Exhibit C to the Complaint, Debtor's counsel stated that the correspondence from Wells Fargo to Debtor enclosing a copy of the writ was dated June 4, 2012. However, a copy of the same letter attached to the Complaint as Exhibit D is dated May 25, 2012.
. In Debtor's answer to the Complaint she states that the garnishment was released on July 11, 2012. Wells Fargo does not state precisely when the funds were released, but implies that they were released on June 11. It is not necessary for the Court to resolve this discrepancy to rule on Wells Fargo’s motion to dismiss.
. The Pennsylvania Supreme Court has held that "the public policy of Pennsylvania prohibits a garnishee bank with notice of a judgment order from engaging in transactions with the judgment debtor that it knows or should know will facilitate the judgment debt- or in attempts to avoid the lawful garnishment of its assets.” Witco Corp. v. Herzog Bros. Trucking, Inc., 580 Pa. 628, 641, 863 A.2d 443, 451 (2004). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495321/ | STATEMENT SUPPORTING ORDER DATED NOVEMBER 2, 2012
RICHARD E. FEHLING, Bankruptcy Judge.
I. INTRODUCTION
On October 2, 2012, Debtors, Carter and Sarah Reese, initiated this Chapter 11 proceeding by filing their petition. I immediately issued an Order pursuant to Section 105(d) of the Bankruptcy Code, 11 U.S.C. § 105(d), scheduling a status conference for me to examine Debtors to determine (1) what led to this filing, (2) the current status of Debtors, and (3) how the Debtors intend to reorganize. Both Debtors were present at then Chapter 11 status conference and each had individual counsel. Two of Debtors’ creditor banks were present through their counsel. I started the status conference by disclosing certain contacts that I have had with Debtors over the years and announced that I did not believe those prior contacts warranted my recusal from presiding over this proceeding. I invited any party, however, to inform the Chief Deputy Clerk anonymously to request that I recuse myself. One of the parties did so and I scheduled and conducted a hearing on my recusal on November 2, 2012, at which the parties were free to advocate their positions. Counsel for one of the creditors acknowledged that he had contacted the Clerk about my possible recusal. This Statement constitutes my recitation of my prior contacts with Debtors and my determina*532tion and conclusion that I will not recuse myself from this matter. This Statement supports the Order entered on November 2, 2012.
II. FACTUAL BACKGROUND
To the best of my recollection, my prior contacts with Debtors follow:1
(1.) I met Debtors for the first time sometime in the late 1990s or early 2000s;
(2.) I was aware at some time in the late 1990s or early 2000s that Debtors had a business of assisting foreign students in the admission process for secondary schools and colleges in the United States;2
(3.) At some time in the late 1990s or early 2000s, I visited Debtors’ home at 84 Grandview Blvd., Wyomissing Hills, Berks County, Pennsylvania, for a social event (I have no recollection of any details of the event, i.e., whether it was a sit-down dinner, a reception, or some other type of event);3
(4.) Debtors have not attended any social events at my home;
(5.) During my visit to Debtors’ home, I toured an upper floor and saw a display of antique toys shown in plexiglass-like cases (I do not recall any specifics of any of the displays);
(6.) During the tour of the antique toys at Debtors’ home, no person other than, perhaps, Mr. Reese accompanied us to answer questions about the toys (I recall nothing in particular about any discussion with Mr. Reese or any other person about the toys, other than my expression of admiration for the collection in general);4
(7.) Sometime in the late 1970s or early 1980s, I had stayed overnight at 84 Grandview Blvd., when it was owned by its previous owners, who were my friends (I do not recall any specifics of the inside of 84 Grandview Blvd. and recall specifically only that it has an out building/garage in which one of my friends lived and that it has a basketball court in the driveway, where I played basketball on numerous occasions);5
(8.) Over the past 10-12 years, I have seen Debtors a half dozen times more or less at social or institutional charitable events throughout Berks County, at which our contacts/conversations were nothing more than exchanging pleasantries; and
(9.) At some time in the past two or three years, my wife and Mrs. Reese worked together to organize a birthday party for one of their mutual friends (who is also a friend of mine).
III. DISCUSSION
A. 28 U.S.C. Section 455
Federal Rule of Bankruptcy Procedure, *533Rule 5004(a)6, states that a bankruptcy judge shall be governed by 28 U.S.C. § 455 in matters of disqualification. Section 455 sets forth the statutory requirements for the recusal of a United States Judge from hearing certain litigation.7 Only two of the sub-sections of Section 455-Section 455(a) and Section 455(b)(1)— pertain to this matter. Sub-sections 455(b)(2)-(5) do not apply to this matter. First, Section 455(a) provides:
(a) Any justice, judge, or magistrate of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.
28 U.S.C. § 455(a). Second, Section 455(b)(1) provides:
(b) He shall also disqualify himself in the following circumstances: (l)Where he has a personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceeding....
28 U.S.C. § 455(b)(1). As a United States Judge, I am also guided by the Code of Conduct for United States Judges, although the Code of Conduct neither expands upon nor extends the statutory prohibitions of Section 455.
“To invoke these provisions of Section 455, there must be a factual and reasonable basis to question the court’s impartiality.” United States v. Martorano, Crim. No. 82-11, 1987 WL 13677, at *3 (E.D.Pa. July 13, 1987). Furthermore, application of Section 455 involves a two-step analysis:
First, a charge of partiality must be supported by a factual basis. Although public confidence may be as much shaken by publicized inferences of bias that are false as by those that are true, a judge considering whether to disqualify himself must ignore rumors, innuendos, *534and erroneous information published as fact in the newspapers. To find otherwise would allow an irresponsible, vindictive or self-interested press informant and/or an irresponsible, misinformed or careless reporter to control the choice of judge. Second, disqualification is appropriate only if the facts provide what an objective, knowledgeable member of the public would find to be a reasonable basis for doubting the judge’s impartiality. Were less required, a judge could abdicate in difficult cases at the mere sound of controversy or a litigant could avoid adverse decisions by alleging the slightest of factual bases for bias. See H. Rep. No. 1453, 1974 U.S. Code Cong. & Admin. News, supra, at 6355. This restricted mandate to disqualify is calculated to induce a judge to tread the narrow path between timidity and tenacity.
In re United States, 666 F.2d 690, 695 (1st Cir.1981) (footnote and citations omitted).
Therefore, application of Sub-Sections 455(a) and (b)(1) must involve a determination of bias from the objective perspective of a reasonable person rather than from the perspective of the movant. See, e.g., Martorano, 1987 WL 13677, at *3; Barna v. Haas (In re Haas), 292 B.R. 167, 177 (Bankr.S.D.Ohio 2003). “[T]he judge need not recuse himself based on the ‘subjective view of a party’ no matter how strongly that view is held.” United States v. Sammons, 918 F.2d 592, 599 (6th Cir.1990).
Moreover, a judge “has a duty not to recuse if disqualification is not appropriate.” Martorano, 1987 WL 13677, at *3 (emphasis added); accord, e.g., United States v. Brant, Crim. A. Nos. 89-111-01, 89-111-02, 1995 WL 118214, at *1 (E.D.Pa. March 10, 1995); In re Womack, 253 B.R. 245, 246 (Bankr.E.D.Ark.2000). Although the language of Section 455 is clear, the legislative history relating to its enactment provides further interpretative assistance:
No judge, of course, has a duty to sit where his impartiality might be reasonably questioned. However, the new test should not be used by judges to avoid sitting on difficult or controversial cases. At the same time, in assessing the reasonableness of a challenge to his impartiality, each judge must be alert to avoid the possibility that those who would question his impartiality are in fact seeking to avoid the consequences of his expected adverse decision. Disqualification for lack of impartiality must have a reasonable basis. Nothing in this proposed legislation should be read to warrant the transformation of a litigant’s fear that a judge may decide a question against him into a “reasonable fear” that the judge will not be impartial. Litigants ought not to have to face a judge where there is a reasonable question of impartiality, but they are not entitled to judges of their own choice.
H.R.Rep. No. 93-1453 (1974). reprinted in 1974 U.S.C.C.A.N. 6351, 6355. “[C]ourts must exercise great care in considering motions for recusal so as to discourage their use for purposes of judge shopping or delay.” Haas, 292 B.R. at 175.
Section 455(b)(1) sets forth an explicit statement of circumstances that mandate recusal of a judge. A Seventh Circuit decision describes the working test for determining recusal/disqualification as “whether a reasonable person would be convinced the judge was biased.” Brokaw v. Mercer County, 235 F.3d 1000, 1025 (7th Cir.2000). The court further explained that recusal “is required only if actual bias or prejudice is proved by compelling evidence.” Id. In Easley v. University of Michigan Board of Regents, 906 F.2d 1143 (6th Cir.1990), a judge serving on a law *535school committee was not required to re-cuse himself from a discrimination suit against the law school because his position did not give him any knowledge of the events at issue in the underlying discrimination litigation against the school.
Section 455(a), on the other hand, does not set forth specific instances in which I should recuse myself, as Section 455(b) prescribes. Sub-section (a) is more generalized and requires an objective view when considering recusal. The question for me to answer is not whether I believe that I am biased, prejudiced, or impartial, but whether my “impartiality might be reasonably questioned.” In the Third Circuit, this reasonable person standard has been interpreted to mean: “[A] reasonable man knowing all the circumstances would harbor doubts concerning the judge’s impartiality.” Blanche Road Carp. v. Bensalem Township, 57 F.3d 253, 266 (3d Cir.1995) (quoting and relying upon prior Third Circuit decisions).
Other courts’ decisions have further refined the standard. The hypothetical reasonable person is not generally considered to be a judge because judges may have become inured to certain perceived conflicts that might genuinely offend lay persons. See United States v. DeTemple, 162 F.3d 279, 287 (4th Cir.1998). The hypothetical observer, however, “is not a person unduly suspicious or concerned about a trivial risk that a judge may be biased.” Id. A judge is obliged to consider “how things appear to the well-informed, thoughtful observer rather than to a hypersensitive or unduly suspicious person.” In re Mason, 916 F.2d 384, 386 (7th Cir.1990).
Section 455(a) can be broken into thirteen bases for recusal, seven that are frequently alleged but rarely require recusal and six in which recusal may be more likely to be granted.8 Many of these thirteen bases do not apply at all to the matter at hand, but I will mention them. The seven types of allegations that do not generally warrant recusal can be summarized as follows: (1) Rumor, speculation, beliefs, conclusions, innuendo, suspicions, opinions, and similar non-factual matters; (2) the judge’s prior statements on a point of law or policy; (3) prior rulings in the same or a related proceeding; (4) familiarity with the parties or the legal theories presented; (5) baseless personal attacks on the judge; (6) reports in the media about what the judge believes, says, or does; and (7) threats or attempts to intimidate the judge. Nichols v. Alley, 71 F.3d 347, 351 (10th Cir.1995). Nothing in this dispute appears to rely in any way on numbers (l)-(3) or (5)-(7) above; but number (4) is at issue.
Judges often cannot possibly avoid having some acquaintance with the parties or law firms that might appear before them, which is the basis of disqualifying reason (4). Direct and personal social, business, or other relationships and previous contacts with parties or counsel are generally rejected as the basis for recusal. See MacDraw, Inc., v. CIT Group Equip. Fin., Inc., 157 F.3d 956, 963 (2d Cir.1998); United States v. Morrison, 153 F.3d 34, 47-49 (2d Cir.1998). These disqualifying reasons will be further examined below.
The six types of recusal allegations that get more traction with the courts are: (8) Close personal or professional relationships with attorneys or others; (9) public comments or outside activities; (10) ex *536parte contacts; (11) involvement pertaining to a guilty plea in criminal cases; (12) the judge taking personal offense at something done or said by the parties or counsel; and (13) miscellaneous allegations of some conflict that faces the judge personally and directly. Again, this dispute does not rely on numbers (9), (10), (11), (12), or (13), but number (8) is at issue.
As mentioned above, a judge’s friendship with one or more of the attorneys, witnesses, or parties in a matter, which is disqualifying reason (8), does not ordinarily require recusal. When a judge’s close personal friend, however, was a key witness in a proceeding, when the judge remarked that he would “bend over backwards to prove he lacked favoritism” toward the witness, and when an adverse decision might jeopardize the judge’s wife’s friendship with a party’s wife, the judge should have recused himself. United States v. Kelly, 888 F.2d 732, 744-47 (11th Cir.1989). The Eleventh Circuit Court also examined a matter in which a judge’s law clerk’s father (who had himself been a law clerk for the judge) was a partner in a law firm representing one of the parties before the judge and the law clerk had actually conducted a hearing with counsel in the judge’s absence. Parker v. Connors Steel Co., 855 F.2d 1510 (11th Cir.1988). Recusal might have appeared even more appropriate because the judge openly credited his law clerk in his written opinions. Even with these close and overlapping personal and direct relationships, however, the Eleventh Circuit found the judge’s failure to recuse himself to be harmless error in Parker.
Counsel for one of the creditors acknowledged at the hearing on November 2, 2012, that he had contacted the Clerk about my recusal because of a single issue. The antique toy collection allegedly secured the debt owed to his creditor client. His client and he were concerned, based upon my passing description of my prior contacts with Debtors at the October 11, 2012 Chapter 11 status conference, that I had seen the toy collection at Debtors’ home. He was concerned that some expert or other person may have described the toys in detail and ascribed some value to some or all of them. At the November 2, 2012 hearing, I described my failure to recall any person other than perhaps Mr. Reese, accompanying us in the tour of the toys. Even if Mr. Reese had accompanied us, nevertheless, I recall no discussion or description of any toy in particular or of the collection as a whole.
B, Application of Section 455 to the Present Grounds for Recusal
The two categories of grounds for recusal discussed above under Section 455(a) obviously come down to disqualifying reasons (4) and (8) — familiarity (with the Debtors and their assets) and friendship — which are effectively the same thing, varying only in the degree of the judge’s familiarity and friendship with either counsel or the parties. I will therefore regard the request for my recusal as being based entirely upon my prior relationship with and knowledge of Debtors and the antique toy collection.
As discussed above, the decisions in MacDraw, 157 F.3d at 963, and Morrison, 153 F.3d at 47-49, reject even direct and personal social or business relationships with parties or counsel as the basis for recusal (whether positive or negative). Furthermore, MacDraw and Morrison speak to the judge’s personal and direct prior and existing relationships, not some attenuated or assumed relationship. In Kelly, 888 F.2d at 744-47, and Parker, 855 F.2d at 1523-28, the court determined that the direct and personal nature of the judge’s relationships should have led to recusal (but even the Parker court found *537that the very close, personal relationship, although possibly justifying recusal, was ultimately harmless error).
In considering my relationship with the Debtors, the decision in U.S. v. Murphy, 768 F.2d 1518, 1537 (7th Cir.1985), supports the principle that a judge should recuse himself only if the friendship between the judge and the attorney was particularly close and personal (their families were about to take a joint vacation). Id. at 1538. I have no close personal relationship whatsoever with the Debtors.
That leaves the concern that I might have special, inside knowledge of Debtors’ home or their antique toy collection. I noted above and I say again that I have no particular knowledge about the home at 84 Grandview Blvd. Even more certainly, I can say that I have no idea whatsoever about the nature, provenance, rarity, or value of any toy individually or of the collection altogether. Without demeaning this case or its parties, I can easily echo John Banner (Sergeant Hans Schultz) in the long running television sit-com Hogan’s Heroes:9 “I know nothing! NOTHING!”
As far as the particular elements of Section 455(b)(1) are concerned, I can find nothing whatsoever that might show (1) actual bias or prejudice or (2) special or otherwise relevant knowledge about any of Debtors assets. Brokaw, 235 F.3d at 1025. I have no personal bias or prejudice concerning a party and I have no personal knowledge of any disputed evidentiary facts or values. No reasonable person could believe that I was prejudiced or biased one way or another.
In conclusion, I find that none of my contacts with Debtors over the past 15 years or so requires me to disqualify or recuse myself from involvement in this proceeding. I also find and conclude that my scant knowledge about the antique toy collection is sufficiently attenuated that I need not recuse myself on the basis of knowing anything about its value.10 Beyond being required to recuse or disqualify myself, of course, is my ability and power to do so voluntarily. I believe that any decision to recuse myself, even voluntarily, based upon my contacts with Debtors and their assets would be wholly inappropriate and improper.
IV. CONCLUSION
For the foregoing reasons, I enter this Statement in support of my November 2, 2012 written Order, in which I declined to recuse myself from hearing and presiding over this Chapter 11 proceeding.
. I do not warrant the accuracy of any of my recollections of contacts with Debtors. I have recited this summary of contacts solely to the best of my memory at this time, including answering some questions by counsel at the hearing on November 2, 2012.
. Mr. Reese had been involved in admissions or some other administrative post at The Hill School in Pottstown, Pennsylvania, before leaving to form his own placement business with Mrs. Reese. Both my son and my daughter attended The Hill School, but Debtors had nothing to do with either of them in their admissions process.
. This event is the only instance in which I visited Debtors at their home.
. I received no information or description of the value of any one, of any sub-collection, or of all of Debtors' antique toys.
. Debtors' home at 84 Grandview Blvd. is only a few hundred yards from my home.
. Federal Rule of Bankruptcy Procedure, Rule 5004(a) states:
(a) Disqualification of judge—
A bankruptcy judge shall be governed by 28 U.S.C. § 455, and disqualified from presiding over the proceeding or contested matter in which the disqualifying circumstance arises or, if appropriate, shall be disqualified from presiding over the case.
. 28 U.S.C. § 455 provides:
(a) Any justice, judge, or magistrate judge of the United States shall disqualify himself in any proceeding in which his impartiality might reasonably be questioned.
(b) He shall also disqualify himself in the following circumstances:
(1) Where he has a personal bias or prejudice concerning a party, or personal knowledge of disputed evidentiary facts concerning the proceeding;
(2) Where in private practice he served as lawyer in the matter in controversy, or a lawyer with whom he previously practiced law served during such association as a lawyer concerning the matter, or the judge or such lawyer has been a material witness concerning it;
(3) Where he has served in governmental employment and in such capacity participated as counsel, adviser or material witness concerning the proceeding or expressed an opinion concerning the merits of the particular case in controversy;
(4) He knows that he, individually or as a fiduciary, or his spouse or minor child residing in his household, has a financial interest in the subject matter in controversy or in a party to the proceeding, or any other interest that could be substantially affected by the outcome of the proceeding;
(5) He or his spouse, or a person within the third degree of relationship to either of them, or the spouse of such a person:
(i) Is a party to the proceeding, or an officer, director, or trustee of a party;
(ii) Is acting as a lawyer in the proceeding;
(iii) Is known by the judge to have an interest that could be substantially affected by the outcome of the proceeding;
(iv) Is to the judge’s knowledge likely to be a material witness in the proceeding.
. My analysis of Section 455, is derived in part from a booklet provided to federal judges explaining numerous ethical issues, including recusal. See Recusal: Analysis of Case Law Under 28 U.S.C. §§ 455 & 144., Federal Judicial Center (2002). See also Judicial Disqualification: An Analysis of Federal Law, Federal Judicial Center (2d ed. 2010).
. Hogan’s Heroes presented the comedic exploits of Allied POW’s held in Luftwaffe Sta-lag 13 and ran for 168 episodes from 1965 through 1971 on the CBS television network.
. Counsel for the creditor who had the toy collection as collateral for his client's loan announced his satisfaction that I should not recuse myself. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495322/ | ORDER DENYING CONFIRMATION
DAVID R. DUNCAN, Bankruptcy Judge.
This matter comes before the Court for confirmation of a Chapter 13 plan submitted by the debtor, Anthony Martellini (“Debtor”), on July 25, 2012. The Chapter 13 Trustee (“Trustee”) objected to confirmation on July 30, 2012. The Court held a hearing regarding confirmation of the proposed plan on October 15, 2012. The Court has jurisdiction over this matter as a core proceeding pursuant to 28 U.S.C. §§ 1334 and 157. After careful consideration, the Court issues the following findings of fact and conclusions of law with respect to Debtor’s July 25, 2012 plan.
Debtor filed his Chapter 13 petition on July 15, 2012. His wife did not join in the petition with him. The filing was precipitated by a change in job status and income for Debtor. From 2007 through 2010, the United States Navy’s Space and Naval Warfare Command employed Debt- or in Orangeburg, South Carolina as a civilian within the information technology field. At the hearing, Debtor indicated that he knew his assignment in Orange-burg was temporary. According to Debt- or’s memorandum, his employer notified Debtor in late summer 2010 of the termination of his assignment in Orangeburg and relocated his position to Charleston, South Carolina. This change in his job assignment also meant a reduction in his salary, and Debtor began searching for other positions within the federal government. Shortly thereafter, he accepted a position with the Army Corps of Engineers in Charleston that had a slightly higher salary than the position to which he was being reassigned by Space and Naval Warfare Command. Debtor asserts this change in his job status resulted in the Martellinis’ gross household income decreasing by $42,376.
Debtor indicates his estimated gross monthly income is $7,727 on his Schedule I. Thus, Debtor’s annual estimated gross income is $92,724. His non-filing spouse’s estimated gross income, as listed on Schedule I, is $7,067. Consequently, Mr. and Mrs. Martellini’s combined annual gross income is $177,528, which is significantly higher than the $52,428 median family income for their state of residence, as indicated on Debtor’s Form 22C. Debt- or’s average monthly income after payroll *540deductions is $5,688, and his non-filing spouse’s average monthly income is $5,288. Therefore, their combined average monthly income is $10,976. Included in their payroll deductions are expenses for repayment of three 401(k) loans.
On Schedule A, Debtor indicates he and his wife purchased their home, which is located in Irmo, South Carolina near Lake Murray, in 2006 for $459,900. He lists the current value of the property at $413,000. On Schedule D, he states there are two mortgages on the property totaling $414,348.71. Debtor indicates the monthly payment on the mortgages is $3,153. Other secured claims listed on Schedule D include a $33,223.87 claim secured by a 2011 Chevrolet Camaro valued at $30,000; a $28,624.84 claim secured by a 2004 Four Winds 24 foot deck boat (“boat”) valued at $27,500; a $8,455.87 claim secured by a 2010 Seadoo jet ski (“jet ski”) valued at $7,500; and a $4,875.50 claim on a 2005 Chevrolet Silverado valued at $4,825. At the hearing, Debtor testified he and his wife purchased the boat in March 2007 for approximately $39,000 and the jet ski in 2009 for approximately $12,000. The Ca-maro was purchased at or near the time Debtor learned of the change in his job situation. According to Schedule E, the Internal Revenue Service has a $14,800 unsecured priority claim for Debtor’s 2009 income taxes. On his amended Schedule F, Debtor lists $71,850.79 in unsecured nonpriority claims, consisting mostly of credit card debt. At the hearing, Debtor indicated that most of the purchases made with these credit cards were for the benefit of his family, not just himself.
Debtor lists monthly expenditures totaling $9,563 on Schedule J, resulting in a monthly net income for him and his spouse of $1,413. The expenditures listed include $2,920 in other expenditures. In part, these other monthly expenditures consist of a $375 boat payment, a $241 jet ski payment, a $200 storage fee for the boat,1 and $600 rent for a room in Charleston. In his brief, Debtor asserts he saves money by renting this room in which he stays during the workweek because, when he began working in Charleston, he discovered that his fuel costs for commuting were approximately $1,000 a month, as it is 265 miles roundtrip from his home in Irmo to his work site in Charleston.
Debtor proposes a Chapter 13 plan under which his plan payments will be $1410 per month for a period of 60 months. Under the plan, $631 of the $1410 plan payment will go to the lien holder on the Chevrolet Camaro. Debtor proposes to surrender his interest in the 2005 Chevrolet Silverado to the lien holder on that vehicle. Debtor also proposes to surrender his interest in the boat and jet ski to the lien holders on those items. However, these two watercraft will not be surrendered as his non-filing spouse will remain current on the payments outside of the plan. The Trustee estimates that under the plan, Debtor will pay 26% of his unsecured debt.
The Chapter 13 Trustee objects to the plan, asserting that Debtor is not applying all of his projected disposable income to pay unsecured creditors in violation of 11 U.S.C. § 1325(b)(1) and that Debtor has not filed his plan or petition in good faith. More specifically, the bases of the Trustee’s objection are: (1) Debtor, through the artifice of surrendering his interest in luxury items and having his non-filing spouse pay for them outside the plan, is not applying all of his disposable income to the plan payment; and (2) Debtor and his *541non-filing spouse are using their incomes to maintain a luxurious lifestyle at the expense of Debtor’s unsecured creditors. Primarily, the Trustee objects to Debtor’s plan to surrender his interests in the boat and jet ski but not the items themselves. Rather, his non-filing spouse will remain current on the payments outside the plan. The Trustee asserts that while Debtor is surrendering legal ownership of the property, the plan is an attempt to retain possession of the items through his non-filing spouse. Additionally, the Trustee advances that if the $816 being used to pay for the watercraft were added to the plan payment, Debtor would pay almost 80% of his unsecured debt.
Under 11 U.S.C. § 1325(b)(1), a court may not approve a Chapter 13 plan to which the Trustee has objected, unless “the value of the property to be distributed under the plan on account of such claim is not less than the amount of such claim; or ... the plan provides that all of the debt- or’s projected disposable income to be received in the applicable commitment period beginning on the date that the first payment is due under the plan will be applied to make payments to unsecured creditors under the plan.” Section 1325(b)(2) describes how projected disposable income is calculated by defining income and allowed expenses. In re Barnes, 378 B.R. 774, 778 (Bankr.D.S.C.2007). A debtor’s sources of income consist of the following two categories: (1) “monthly income from all sources that the debtor receives (or in a joint case the debtor and debtor’s spouse receive) without regard to whether such income is taxable income” and (2) “any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents (and in a joint case the debtor’s spouse if not otherwise a dependent)_”11 U.S.C. § 101(10A); see also Barnes, 378 B.R. at 778. “The burden of proof for an objection under 11 U.S.C. § 1325(b) is a shifting burden where the Trustee ... is initially required to produce satisfactory evidence that Debtor is not devoting [his] ‘projected disposable income’ to [his] Plan and, once this burden is met, the burden shifts to Debtor to demonstrate, by a preponderance of the evidence, compliance with 11 U.S.C. § 1325(b).” Barnes, 378 B.R. at 777.
The Trustee also asserts Debtor has not filed his plan or petition in good faith. Title 11, United States Code, Section 1325(a) provides that a plan must be “proposed in good faith and not by any means forbidden by law” and that “the action of the debtor in filing the petition [must be] in good faith.” See 11 U.S.C. § 1325(a)(3), (7). “While no precise definition can be sculpted to fit the term ‘good faith’ for every Chapter 13 case,” the Fourth Circuit Court of Appeals has stated that “[b]roadly speaking, the basic inquiry [is] whether or not under the circumstances of the case there has been an abuse of the provisions, purpose, or spirit of [the Chapter] in the proposal or plan.” Deans v. O’Donnell, 692 F.2d 968, 972 (4th Cir.1982) (third alteration in original) (citation omitted). Although the Fourth Circuit rejected the importation of a per se rule of substantial repayment to unsecured creditors into the good faith requirement, it has stated substantial repayment is one factor to be considered among others in determining if a plan has been proposed in good faith. Id. Other factors might include, depending on the particular case, “the debtor’s financial situation, the period of time over which creditors will be paid, the debtor’s employment history and prospects, the nature and amount of unsecured claims, the debtor’s past bankruptcy fil*542ings, the debtor’s honesty in representing the facts of the case, the nature of the debtor’s pre-petition conduct that gave rise to the debts, whether the debts would be dischargeable in a Chapter 7 proceeding, and any other unusual or exceptional problems the debtor faces.” In re Solomon, 67 F.3d 1128, 1134 (4th Cir.1995) (citing Neufeld v. Freeman, 794 F.2d 149, 152 (4th Cir.1986)); see also Deans, 692 F.2d at 972. These factors are not exhaustive and are not intended to be a “check-list,” as a “court’s discretion in making the good faith determination is necessarily a broad one” and should be based on an examination of the totality of the circumstances on a case by ease basis. Deans, 692 F.2d at 972. Debtor has “the burden of proving by a preponderance of the evidence that [his] plan meets the confirmation requirements of § 1325(a), including the good faith requirement of § 1325(a)(3).” In re Bridges, 326 B.R. 345, 349 (Bankr.D.S.C.2005).
As the Trustee notes in her objection, if this Chapter 13 petition was a joint filing by Debtor and his spouse, the Mar-tellinis most likely would not be able to keep the watercraft at the expense of their unsecured creditors. See In re Loper, 367 B.R. 660, 664-65 (Bankr.D.Colo.2007) (“A plan should not be confirmed ‘whenever debtors include in their budgets expenditures for luxury items, or excessive expenditures for non-luxury items.’ ”) (quoting In re McDaniel, 126 B.R. 782, 784 (Bankr.D.Minn.1991)); In re Kasun, 186 B.R. 62, 64 (Bankr.E.D.Va.1995) (denying confirmation of Chapter 13 plan where debtors proposed to pay in excess of $600 per month toward their retention of a luxury boat while paying only 34.9% of their unsecured debt); In re Hedges, 68 B.R. 18, 20-21 (Bankr.E.D.Va.1986) (“The purposes of § 1325(b) would be ill-served if the Court were to allow the debtor ... to retain possession of purely recreational property not reasonably necessary for maintenance or support of the debtor or his dependents while his general unsecured creditors are to receive, over an extended period of time, less than half of the total amount of their claims.”); In re Cordes, 147 B.R. 498, 505 (Bankr.D.Minn.1992) (denying confirmation of Chapter 13 plan that included payments to the lien holder on a recreational boat notwithstanding “debtors’ lack of malice, guile or avarice”).
The present case is different because Debtor plans to surrender only his interest in the watercraft, but his family will keep the watercraft as a result of the non-filing spouse paying for them outside the plan. However, this is not the first time a court has faced such a set of circumstances. In In re McNichols, the Bankruptcy Court for the Northern District of Illinois, when confronted with a situation similar to that presented here, reasoned that “[t]he family is a functioning unit, of which the Debtor is an integral and important member, and the totality of the family’s income and expenses is appropriately considered in calculating both the disposable income of the Debtor for purposes of § 1325(b)(2) as well as the good faith requirement of § 1325(a)(3).” In re McNichols, 249 B.R. 160, 170 (Bankr.N.D.Ill.2000) (“McNichols I”). In denying confirmation of the proposed plan, the court concluded:
While a nondebtor spouse can understandably be expected to pay for certain family expenses in amounts greater than the Debtor, there is no compelling logic, as the Debtor argues, to have some reasonably necessary expenses paid 50/50 while others are borne by the spouse at a much higher percentage, especially the nonessential luxury items, such as vacation home, timeshare, housekeeper, hairdresser and manicure expenses. True enough, some of those items are purportedly to be paid for by the spouse *543from his income, but the Debtor has the direct or indirect benefit and enjoyment of same. It is not appropriate for the Debtor to “cherry pick” the family expense budget and have luxury items paid for through allocation to the non-debtor spouse so that the net effect is to maintain a luxurious lifestyle, but only pay a small dividend to unsecured creditors ....
Id. at 170. Moreover, while the McNi-chols court stated it would favor an approach where the debtor and non-filing spouse “proportionally bear reasonable and necessary family expenses to maintain the family in the same relative ratio as their respective net incomes,” it also indicated it “would disallow all unnecessary luxury items from the family budget in determining the Debtor’s disposable income.” Id. at 172. In sum, the court found it “simply inappropriate and unfair to the unsecured creditors to allow luxury items to be paid for through the expedient ploy of budgetary allocation to pay for same from the spouse’s net income when, in fact, the Debtor directly or indirectly benefits therefrom.” Id.; see also In re McNichols, 254 B.R. 422, 430-31 (Bankr.N.D.Ill.2000) (“McNichols II”) (finding that debtor had not committed all of her disposable income to fund a third amended plan and that the plan did not meet the good faith requirement and dismissing the case).
In In re Nahat, the United States Bankruptcy Court for the Northern District of Texas overruled the trustee’s objections to a Chapter 13 plan where the non-filing spouse dedicated the balance of her income to the plan after paying debts she personally incurred. In re Nahat, 278 B.R. 108, 111 (Bankr.N.D.Tex.2002). However, in doing so, the court noted it was “mindful that situations may exist requiring a different result.” Id. at 117. The court reasoned that the non-filing spouse’s income was dedicated to paying creditors and that “[t]o the extent there [was] a surplus after payment of obligations incurred by her, it [was] devoted to necessities and satisfaction of the terms of the Plan. Were that surplus being used to underwrite luxuries to be enjoyed by the Debtor and Mrs. Nahat, while the Debtor used chapter 13 for lien stripping, extensions of indebtedness and discharge of unsecured claims, there might exist grounds for dismissal of the case or denial of confirmation on the basis that the chapter 13 filing was in bad faith.” Id. In the present case, the non-filing spouse is using her income to pay for luxury items from which Debtor will derive enjoyment even if he does not personally use them. Moreover, the money owed for the boat and jet ski are debts that were incurred not just by the non-filing spouse but by Debtor as well.2
*544The Court has carefully considered Debtor’s arguments as to why his plan is proposed in good faith. While Debtor is correct that there is no per se rule of substantial repayment before a plan can be considered filed in good faith, Deans, 692 F.2d at 972, the Court cannot overlook the fact that Debtor’s family will keep two expensive recreational items while less than 30% of his unsecured debt is paid. In addition, the Court does not entirely agree with his statement that “his current financial situation arose unexpectedly and not by his own actions or financial mismanagement.” While the Court acknowledges that Debtor’s bankruptcy was precipitated by a change in his employment, Debtor testified that he knew his assignment in Orangeburg was temporary. Furthermore, Debtor has incurred debt to such an extent that he is not able remain current on his obligations even though his and his wife’s combined annual gross income is still $177,528. These obligations include over $70,000 in unsecured debt, primarily consisting of credit card debt, and debts for a $39,000 boat and a $12,000 jet ski. The jet ski and possibly the boat were purchased at a time when Debtor was working in a position that paid more than his current position but that was also temporary. Debtor indicates he attempted to refinance his home mortgage in order to reduce his monthly payments but was unable to do so because of a lack of equity. While the Court commends Debtor for his efforts at refinancing his mortgage, the Court cannot ignore the fact that he and his wife purchased the home for $459,900 and that he might be better able to afford his obligations if they had purchased a more moderately-priced home. Finally, Debtor states his wife works in a position that involves fiduciary responsibilities and that she does not want to be involved in the bankruptcy or surrender the watercraft because such an adverse credit event could result in her losing her job. However, Debtor has not presented evidence to support his assertion that if his wife surrendered the watercraft, it would result in her employment being terminated. Furthermore, in the end, what is at issue is not the non-filing spouse’s discomfort with her family’s financial situation and with the available alternatives for dealing with it but rather Debtor’s good faith.
Debtor also asserts that courts favor distributing household expenses pro rata between a Chapter 13 debtor and a non-filing spouse in order to ensure that “the bankruptcy estate has not assumed responsibility for a disproportionate share of the reasonable household expenses.” In re Herrmann, C/A No. 10-06523-JW, 2011 WL 576753 (Bankr.D.S.C. Feb. 9, 2011) (Waites, C.J.). Debtor asserts that after paying her share of the household expenses, his wife has $1,638.08 remaining, which more than covers the $816 needed for the monthly payments on the watercraft and the storage for the boat. The facts in In re Herrmann are distinguishable from those here as that case involved a married couple who filed jointly and did not allocate any of the husband’s social security income towards the payment of creditors or living expenses. In addition, one court has stated that while it favored a pro rata approach, it would also “disallow all unnecessary luxury items from the family budget in determining the Debtor’s disposable income.” McNichols I, 249 B.R. at 172.
It is not the role of this Court to instruct a non-filing spouse how to spend her income. Rather, it is this Court’s role to evaluate whether the plan before it has been proposed in good faith, and Debtor *545has the burden of proof on this issue. In re Bridges, 326 B.R. 345, 349 (Bankr.D.S.C.2005). This burden has not been met. After careful consideration, the Court finds that Debtor’s plan is in violation of 11 U.S.C. § 1325(a)(3) as it has not been proposed in good faith. More specifically, the Court finds the plan is not proposed in good faith because Debtor’s family, through the guise of Debtor ceding his interest to his .wife, proposes to continue ownership of and payments on a $39,000 boat and $12,000 jet ski while at the same time Debtor pays less than 30% of his unsecured debt, much of which Debtor testified was incurred making purchases for the family’s benefit. This combined with the purchase of the 2011 Camaro rather than a more moderately priced vehicle so near to the time of Debtor’s uncertainty with his job situation tips the balance against Debtor. It is noteworthy that a significant portion of Debtor’s monthly plan payment will be consumed to pay for the recently acquired vehicle. “Debtors do not have an entitlement, at the expense of their creditors, to maintain their prepet-ition lifestyles and status in society, especially when their prior lifestyles ‘... were characterized by luxury, excessive consumption of nonessentials, or inordinately high expenditures for purchases of necessities.’ ” In re Daniel, 260 B.R. 763, 769 (Bankr.E.D.Va.2001) (quoting In re Bottelberghe, 253 B.R. 256, 263 (Bankr.D.Minn.2000)) (omission in original). Debtor as-serfs it was the change in his employment that resulted in this bankruptcy. However, the decision by Debtor and his spouse to purchase items such as the boat, the jet ski, an expensive home, and a new vehicle and to accumulate the significant unsecured debt demonstrated in Debtor’s filings no doubt contributed to their current financial situation.3 The Court finds it “simply inappropriate and unfair to the unsecured creditors to allow luxury items to be paid for through the expedient ploy of budgetary allocation to pay for same from the spouse’s net income when, in fact, the Debtor directly or indirectly benefits” from those luxuries. McNichols I, 249 B.R. at 172. Even if Debtor no longer uses the watercraft, as he asserts, his spouse and child presumably still do, and he most likely derives enjoyment from their use of these items. This enjoyment is coming at the expense of Debtor’s unsecured creditors. This Court cannot ignore the fact that Debtor seeks to discharge a significant amount of unsecured debt, much of which Debtor testified was incurred for the benefit of the family, while, at the same time, his wife attempts to keep ownership of a $39,000 boat and $12,000 jet ski they purchased jointly. As noted by the Trustee, if the $816 paid a month to keep these items was added to the plan payment, Debtor would pay almost 80% of the unsecured debt he owes, which again was incurred mostly for the family’s benefit.4 While the Court stops short of an*546nouncing a per se rule against a non-filing spouse assuming complete ownership of and continuing to make payments on items purchased by a Chapter 13 debtor and a non-filing spouse, it does find that the plan here falls short of the good faith requirement set forth in Section 1325(a). On the other hand, the Trustee’s insistence on a per se rule that only a 100% payment plan avoids scrutiny of the expenditures of the non-filing spouse is likewise inconsistent with the law in the Fourth Circuit, which requires a thorough facts and circumstances analysis as opposed to a bright line test.
For the reasons set forth herein, it is hereby ORDERED that the Trustee’s objection to confirmation is sustained and confirmation of Debtor’s July 25, 2012 plan is denied. Debtors are given ten (10) days from the date of this Order within which to propose and file an amended plan. If no amended plan is filed within ten (10) days, this case may be dismissed without further notice or hearing.
AND IT IS SO ORDERED.
. Debtor testified at the hearing that it is necessary to store the boat somewhere else because it is too large to fit in Debtor’s driveway.
. In the Chapter 7 context, courts have confronted a similar issue in connection with arguments that the granting of relief to a debtor would amount to an abuse of the bankruptcy system. See In re Travis, 353 B.R. 520, 530 (Bankr.E.D.Mich.2006) (“Debtor has not abused the Code by failing to require his non-filing spouse to fund repayment of his obligations. The non-filing spouse is choosing to use her income to pay her unsecured creditors in full, she is not using her income to fund an extravagant lifestyle for her and the Debtor. If the Debtor’s non-filing spouse’s extra income was funding a vacation home or an expensive car for the Debtor, the Court could reach a different conclusion. In this case every dime of the non-filing spouse's income is committed to legitimate expenses of her own or household expenses of her and her dependents.”); In re Staub, 256 B.R. 567, 571 (Bankr.M.D.Pa.2000) (“I cannot simply ignore, as Debtor would have me do, the fact that he is married to a spouse whose disposable income is so great that it could pay off the entirety of his unsecured debt in a matter of months.”). But see In re Baldino, 369 B.R. 858, 862 (Bankr.M.D.Pa.2007) (finding that "Congress chose to exclude that portion of the non-filing spouse's income devoted to per*544sonal pursuits or expenses from current monthly income”).
. Additionally, the Court questions whether Debtor's renting a room in Charleston for $600 actually saves him money. He states he began renting the room after discovering his fuel expenses if he commuted from Irmo to Charleston every day would be approximately $1,000 per month. At the hearing, he testified this number was based on spending about $50 for fuel per round trip. At the hearing, he also testified that he still commutes to Charleston at least two or three times a week for various reasons. Assuming it is two times per week, his fuel costs would be $100 a week. Multiply $100 by four weeks in a month and add the $600 for rent, and it equals $1,000.
. At the hearing, Debtor indicated the reason he has not sold the boat or made more of an effort to do so is that he cannot sell it for more than what he and his wife owe on it. As for the jet ski, Debtor indicated they were close to the breakeven point where they might be able to sell it for at least what is owed on it. Even assuming the boat cannot be feasibly *546sold, Debtor does not provide evidence of efforts to at least sell the jet ski. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495323/ | OPINION
DAVID W. HOUSTON, III, Bankruptcy Judge.
On consideration before the court is a complaint to determine the dischargeability of a debt filed by the plaintiff, First Citizens National Bank (“First Citizens”), against the defendant/debtor, Amanda Trimble (“Trimble” or “debtor”); an answer to said complaint having been filed by Trimble; on proof in open court; 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 adversary proceeding as defined in 28 U.S.C. § 157(b)(2)(I).
II.
Prior to trial, the parties stipulated to the following pursuant to a joint statement of undisputed facts filed on June 28, 2011:
1. Debtor borrowed $337,500 from First Citizens National Bank evidenced by a Promissory Note and Deed of Trust signed by Debtor. Her then husband was not a borrower.
2. In connection with the loan Debtor [sic] a Uniform Residential Loan Application was initialed, signed, and dated by Debtor.
3. The Uniform Residential Loan Application was given to First Citizens National Bank in [c]onnection with the Debtor’s loan evidenced by the Promissory Note and Deed of Trust.
4. The Debtor provided the information contained in the Uniform Residential Loan Application.
5. The proceeds of the Promissory Note were used to purchase real estate located at 1259 Vinton Avenue, Memphis, Tennessee 38014 (the “Property”).
6. The Debtor never moved to live in the Property.
7. The Uniform Residential Loan Application contains the following information compared to actual: (i) Debtor’s monthly income was $13,879 in 2007; her actual income pursuant to her 2007 Form 1040 was approximately $4800 per month; (ii) Debtor leased her existing home at 2857 Summit Drive, Hernando, Mississippi 38632; Debtor never leased her home at 2857 Summit Drive, Hernando, Mississippi 38632[;] (iii) Debtor did not borrow the down payment; *550Debtor either borrowed or was given the down payment by a third party.
8. Debtor was a real estate agent at the time of obtaining the loan.
9. Debtor’s then husband was a “mortgage broker” for a mortgage business created by the Debtor. He could not get bonded because of a prior bankruptcy.
10. Debtor’s 2007 joint tax return, Schedule C (Form 1040) listed Debtor as a mortgage broker with gross sales of $58,483.
11. Debtor’s 2007 joint tax return, Schedule E (Form 1040) showed the Property as rental property.
12. Debtor’s 2007 joint tax return, Schedule S, listed Debtor with a net profit of $29,797.
13. Debtor’s 2007 Mississippi Income Tax Return listed $29,797 total income for Debtor.
14. First Citizens National Bank foreclosed on the Property on August 22, 2008.
15. First Citizens National Bank filed suit for the deficiency balance in the Circuit Court of Shelby County, Tennessee for the Thirtieth Judicial District at Memphis under Case No. CT-005298-08. A judgment was entered into in the amount of $51,453.04.
16. The debt to First Citizens National Bank was $53,754.13 at the time of commencement of this ease. Interest pursuant to the Note continues to accrue at ten percent (10%) per annum and the Note provides for reasonable attorney’s fees for its collection.
In addition, pursuant to a trial stipulation (Exhibit P-2), the parties stipulated as to the accuracy of the following amounts as of May 21, 2012:
1. Principal amount of debt = $38,091.09.
2. Interest and late fees = $19,012.60.
3. Attorney fees (only through April 30, 2012) and court costs = $9,312.21.
4. Total owed = $66,415.90.
5. Per diem interest accrual = $6.88.
III.
In its complaint, First Citizens objects to the dischargeability of the debt owed by Trimble pursuant to 11 U.S.C. § 523(a)(2)(B), or in the alternative, pursuant to § 523(a)(2)(A)1. These code sections are set forth as follows:
§ 523. Exceptions to discharge
(a) A discharge under section 727, 1141, 1228(a), 1228(b), or 1328(b) of this title does not discharge an individual debt- or from any debt—
(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained, by—
(A) false pretenses, a false representation, or actual fraud, other than a statement respecting the debtor’s or an insider’s financial condition;
(B) use of a statement in writing—
(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial condition;
(iii) on which the creditor to whom the debtor is liable for such money, *551property, services, or credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceived]
§ 523(a)(2)(A) — (B).
IY.
As noted above, the debtor applied for and obtained a loan in the amount of $337,500.00 from First Citizens to purchase a home located in Memphis, Tennessee. She initiated the loan application process through a telephone conversation with Kacey C. Kidd, (“Kidd”), a loan originator employed by First Citizens. During the telephone conversation with Kidd, the debtor provided information regarding her income, assets, and employment, as well as, information related to the property to be purchased.
The debtor signed a Uniform Residential Loan Application, (Exhibit P-3), in order to obtain the loan. The application included a column in which to list the borrower’s monthly income, as well as, a separate column to include the income of a co-borrower. In the column provided for the borrower, the debtor set forth a gross monthly employment income of $13,879.00. There was no co-borrower on the loan application, so the column applicable to the co-borrower was left blank. However, the debtor testified that the $13,879.00 figure she provided to Kidd was derived by adding her monthly income to the monthly income of her spouse who was obviously not a co-borrower.
On their 2007 joint tax return Schedule C, Profit or Loss From Business, (Exhibit P-4), the debtor reported gross income of $58,483.00, and her spouse reported gross income of $100,720.00. Using the amounts on Schedule C, the monthly gross income for both the debtor and her spouse would total approximately $13,267.00 per month.
The loan application reflects a net monthly rental income of $9.00 per month. At the time she executed the loan application, the debtor lived in a home located in Hernando, Mississippi. The debtor testified that she informed Kidd of her intention to rent the Hernando property for $3,000.00 per month after she purchased the home located in Memphis. She indicated that she obtained a rental agreement for the Hernando property prior to the loan closing, but the potential tenant never occupied the property, nor paid any rent. The $9.00 net monthly rental income amount set forth on the loan application was calculated by deducting the mortgage payment, insurance premiums, maintenance costs, and taxes applicable to the Hernando property from the anticipated $3,000.00 rental income which was never realized.
After the debtor’s loan application was approved, she executed the note and deed of trust on November 8, 2007. Not long thereafter, she defaulted, and First Citizens foreclosed on the property on August 22, 2008. First Citizens then filed suit against the debtor for the deficiency in the Circuit Court of Shelby County, Tennessee, and obtained a judgment in the amount of $51,453.04. The debtor filed for relief under Chapter 7 of the Bankruptcy Code on September 13, 2010.
V.
First Citizens originated the loan to the debtor with plans to immediately sell the loan to Countrywide Home Loans, (“Countrywide”), as part of its “stated income/stated asset” loan program. “Stated income/stated asset” loans allowed borrowers to provide income and asset information to their lenders with little or no supporting documentation. See New Jersey Carpenters Vacation Fund, et al. v. Royal Bank of Scotland Grp., PLC, 720 *552F.Supp.2d 254, 269 (S.D.N.Y. March 26, 2010). Although the borrower’s income is not verified, the stated income amount should be reasonable when considering the borrower’s employment. See id. Under this program, borrowers routinely inflated their income levels. See id.
Kidd’s deposition testimony, (Exhibit P-1), confirmed that she communicated with the debtor solely by telephone during the loan application process. Although Kidd did not specifically remember the debtor, she provided an overview of the loan application and approval process for First Citizens at the time of the debtor’s loan. It is summarized as follows:
1. As a loan originator, Kidd would originate loans for the bank to be sold on the secondary market. At the time of the debtor’s loan, Kidd did not make “in-house” loans. Instead, all loans were made to be sold to bigger companies, such as FHA, Fannie Mae, Freddie Mac, and Countrywide.
2. Ultimately, the lending decision was made by the investor to which the bank intended to sell the loan. The bank would close the loan and retain liability until the loan was sold to the investor.
8. Kidd would collect information from the borrower in person, by phone, or by mail, and transfer the collected information onto the loan application documents. She would then assign the file to a loan processor who would verify employment, obtain a credit report, order an appraisal and a title opinion, and then send the file to underwriting.
4.For a “stated income/stated asset” loan, the prospective borrower would provide income information, but the bank did not verify its accuracy. Instead, the bank would rely on the information provided by the loan applicant, coupled with the employment verification and the credit report.
5. This type loan was processed through Countrywide’s underwriting system. However, Kidd would typically make sure the information provided by the borrower “fell within the parameters or guidelines that were set in place by Countrywide.”
6. A loan processor pulled Trimble’s credit report and verified her employment, but neither of these sources revealed Trimble’s actual income.
7. The lender was not allowed to ask for tax returns or to verify income information under this loan program. As such, the bank relied on the borrower to be truthful and to provide accurate information. If ascertained by the bank, the provision of untruthful or inaccurate information would have a negative impact on the loan decision.
8. Kidd stated she would not have made a loan if a borrower lied to her.
9. In the normal process of obtaining approval for Trimble’s loan, nothing raised “red flags” to put the bank on notice that any information was incorrect. Additionally, Kidd had no reason to doubt that a real estate agent’s monthly income was $18,789.00 in 2007, the time the debtor obtained her loan.
10. First Citizens received an approval notice for the loan closing from the underwriter. Kidd did not remember the reason for Countrywide’s refusal to purchase the loan.
*553First Citizens provided additional insight in its responses to interrogatories propounded by the debtor (Exhibit D-l). The Countrywide guidelines did not require income verification because the debt- or’s credit scores were sufficient to qualify her for the “stated asset/stated income” loan. After receiving approval to close the loan from Countrywide’s underwriting system, First Citizen submitted the loan to Countrywide for purchase. However, due to an appraisal issue, Countrywide declined to purchase the loan.
VI.
The court notes that the debtor offered no evidence to contradict Kidd’s deposition testimony, nor did the debtor dispute any other evidence offered by First Citizens at trial. Instead, the debtor argued that First Citizens could not meet its burden of proof because the debtor’s false statements were not the proximate cause of First Citizens’ loss. In support of this argument, the debtor pointed out that absent the appraisal issue, it would be Countrywide, not First Citizens, to which the debtor would be liable. The Fifth Circuit has previously rejected grafting a proximate causation requirement onto § 523(a)(2). See Norris v. First Nat’l Bank in Luling (In re Norris), 70 F.3d 27, 29 n. 6 (5th Cir.1995). The debtor in Norris asserted that “a showing that the bank suffered damage as a proximate cause of the misleading financial statement is required before the debt may be declared nondischargeable.” Id. at 29. In rejecting this approach, the Fifth Circuit stated that “such a ‘proximate causation’ element would in many respects duplicate the ‘materiality’ and ‘reasonable reliance’ determinations required by § 523(a)(2)(B)© and (iv).” Id. at 29 n. 6.
Therefore, this court, relying on the instructive language of the Fifth Circuit, finds no merit in the debtor’s argument that First Citizens failed to meet its burden of proof due to a failure to show proximate causation. This finding, however, does not relieve First Citizens of its burden to prove each of the elements of nondischargeability underpinning a § 523(a)(2) claim by a preponderance of the evidence. See Grogan v. Garner, 498 U.S. 279, 291, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
VII.
As a general rule, “all debts arising pri- or to the filing of the bankruptcy petition will be discharged.” United States v. Coney, 689 F.3d 365, 371 (5th Cir.2012) (citing In re Bruner, 55 F.3d 195, 197 (5th Cir.1995)). “However, to ensure that the Bankruptcy Code’s ‘fresh start’ policy is only available to ‘honest but unfortunate debtor[s],’ Congress has provided that certain types of liabilities are excepted from the general rule of discharge.” Id. “Congress evidently concluded that the creditors’ interest in recovering full payment of debts in these categories outweighed the debtors’ interest in a complete fresh start.” Norris v. First Nat’l Bank in Luling, 70 F.3d 27 at 30.
First Citizens asserts that the debt owed by Trimble is excepted from discharge pursuant to § 523(a)(2)(B), or alternatively § 523(a)(2)(A). The Fifth Circuit recently noted the difference between these two provisions in Bandi v. Becnel (In re Bandi), 683 F.3d 671, 673-675 (5th Cir.2012):
Section 523(a)(2)(A) provides that certain debts obtained by false pretenses, a false representation, or actual fraud are nondischargeable but excludes from its coverage “a statement respecting the debtor’s ... financial condition.” Section 523(a)(2)(B) provides that certain debts obtained by a false “statement in *554writing ... respecting the debtor’s financial condition” are nondischargeable.
The Supreme Court has described these two subsections as “two close statutory companions barring discharge,” the first of which pertains to fraud “not going to financial condition” and the second of which pertains to “a materially false and intentionally deceptive written statement of financial condition upon which the creditor reasonably relied.”
In order to prevail on its primary claim that the debt is nondischargeable under § 523(a)(2)(B), First Citizens must prove the underlying four elements by a preponderance of the evidence. In re Norris, 70 F.3d at 29. The debt will be nondischargeable to the extent it is obtained by the use of a written statement:
(i) that is materially false;
(ii) respecting the debtor’s or an insider’s financial condition;
(iii) on which the creditor to whom the debtor is liable for such ... credit reasonably relied; and
(iv) that the debtor caused to be made or published with intent to deceive.
Id.; see also Gen. Elec. Capital Corp. v. Acosta (In re Acosta), 406 F.3d 367, 374 (5th Cir.2005).
A statement is materially false if it “paints a substantially untruthful picture of a financial condition by misrepresenting information of the type which would normally affect the decision to grant credit.” Jordan v. Se. Nat’l Bank (In re Jordan), 927 F.2d 221, 224 (5th Cir.1991); see also In re Norris, 70 F.3d at 30 n. 10.
The term “financial condition” as used in § 523(a)(2)(B)(ii), means “the general overall financial condition of an entity or individual[.]” In re Bandi, 683 at 676.
Under § 523(a)(2)(B), ... “intent to deceive may be inferred from use of a false financial statement.” In re Young, 995 F.2d 547, 549 (5th Cir.1993). A judge may look at the totality of the circumstances and infer an intent to deceive when “[rjeckless disregard for the truth or falsity of a statement combined with the sheer magnitude of the resultant misrepresentation may combine” to produce such an inference. Norris v. First Nat’l Bank (In re Norris), 70 F.3d 27, 31 n. 12 (5th Cir.1995) (quoting In re Miller, 39 F.3d 301, 305 (11th Cir.1994)).
Morrison v. W. Builders of Amarillo, Inc. (In re Morrison), 555 F.3d 473, 482 (5th Cir.2009).
VIII.
The court will first address whether the written statement used by Trimble was materially false with respect to her financial condition, and was made or published with an intent to deceive. It is obvious that Trimble’s loan application was a statement respecting her financial condition as defined by In re Bandi. On the loan application, the debtor overstated her income by more than 250% when she indicated that her gross monthly income was $13,879.00 per month. In fact, it was approximately $4,800.00 per month. In doing so, the debtor painted a substantially untruthful picture of her financial condition by misrepresenting information of the type which would normally affect the decision to grant credit. In re Jordan. Although the court may infer an intent to deceive as discussed in In re Morrison, there is no need to do so because Trimble’s intent to deceive is blatantly obvious by her own admissions. She testified that, as a real estate agent, she was familiar with the level of income required to qualify for loan approval, and then admitted that she overstated her income information in order to meet the income requirement. Conse*555quently, First Citizens has unquestionably met elements (i), (ii), and (iv) required by § 523(a)(2)(B).
IX.
The final element that that First Citizens must establish is reasonable reliance. Under § 523(a)(2)(B), the determination of the reasonableness of a creditor’s reliance is to be made “in light of the totality of the circumstances.” Coston v. Bank of Malvern (In re Coston), 991 F.2d 257, 261 (5th Cir.1993) (en banc). However, before making a determination on whether the reliance was reasonable, the court must first determine whether the reliance was actual:
The reliance component of § 523(a)(2)(B) is a two-step analysis: (1) the creditor must first show that it actually relied on the financial statement and (2) that reliance must be reasonable. To establish actual reliance, the creditor must show its reliance on the false financial statement was “a contributory cause of the extension of credit and that credit would not have been granted if the lender had received accurate information.” Although actual reliance must be demonstrated, a creditor does not have to show that it relied exclusively on the false financial statement. It is sufficient if the creditor establishes that it partially relied on the false statement.
Colo. E. Bank & Trust v. McCarthy (In re McCarthy), 421 B.R. 550, 560-61 (Bankr.D.Colo.2009) (internal footnotes omitted).
In utilizing this two-step analysis, the court turns again to Kidd’s deposition testimony. Kidd testified that, as the loan originator, she would ensure the information provided by the borrower fell within certain guidelines and parameters promulgated by Countrywide under its “stated income/stated asset” loan program. One such parameter, which was known by the debtor according to her own admission, was a certain level of income. First Citizens relied on the debtor’s inflated income level, among other things, to determine the debtor’s eligibility before submitting the loan application to Countrywide for approval. The debtor acknowledged that without such an overstatement of her income she would not have qualified for the loan. As such, the court finds that the income level provided by the debtor was a significant cause in her obtaining the loan approval, and that she would not have obtained the loan had she provided accurate information. Therefore, the court is of the opinion that that First Citizens actually relied on the debtor’s materially false financial statement.
In addition to actual reliance, First Citizens must also show that its reliance was reasonable. “The issue of reasonableness is not whether it was reasonable for the [b]ank to have made the [loan] to the [d]ebtor, but whether it was reasonable for the [b]ank to have relied upon the [d]ebtor’s financial statements in making the [loan].” In re McCarthy, 421 B.R. at 562. Ultimately, the reasonableness of a creditor’s reliance rests on the particular facts of each case. In re Coston, 991 F.2d at 261.
The bankruptcy court may consider, among other things: whether there had been previous business dealings with the debtor that gave rise to a relationship of trust; whether there were any “red flags” that would have alerted an ordinarily prudent lender to the possibility that the representations relied upon were not accurate; and whether even minimal investigation would have revealed the inaccuracy of the debtor’s representations.
Id.
In agreeing with the factors articulated by the Fifth Circuit in In re Coston, the *556Court of Appeals for the Third Circuit added two factors relating to the standard practices and customs of the creditor and the creditor’s industry. See Insurance Co. of N. America v. Cohn (In re Cohn), 54 F.3d 1108, 1117 (3d Cir.1995).
The reasonableness of a creditor’s reliance under § 523(a)(2)(B) is judged by an objective standard, i.e., that degree of care which would be exercised by a reasonably cautious person in the same business transaction under similar circumstances.
A determination of reasonable reliance requires consideration of ... (1) the creditor’s standard practices in evaluating credit-worthiness (absent other factors, there is reasonable reliance where the creditor follows its normal business practices); (2) the standards or customs of the creditor’s industry in evaluating credit-worthiness (what is considered a commercially reasonable investigation of the information supplied by debtor[.])
Id. (citations omitted).
When considering relevant factors, a court may find a creditor’s reliance was reasonable where nothing in the financial statement presents a “red flag” that would invoke a duty to investigate. See Young v. Nat’l Union Fire Ins. Co., 995 F.2d 547, 549 (5th Cir.1993); see also In re McCarthy, 421 B.R. at 562.
It is significant that First Citizens did not exclusively rely on the information provided by the debtor in the loan application process. Kidd stated that she would first ensure that the information provided by a prospective borrower fell within the program guidelines established by Countrywide. Because Trimble’s income was not verified, the bank depended on other sources to determine her eligibility. First Citizens obtained a credit report and verified Trimble’s employment prior to submitting the application to Countrywide. In its responses to interrogatories, First Citizens asserted that Trimble’s credit scores were sufficient to qualify her for the “stated income/stated asset” loan program. Additionally, she had “purportedly” unbor-rowed funds available to make the down payment for the home purchase in the amount $37,500.00.
Furthermore, Kidd testified that she had no reason to doubt that a real estate agent’s monthly income in 2007 was $13,879.00. She also testified that there were no “red flags” to put the bank on notice that the information provided by Trimble in the loan application was incorrect. Kidd stated that she would not have made a loan if she were aware that Trim-ble had lied to her.
In hindsight, it is now known that inherent problems existed with the “stated income/stated asset” loan program. By its very definition, a “stated income/stated asset” loan required the lender to partially rely on the income and assets “stated” by the borrower in the loan application. However, these loans were commonly utilized in the lending industry and available to borrowers when Trimble obtained her loan. First Citizens sold these loans not only to Countrywide, but to FHA, Fannie Mae, and Freddie Mac as well. Although in retrospect the practices utilized in the “stated income/stated asset” loan program were perhaps not the most prudent, the court finds that these practices were consistent with the standards or customs of the lending industry at that time. As a seasoned real estate agent, Trimble knew how to manipulate the borrowing procedures of this loan program and did so. Accordingly, the court finds that the totality of the circumstances indicates that the reliance by First Citizens on the debtor’s materially false financial information was reasonable.
*557X.
The court is of the opinion that First Citizens has met is burden in proving that the debt owed by the debtor is nondis-chargeable under § 523(a)(2)(B). Because of this conclusion, the court will not consider at this time the alternative claim of nondischargeability asserted by First Citizens pursuant to § 523(a)(2)(A).
A judgment in the sum of $57,103.69, ($38,091.09 plus $19,012.20), which represents the principal balance plus interest and late fees accrued as of May 21, 2012, shall be awarded in favor of First Citizens against Trimble consistent with this opinion. Said judgment shall be a nondis-chargeable debt in Trimble’s bankruptcy case pursuant to § 523(a)(2)(B). Interest shall accrue thereon from the date of entry of said judgment at the highest rate permitted by state law.
Although the parties stipulated that attorney fees and court costs had accrued as of April 30, 2012, in the sum of $9,312.21, the court is unaware as to whether this amount was considered reasonable or necessary. Therefore, the attorney representing First Citizens shall submit an itemization of his fees and expenses to the court, with a copy to the debtor’s attorney, within 20 days of the date of this opinion. The debtor’s attorney shall have 10 days thereafter to object to the reasonableness and necessity of said fees and expenses. The court will then enter a separate judgment finalizing the award.
An order, consistent with this opinion, shall be entered contemporaneously herewith.
. Hereinafter, all Code sections cited in this opinion will be considered as sections of the United States Bankruptcy Code unless specifically designated otherwise. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495324/ | Opinion Granting In Part Debtor’s Motion For Willful Violation Of The Automatic Stay
PHILLIP J. SHEFFERLY, Bankruptcy Judge.
Introduction
This opinion deals with an individual debtor’s motion seeking damages for a willful violation of the automatic stay under § 362(k) of the Bankruptcy Code. For the reasons set forth in this opinion, the Court grants the motion in part and finds that there was a willful violation of the automatic stay under § 362(k).
Jurisdiction
This is a proceeding arising under title 11, over which the Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157(a).
Facts
The following facts are not disputed.
Bill A. Kallabat is the Debtor in this Chapter 7 bankruptcy case. The Debtor is a pro se defendant in a divorce case pending in the Oakland County Circuit Court, case no. 2011-787798-DM (“Divorce Case”). The Debtor’s wife, Nagham Kal-labat (“Mrs. Kallabat”), is represented by Victor & Victor, PLLC (‘Victor”) in the Divorce Case. The Divorce Case was scheduled for trial on June 5, 2012. One day prior to the trial, the Debtor filed this Chapter 7 case. Upon filing the Chapter 7 petition, the Debtor’s bankruptcy attorney telephoned Victor’s office and left a message and a voice mail informing Victor that *567the Debtor had filed this Chapter 7 case. In addition, the Debtor’s bankruptcy attorney also sent an email on June 4, 2012 with a copy of a notice issued by the Bankruptcy Court showing that the Debtor had filed the Chapter 7 bankruptcy petition. Later that day, Victor left a telephone message with the Debtor’s bankruptcy attorney acknowledging receipt of the email with a copy of the Debtor’s notice of bankruptcy case. On the evening of June 4, 2012, the Debtor’s bankruptcy attorney spoke with an attorney at Victor, who informed the Debtor’s bankruptcy attorney that despite the bankruptcy case, he intended to proceed with the trial of the Divorce Case the following day.
On June 5, 2012, the Debtor’s bankruptcy attorney traveled to the Oakland County Circuit Court at 8:30 a.m. to file with that court a copy of notice of the Debtor’s bankruptcy case. The Debtor’s bankruptcy attorney then delivered a time-stamped copy of the bankruptcy notice to the chambers of the Honorable Cheryl A. Matthews, the Oakland County Circuit Court Judge presiding over the Divorce Case. At 9:34 a.m. on June 5, 2012, the Divorce Case was called. The Debtor’s bankruptcy attorney appeared and informed Judge Matthews on the record of the Debtor’s bankruptcy filing. Victor told Judge Matthews that it wished to proceed with the Divorce Case. Judge Matthews indicated that the Divorce Case should go forward notwithstanding the Debtor’s Chapter 7 bankruptcy case. Judge Matthews acknowledged the automatic stay of § 362 of the Bankruptcy Code, but explained that, “although pursuant to 11 U.S.C. § 362(b), the — certain matters in a divorce case are stayed, certainly, I’m still able to do certain things, including divorce the parties, and I intend to do that....” (Divorce Case Tr. June 5, 2012, 7:14-18.)
Judge Matthews then inquired of Victor whether there was any joint property or any joint debts of the parties to the Divorce Case. Victor explained that the parties did not have any joint property, but they did have a joint debt. Victor informed Judge Matthews that , there was a credit card that the Debtor had fraudulently opened in Mrs. Kallabat’s name at Comerica and requested that Judge Matthews require the Debtor to pay the credit card balance of $4,000.00 because of the Debtor’s fraud. Judge Matthews asked whether Victor’s request violated the automatic stay:
THE COURT: Are you asking to attribute that to him? Does that violate the stay?
MR. VICTOR: It does not violate the stay considering the fact that the debt is either going to be the same or discharged. Thus, awarding it to him would not be prejudicial to him because, at the very worst, he’ll owe what he already owes, nothing more. Best for him is that it’s discharged. Either way, my client should bear no liability for it.
(Tr. 8:22-25 to 9:1-5.)
The Debtor requested that the trial of the Divorce Case not go forward. Judge Matthews stated that she could not divide up any joint property because of the Debt- or’s bankruptcy case, but that she would go forward with the trial of the Divorce Case.
THE COURT: Well, that’s property. I can’t split it up today. I can’t split it up.
THE COURT: I’m going to divorce you and award spousal support and child support, if any, and I can order custody. I can’t — I just can’t split a property or a debt; that’s the only thing I can’t do *568because you filed for bankruptcy yesterday.
(Tr. 20:19-20; 21:1-5.)
Judge Matthews then held the trial of the Divorce Case. Mrs. Kallabat testified first. Then the Debtor testified. At the conclusion of the trial, Victor and the Debtor each made a closing argument. Victor requested that the Court dissolve the marriage, make provision for custody of the children, and order the Debtor to pay support. In addition, Victor made two other requests. First, it requested that Judge Matthews hold the Debtor responsible for the Comerica credit card debt of $4,000.00 because, Victor claimed, the credit card account was opened by the Debtor in the name of Mrs. Kallabat without her permission and was therefore fraudulent. Second, Victor requested that Judge Matthews award the marital home to Mrs. Kallabat free and clear of any interest by the Debtor.
MR. VICTOR: Then there was the issue of the credit card that my client was out of the country, for which when Mr. Kal-labat applied for, that will be part of the bankruptcy proceedings, but in the event that the debt is not discharged at the disposition of the bankruptcy proceeding, we would ask that the Court make Mr. Kallabat solely liable for that debt, being that he is the only beneficiary of the expenditures from same.
I believe that the testimony further shows that the home that is deeded and financed solely by the Plaintiff [Mrs. Kallabat] should be awarded to her free and clear. Mr. Kallabat testified that he intends to move out into an apartment anyway.
(Tr. 76:3-15.)
At the conclusion of the trial, Judge Matthews made certain findings and rendered her decision. Judge Matthews dissolved the marriage, awarded custody of the children, and awarded support to Mrs. Kallabat. Judge Matthews also noted that because of the Debtor’s Chapter 7 bankruptcy case, she could not adjudicate property interests of the parties to the Divorce Case.
THE COURT: There are certain things that I cannot decide as I already placed on the record based on the bankruptcy. So I’m going to set a review date for a time after the bankruptcy, which was filed only yesterday. And, therefore, there’s a stay, but that’s only as to property. And property would include the items in the marital home and the house.
(Tr. 91:14-19.)
Judge Matthews ruled as follows with regard to Victor’s last two requests concerning liability for the Comerica credit card and the awarding of the marital home. First, with respect to the credit card, Judge Matthews required the Debtor to pay the balance and relieved Mrs. Kalla-bat of any liability.
THE COURT: He has to pay on the one that’s in her name that he applied for because that’s uncontroverted evidence, right?
MR. VICTOR: Okay, so that’s what I would ask about that, that debt—
THE COURT: Yeah, I think I can do that, can’t I?
MR. VICTOR: I mean, that would then ultimately be between him and the bankruptcy. At least for purposes of this Court’s jurisdiction, she’s relieved.
THE COURT: Right. Right.
(Tr. 113:3-12.) As for the marital home, Judge Matthews reiterated that “I’m not awarding any property, such as the house right now,” (Tr. 109:7-8), but did order the Debtor to leave the marital home.
Judge Matthews then instructed Victor to submit a proposed order memorializing *569the Court’s rulings. Victor drafted a proposed judgment of divorce (“Proposed Judgment”) and submitted it to the Oakland County Circuit Court for entry.
On June 13, 2012, the Debtor filed a motion (docket entry no. 10) in the Bankruptcy Court seeking actual and punitive damages for a willful violation of the automatic stay pursuant to § 362(k) of the Bankruptcy Code.1 The motion alleges in paragraph 12 that “Victor, with Judge Matthews’ approval, put in testimony and proofs regarding disposition of marital assets, including, without limitation, the removal of the Debtor from the marital home.” The motion also attaches a copy the Proposed Judgment. The motion then alleges that these facts constitute a willful violation of the automatic stay. The motion does not specify who violated the stay but instead, in the prayer for relief, requests that the Court “[djetermine the individuals or entities in willful violation of 11 USC § 362” and “[ajward actual and punitive damages against those individuals or entities in amounts to [sic] determined by this Court.”
Mrs. Kallabat filed an objection (docket entry no. 21) to the motion. Victor filed a separate objection (docket entry no. 22). Mrs. Kallabat’s objection argues that there was no violation of the automatic stay of § 362(a) of the Bankruptcy Code, because all of the actions that took place in the Divorce Case on June 5, 2012 and thereafter are excepted from the automatic stay pursuant to § 362(b)(2)(A) of the Bankruptcy Code. Victor’s objection does not address whether the proceedings in the Divorce Case were stayed by § 362(a) of the Bankruptcy Code or were excepted from the automatic stay under § 362(b) of the Bankruptcy Code. Victor’s objection does not cite either of those statutory provisions, but instead makes a number of allegations about the Debtor’s behavior before and during the Divorce Case, and then requests an award of attorney fees against the Debtor and the Debtor’s bankruptcy attorney under 28 U.S.C. § 1927 for vexatious litigation.
On June 27, 2012, the Court heard the Debtor’s motion. At the hearing, counsel for the Debtor, Mrs. Kallabat and Victor informed the Court that there was a hearing scheduled in the Divorce Case in Oakland County Circuit Court on July 11, 2012 to determine whether to enter the Proposed Judgment. Although the Debtor’s motion attached a copy of the Proposed Judgment, the parties did not provide the Court with a copy of the transcript of the June 12, 2012 state court trial. At the conclusion of the hearing, the Court requested that the Debtor file a copy of the transcript with the Bankruptcy Court and then entered an order (docket entry no. 28) authorizing the Debtor to file the copy of the transcript under seal. The Court took the Debtor’s motion under advisement. On June 29, 2012, the Debtor filed a copy of the transcript under seal (docket entry no. 30). On July 6, 2012, the Court held a hearing to infomrthe parties of the Court’s ruling and also stated that the Court would enter its own order to memorialize its ruling. On July 10, 2012, the Court entered the order (docket entry no 33). This opinion sets forth the reasons for the Court’s ruling and supplements the record at the hearing on July 6, 2012. If there are any inconsistencies between the Court’s statements on the record at that *570hearing and the statements in this opinion, this opinion governs.
Applicable Law
Section 362(a) of the Bankruptcy Code provides a very broad stay of actions when an individual debtor files a bankruptcy case. Section 362(a)(1) stays the commencement or continuation of any judicial action “against the debtor that was or could have been commenced before [the bankruptcy case was filed] to recover on a claim against the debtor that arose before the commencement of the [bankruptcy case.]” Section 362(a)(3) stays “any act to obtain possession of property of the [bankruptcy] estate or to exercise control over property of the [bankruptcy] estate[.]” Section 362(a)(6) stays “any act to collect, assess, or recover a claim against the debt- or that arose before” the bankruptcy case.
However, § 362(b) of the Bankruptcy Code contains numerous statutory exceptions to the automatic stay. The exceptions that may be relevant to the Debtor’s motion are all contained in § 362(b)(2)(A). That subsection states that the filing of a bankruptcy case does not operate to stay the commencement or continuation of a civil proceeding
(i) for the establishment of paternity;
(ii) for the establishment or modification of an order for domestic support obligations;
(iii) concerning child custody or visitation;
(iv) for the dissolution of a marriage, except to the extent that such proceeding seeks to determine the division of property that is property of the estate; or
(v)regarding domestic violence[.]
Section 362(k)(l) of the Bankruptcy Code provides that “an individual injured by any willful violation of a stay provided by this section shall recover actual damages, including costs and attorneys’ fees, and, in appropriate circumstances, may recover punitive damages.”
[A] “willful violation” [does] not require proof of a specific intent to violate the stay, but rather an intentional violation by a party aware of the bankruptcy filing.... A violation of the automatic stay can be willful when the creditor knew of the stay and violated the stay by an intentional act.
TranSouth Financial Corp. v. Sharon (In re Sharon), 234 B.R. 676, 687-88 (6th Cir. BAP 1999) (citations omitted). A debtor may recover actual damages and bears the burden of proof. “[A] damage award must not be based on ‘mere speculation, guess, or conjecture.’ Proof of damages requires that degree of certainty that the nature of the case admits.” In re Perrin, 361 B.R. 853, 856 (6th Cir. BAP 2007) (quoting Archer v. Macomb County Bank, 853 F.2d 497,499 (6th Cir.1988)).
Discussion
The Debtor’s Chapter 7 bankruptcy petition did not stay the entire Divorce Case. Section 362(b)(2)(A)(iv) makes it clear that a proceeding to dissolve a marriage is not stayed by § 362(a). Similarly, § 362(b)(2) (A) (ii) makes it clear that the establishment of a domestic support obligation is not stayed.2 Further, *571§ 362(b) (2) (A) (iii) excepts from the automatic stay proceedings concerning child custody or visitation. The first question before this Court is whether the actions described in the Debtor’s motion are within or outside of these exceptions to the automatic stay.
After carefully reviewing the transcript of the Divorce Case trial, the Court concludes that Mrs. Kallabat and Victor were not stayed by the Debtor’s bankruptcy case from continuing the Divorce Case to dissolve the marriage, to determine child custody and visitation for the Debt- or’s children, nor to establish any domestic support obligations to be paid by the Debt- or. To argue, as the Debtor’s motion does, that the entire Divorce Case was stayed and that the trial should not have gone forward on June 5, 2012 is simply incorrect as a matter of law. But that does not mean that every request for relief made at the trial was within one of the § 362(b)(2)(A) exceptions to the automatic stay of the Bankruptcy Code. An examination of the transcript shows that there were two separate requests for relief that were made at the trial in violation of the automatic stay of § 362(a) and that were not within any of the exceptions contained in § 362(b)(2)(A).
First, the request that Mrs. Kalla-bat be awarded the marital home free and clear of any interest of the Debtor violated § 362(a)(3). Section 362(b)(2)(A)(iv) elearly states that there is an exception to the automatic stay for dissolution of a marriage, but qualifies that exception by saying that it does not apply “to the extent that such proceeding seeks to determine the division of property that is property of the estate!.]” Whatever interest, if any, that the Debtor may have in the marital home, became property of the Debtor’s bankruptcy estate when he filed his Chapter 7 petition on June 4, 2012. See 11 U.S.C. § 541(a). As a result, § 362(a)(3) stayed any request that the Oakland County Circuit Court adjudicate the Debtor’s interest in the marital home. Despite this fact, as noted above, the transcript shows that Victor expressly did make such a request. There is nothing in the transcript to show that Mrs. Kallabat made the request, but instead the transcript shows it was Victor that did so. The transcript also shows that despite Victor’s request, when Judge Matthews made her ruling (Tr. 91:14-19), Judge Matthews was careful to state that she was not adjudicating property interests of the parties because of the automatic stay. Therefore, the transcript demonstrates that only Victor violated the automatic stay by requesting an adjudication of the property rights of the Debtor in the marital home.
The second place where there was a violation of the automatic stay at the trial pertains to the request by Victor that the Oakland County Circuit Court impose liability upon the Debtor for the $4,000.00 *572balance owing on the Comerica credit card account. The sole basis for Victor’s request to make the Debtor liable for the $4,000.00 balance on the Comerica credit card was Mrs. Kallabat’s allegation that the Debtor had defrauded Mrs. Kallabat by signing her name to open the account. Unlike the establishment of a domestic support obligation, which is by definition in the nature of support, the request to impose liability because of fraud is plainly based upon a pre-petition claim that Mrs. Kallabat holds against the Debtor that has nothing to do with Mrs. Kallabat’s need for support. The assertion of this claim violates § 862(a)(1) and (6) of the Bankruptcy Code and is not within any of the specific exceptions of § 362(b)(2)(A). The transcript shows that it was Victor, and not Mrs. Kallabat, that made this request. By requesting the Oakland County Circuit Court to hold the Debtor responsible for this $4,000.00 credit card balance for fraud, Victor violated the automatic stay. When Judge Matthews determined that the Debtor was responsible to pay the $4,000.00 balance on the Comerica credit card, she cited only fraud as the factual and legal basis.
In sum, there were two violations of the automatic stay that occurred at the trial of the Divorce Case on June 5, 2012, and both of them were by Victor: (i) Victor’s request to adjudicate property rights in the marital home; and (ii) Victor’s request to impose liability upon the Debtor for the Comerica credit card account because of fraud.
But the Debtor’s motion also alleges that Mrs. Kallabat and Victor are continuing to violate the automatic stay by requesting the Oakland County Circuit Court to enter the Proposed Judgment in the Divorce Case. After reviewing the Proposed Judgment, the Court finds that most of the sections of the Proposed Judgment set forth requests for relief that are clearly within the exceptions to the automatic stay contained in § 362(b)(2)(A). In that respect, the Proposed Judgment is consistent with what the transcript reflects took place at the trial. However, the Proposed Judgment, like the trial, contains some requests for relief that are not within the exceptions of § 362(b)(2)(A). Even worse, the Proposed Judgment has a number of requests for relief that were not made at trial and that go far beyond the exceptions of § 362(b)(2)(A). Therefore, the Court agrees with the Debtor that the submission of the Proposed Judgment for entry by the Oakland County Circuit Court constitutes a separate, independent violation of the automatic stay.
First, the Proposed Judgment contains a section entitled “PROPERTY AWARD.” This section acknowledges the Debtor’s bankruptcy case, but also contains a finding that “this Court’s adjudication and award of real and personal property in this matter is stayed pending the disposition of Defendant’s filing in the Bankruptcy Court.” It is not entirely clear what the Proposed Judgment is trying to do by this sentence. But it does seem to imply that the Oakland County Circuit Court has made an “adjudication and award of real and personal property” as between Mrs. Kallabat and the Debtor, albeit one that is stayed for the time being because of the Debtor’s bankruptcy case. The language is confusing but, more importantly, it does appear to request recognition of some adjudication of property rights. To that extent, it violates the automatic stay.
Another section of the Proposed Judgment is entitled “LIABILITIES.” Some parts of this section deal with debts that are described as being in the nature of support. Those parts are excepted from the automatic stay by § 362(b)(2)(A)(ii). However, there is also a paragraph in this *573section that does not say anything about support, but instead holds that the Debtor is “solely liable for 100% of the debt and liability owed for the Comerica Credit Card in the name of [MRS.] KALLABAT ..., with an approximate balance of $4,000.” Unlike the other financial obligations imposed upon the Debtor and described in the Proposed Judgment as support, this particular financial obligation does not recite that it is in the nature of support. That is consistent with what is reflected in the transcript of the trial, which shows that Judge Matthews made this determination of liability based solely upon a finding that the Debtor had defrauded Mrs. Kallabat. To the extent that the submission of the Proposed Judgment again seeks a determination that the Debt- or is responsible for this debt because of fraud, it again violates the automatic stay because this debt is based upon a pre-petition claim against the Debtor that is not within one of the exceptions to the automatic stay provided by § 362(b)(2)(A) of the Bankruptcy Code.
Another section of the Proposed Judgment is entitled “PENSION, PROFIT SHARING, LIFE INSURANCE AND RETIREMENT.” This section of the Proposed Judgment goes far beyond anything contained in the trial transcript. This section contains findings extinguishing property rights of the Debtor. It reads as follows:
IT IS FURTHER ORDERED AND ADJUDGED that the interest which either of the parties hereto may now have or may heretofore have had in any of the life insurance, annuity, endowment, retirement accounts, IRAs, 401(k)s, or pension contracts or policies of the other party, shall be and the same is hereby extinguished and the parties hereto shall, in the future, hold all such life insurance, annuities, endowments, retirement accounts, IRAs, 401(k)s or pensions free and clear of any right or interest which the other party now has or may heretofore have had therein or thereto, by virtue of being the beneficiary, the contingent beneficiary or otherwise.
There is no question that this section purports to determine the division of property that is property of the Debtor’s bankruptcy estate. This request violates § 362(a)(3) of the Bankruptcy Code and is not within the exception to the automatic stay of § 362(b)(2)(A)(iv).
Finally, there is another section in the Proposed Judgment entitled “TERMINATION OF INSURANCE BENEFICIARY RIGHTS.” It reads as follows:
IT IS FURTHER ORDERED AND ADJUDGED that all rights of either party in and to the proceeds of any policy or contract of life insurance, endowment, or annuity upon the life of the other in which said party was named or designated as beneficiary, or to which said party became entitled by assignment or change of beneficiary during the marriage or in anticipation thereof, whether such contract or policy was heretofore or shall hereafter be written or become effective, shall terminate as of the date of entry of this Judgment of Divorce and shall hereupon become and be payable to the estate of the owner of said policy, or such named beneficiary as shall hereafter be affirmatively designated.
There is no reference to this request for relief at all in the trial transcript. The request to have the Oakland County Circuit Court enter the Proposed Judgment, with this adjudication of rights in the insurance contracts, clearly violates the automatic stay provisions of § 362(a)(3) of the Bankruptcy Code because it seeks to determine a division of property that is *574property of the bankruptcy estate of the Debtor.
To recap, the Court finds that Mrs. Kal-labat and Victor were not stayed from going forward with most of the requests for relief that they made at the trial of the Divorce Case on June 5, 2012, nor from submitting most of the requests for relief that are in the Proposed Judgment. But any requests to divide property or impose liability other than for support, whether during the trial or later in the Proposed Judgment, were stayed.
Having determined that there were two violations of the automatic stay, the next question is whether these violations were willful such that they give rise to liability under § 362(k) of the Bankruptcy Code. The Debtor’s motion nowhere says exactly who the Debtor is seeking relief against, but a fair reading of the Debtor’s motion is that it requests relief against Mrs. Kalla-bat and Victor, only. The Debtor has not said, either in the motion or at the hearing on June 27, 2012, whether there are any other persons or entities against whom the Debtor is seeking relief.3 Therefore, the Court will consider the Debtor’s request for relief solely with respect to Mrs. Kalla-bat and Victor.
The Debtor does not allege, and the transcript does not show, that Mrs. Kallabat in any way willfully violated the automatic stay. The actions described in the Debtor’s motion were all taken by Victor, both during the trial on June 5, 2012 and in submitting the Proposed Judgment. Although Victor is the representative of Mrs. Kallabat in the Divorce Case, there is no basis for this Court to conclude that Mrs. Kallabat in any way willfully violated the automatic stay. However, the same is not true with respect to Victor.
Victor does not deny knowing of the Debtor’s bankruptcy petition being filed on June 4, 2012 prior to the trial of the Divorce Case. Victor knew of the bankruptcy case but chose to proceed with the trial. Victor could have asked Judge Matthews to decide whether the automatic stay applied, as the Oakland County Circuit Court has concurrent jurisdiction to make such determination. “As a general rule, the filing of a bankruptcy petition operates to stay, among other things, the continuation of a judicial proceeding against the debtor that was commenced before the petition. But the automatic stay protection does not apply in all cases.... The court in which the judicial proceeding in pending ... has jurisdiction to decide whether the proceeding is subject to the stay.” Dominic’s Restaurant of Dayton, Inc. v. Mantia, 683 F.3d 757, 760 (6th Cir.2012) (citing in part NLRB v. Edward Cooper Painting, Inc., 804 F.2d 934, 939 (6th Cir.1986)) (other citations omitted). “If the non-bankruptcy court’s initial jurisdictional determination is erroneous, the parties run the risk that the entire action later will be declared void ab initio.” Chao v. Hospital Staffing Services, Inc., 270 F.3d 374, 384-85 (6th Cir.2001) (citations omitted).
But Victor did not ask Judge Matthews to determine whether the automatic stay applied. Instead, the transcript shows that Victor and Judge Matthews discussed in a very general way the effect of the automatic stay upon the trial that day, but they did not discuss § 362(a) nor any of the express statutory exceptions to it set *575forth in § 362(b). Victor did not cite Judge Matthews to any exceptions to the automatic stay that it felt might be applicable when it proceeded to try the Divorce Case. Although Victor made the conclusory statement during the trial that it was not acting in violation of the automatic stay, it offered no statutory authority or other basis for that statement. Victor knew of the bankruptcy case, and then undertook the deliberate act of requesting the Oakland County Circuit Court to adjudicate property interests of the Debtor and to impose liability on the Debtor because of a pre-petition fraud claim that Mrs. Kallabat held against the Debtor. Even if Victor did not intend to violate the automatic stay, and even if Victor believed that its requests for relief did not violate the automatic stay, it willfully violated the stay. The question then becomes what is the proper remedy.
The remedy for any findings requested by Victor and made by the Oakland County Circuit in violation of the automatic stay, is for this Court to void such findings. Acts taken in violation of the automatic stay are voidable. Easley v. Pettibone Michigan Corp., 990 F.2d 905, 911 (6th Cir.1993). The rulings made by the Oakland County Circuit Court to adjudicate any property interests that the Debtor may have in marital property or other property that is property of the Debtor’s bankruptcy estate are therefore void and of no force or effect. Similarly, the Oakland County Circuit Court’s ruling that the Debtor is responsible for the $4,000.00 Comerica credit card balance because of his fraudulent pre-petition conduct is also void and of no force or effect. All of the other rulings made by the Oakland County Circuit Court remain unaffected, because they were not made in violation of the automatic stay, but instead were within the express statutory exceptions to the automatic stay under § 362(b)(2)(A) of the Bankruptcy Code.
The remedy for Victor’s conduct is prescribed by § 362(k). Because the Court finds that Victor willfully violated the automatic stay, both by requesting certain forms of relief against the Debtor at the trial of the Divorce Case, and by asking the Oakland County Circuit Court to enter the Proposed Judgment, which contains dispositions, some requested at trial and some not, of property of the Debtor’s bankruptcy estate, the Court holds that the Debtor is entitled to damages under § 362(k) of the Bankruptcy Code. Because the Debtor’s motion does not identify any specific actual damages that the Debtor suffered as a result of the willful violation of the automatic stay by Victor, the Court has fixed a date by which the Debtor must file an affidavit itemizing any damages sought. The Court has also fixed a date by which Victor may file any objection to the affidavit. After reviewing the affidavit and any objection, the Court will then either make an award of damages or determine that further proceedings are required.
Victor had also asked for sanctions against the Debtor under § 1927 of title 28 for bringing this motion. Section 1927 applies when an attorney “multiplies the proceedings in any case unreasonably and vexatiously....” Because the Court has determined that Victor violated the stay and thus the Debtor is entitled to some of the relief requested in his motion, the Court finds that sanctions under this statute are not warranted. See Ridder v. City of Springfield, 109 F.3d 288, 298 (6th Cir.1997) (finding that sanctions under § 1927 require “ ‘some conduct on the part of the subject attorney that trial judges, applying the collective wisdom of their experience on the bench, could agree falls short of the obligations owed by a member *576of the bar to the court and which, as a result, causes additional expense to the opposing party’ ”) (quoting In re Ruben, 825 F.2d 977, 984 (6th Cir.1987)) (other citations omitted).
Conclusion
The Court concludes that the Debtor’s motion should be granted in part. The Court finds that Victor willfully violated the automatic stay of § 362(a) of the Bankruptcy Code. The Court finds that Mrs. Kallabat did not willfully violate the automatic stay of § 362(a) of the Bankruptcy Code. The transcript demonstrates that Judge Matthews was aware of the automatic stay of § 362(a) and tried not to violate the automatic stay in going forward with the Divorce Case on that date. It was Victor who assured the Court that the requests for relief it was making did not violate the automatic stay. As explained above, Victor was only partially right. Knowing that the Debtor had filed Chapter 7, it would have been prudent for Victor to first review § 362(a) and (b) and then inform Judge Matthews of what § 362(a) stayed, and what § 362(b) excepted from the automatic stay. Victor did not do that, but instead simply plowed ahead. As it turns out, most of the forms of relief sought in the Divorce Case on June 5, 2012 were excepted from the automatic stay under § 362(b)(2)(A) of the Bankruptcy Code, but not all of them.
The Court appreciates the strong state law policy reasons behind allowing domestic relations matters to proceed expeditiously, and respects the state court’s primacy in such areas. But there are important policies behind the automatic stay and the protections it affords to debtors and to creditors of the debtor when a bankruptcy ease is filed. The Bankruptcy Code carefully balances and respects these sometimes competing policies by expressly stating what is covered by the automatic stay in § 362(a) and what is excepted from the automatic stay in § 362(b). Once a bankruptcy case is filed, any entity seeking relief against a debtor must take the time to first review this statutory scheme rather than proceed blindly and run the risk of violating the stay.
The Court has already entered a separate order granting the Debtor’s motion in part for the reasons set forth in this opinion.
. Actions for violations of the automatic stay or the discharge injunction are properly brought by motion and not by filing an adversary complaint. Pertuso v. Ford Motor Credit Co., 233 F.3d 417, 421 (6th Cir.2000) ("[T]he traditional remedy for violation of an injunction lies in contempt proceedings, not in a lawsuit....”).
. “Domestic support obligation” is defined in § 101(14A) of the Bankruptcy Code as:
The term “domestic support obligation” means a debt that accrues before, on, or after the date of the order for relief in a case under this title, including interest that accrues on that debt as provided under applicable nonbankruptcy law notwithstanding any other provision of this title, that is—
(A) owed to or recoverable by—
(i) a spouse, former spouse, or child of the debtor or such child's parent, legal guardian, or responsible relative; or
*571(ii) a governmental unit;
(B) in the nature of alimony, maintenance, or support (including assistance provided by a governmental unit) of such spouse, former spouse, or child of the debtor or such child’s parent, without regard to whether such debt is expressly so designated;
(C) established or subject to establishment before, on, or after the date of the order for relief in a case under this title, by reason of applicable provisions of&emdash;
(i) a separation agreement, divorce decree, or property settlement agreement;
(ii) an order of a court of record; or
(iii) a determination made in accordance with applicable nonbankruptcy law by a governmental unit; and
(D)not assigned to a nongovernmental entity, unless that obligation is assigned voluntarily by the spouse, former spouse, child of the debtor, or such child’s parent, legal guardian, or responsible relative for the purpose of collecting the debt.
. To some extent, the motion implies that Judge Matthews and the Oakland County Circuit Court also violated the automatic stay. But at the hearing on June 27, 2012, the Debtor's attorney was specifically asked by this Court whether he was seeking relief against Judge Matthews and the Oakland County Circuit Court, and he answered that he was not. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495325/ | Opinion Regarding United States Trustee’s Motion For Relief Under Section 329 Of The Bankruptcy Code
PHILLIP J. SHEFFERLY, Bankruptcy Judge.
Introduction
This opinion deals with a motion filed by the United States Trustee (“UST”) under § 329 of the Bankruptcy Code, seeking cancellation of an agreement to pay a fee to a Chapter 7 debtor’s attorney and disgorgement of a fee paid to that attorney. This is a core proceeding under 28 U.S.C. § 157(b)(2)(A), over which the Court has jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and 157(a).
Facts
The following facts are not in dispute.
On April 2, 2012, the Debtors filed this Chapter 7 case. Prior to filing the petition, the Debtors met with and hired the B.O.C. Law Group, P.C. (“BOC”). BOC is *579a law firm that specializes in representing individual debtors in bankruptcy cases. The Debtors signed two separate agreements with BOC. The first agreement is titled “Chapter 7 Fee Agreement” (“Pre-Petition Agreement”) (docket entry no. 23, Ex. 1). The second agreement is titled “Posb-Petition Chapter 7 Fee Agreement” (“Post-Petition Agreement”) (docket entry no. 23, Ex. 2).
The Debtors signed the Pre-Petition Agreement on March 1, 2012. The Pre-Petition Agreement states that the Debtors agree to employ BOC “TO REPRESENT CLIENT(S) IN FILING A VOLUNTARY CHAPTER 7 BANKRUPTCY PETITION.” The Pre-Petition Agreement then describes the pre-petition services that BOC agrees to provide to the Debtors, including “CONSULTATION AND ADVICE” and preparation of the bankruptcy petition and certain other documents necessary for the filing of a bankruptcy case. The Pre-Petition Agreement states that the fee for these pre-petition services is $1,000.00. The Pre-Petition Agreement contains a separate paragraph informing the Debtors that BOC will not represent the Debtors once the bankruptcy case is filed, unless a new agreement is signed.
CLIENT EXPRESSLY UNDERSTANDS THAT [BOC] WILL NOT REPRESENT CLIENT AFTER FILING THE BANKRUPTCY PETITION UNLESS A SEPARATE POST-PETITION FEE AGREEMENT IS SIGNED. CLIENT WILL BE PROVIDED WITH A COPY OF THE SAME AND CLIENT ACKNOWLEDGES HIS/HER/THEIR INTENTIONS TO EMPLOY [BOC] FOR POST-PETITION COMPLETION OF THE CHAPTER 7 BANKRUPTCY FOR A FEE OF $2000.00.
According to the Debtors’ affidavit (docket entry no. 23, Ex. 3), the Debtors “understood” that the $1,000.00 that they paid under the Pre-Petition Agreement was for services rendered to them by BOC prior to filing their bankruptcy case. They “further understood” that they would be “required to retain legal counsel subsequent to the filing of their Bankruptcy Petition to receive legal services for any necessary work required post-petition.” The Debtors state in their affidavit that they paid BOC $1,000.00 on March 16, 2012, satisfying in full their obligation under the Pre-Petition Agreement. The Debtors go on to explain in their affidavit that “although they were in no way obligated to do so, Debtors knowingly and voluntarily decided to retain B.O.C. Law Group, P.C. to perform all necessary post-petition services on behalf of the Debtors.”
After filing their Chapter 7 petition on April 2, 2012, the Debtors met again with BOC and signed the Post-Petition Agreement on April 4, 2012. The Posb-Petition Agreement states that the Debtors agree to employ BOC “to represent [them] in completing a Chapter 7 Bankruptcy, Case number: 12-48448-PJS.” The Posb-Petition Agreement then describes the post-petition services that BOC agrees to provide to the Debtors in connection with the completion of their bankruptcy case, including the preparation and filing of schedules, statement of financial affairs and other documents, and attendance at the § 341 meeting of creditors. The Posb-Petition Agreement states that the fee for these post-petition services is $2,000.00, to be paid at the rate of $166.67 per month beginning on April 13, 2012. In their affidavit, the Debtors state that they “knowingly and voluntarily executed” the Post-Petition Agreement, they are satisfied with BOC’s representation of them in their bankruptcy case, and they “wish to contin*580ue paying” BOC for services rendered to them postpetition under the Posb-Petition Agreement.
On April 16, 2012, BOC filed a Fed. R. Bankr.P.2016(b) statement (docket entry no. 13). The Rule 2016(b) statement describes the “compensation paid or agreed to be paid” by the Debtors as follows:
[X] FLAT FEES — SEE FEE AGREEMENTS
For legal services rendered in contemplation of and in connection with this case, exclusive of the filing fee paid for services:
Pre-Petition_$1,000.00
Posb-Petition ... $2,000.00
Total.$3,000.00
Prior to filing this statement, received.$1,000.00 W
The unpaid balance due and payable is .$2,000,00 O
On June 7, 2012, the UST filed a motion (docket entry no. 21) seeking an order requiring BOC to disgorge any amounts paid by the Debtors under either the Pre-Petition Agreement or PosU-Petition Agreement. On June 28, 2012, BOC filed a response (docket entry no. 23) accompanied by the Debtors’ affidavit, and then filed a brief (docket entry no. 29) on July 17, 2012.
The Court held a hearing on August 9, 2012. At the hearing, BOC provided the Court and the UST with a copy of its Itemized Record of Services. The Itemized Record of Services shows that BOC provided seven hours of pre-petition services, totaling $1,237.50, the fee for which was reduced to $1,000.00 pursuant to the Pre-Petition Agreement. It further shows that BOC provided 10.7 hours of post-petition services, totaling $2,062.50, the fee for which was reduced to $2,000.00 pursuant to the Posb-Petition Agreement.
Positions of the UST and BOC
The UST’s motion is brought under § 329 of the Bankruptcy Code. Section 329(a) requires that any attorney representing a debtor in a bankruptcy case must
file with the court a statement of the compensation paid or agreed to be paid, if such payment or agreement was made after one year before the date of the filing of the petition, for services rendered or to be rendered in contemplation of or in connection with the case by such attorney, and the source of such compensation.
Section 329(b) provides that if the compensation paid or agreed to be paid “exceeds the reasonable value” of the services rendered or to be rendered, “the court may cancel any such agreement, or order the return of any such payment, to the extent excessive[.]”
The UST makes two basic arguments in support of its request for relief under § 329. First, the UST argues that the Pre-Petition Agreement and the Posb-Pe-tition Agreement in substance constitute one agreement between the Debtors and BOC for BOC to represent the Debtors in their Chapter 7 case. According to the UST, taken together, these agreements create a pre-petition debt that is dis-chargeable in the Debtors’ Chapter 7 case under controlling precedent in the Sixth Circuit, Rittenhouse v. Eisen, 404 F.3d 395, 396 (6th Cir.2005). In the UST’s view, the creation of two separate documents, the Pre-Petition Agreement and the Post-Petition Agreement, is a fiction
*581intended as a “workaround” of the holding of Rittenhouse. Second, the UST argues that, if the Court treats the Pre-Petition Agreement and Post-Petition Agreement separately, then the Court should still grant the UST’s motion because BOC’s breaking up of the services that it agreed to render to the Debtors between pre-petition services and post-petition services is an impermissible “unbundling” of the legal services essential to the representation of a debtor in a Chapter 7 bankruptcy case.
BOC concedes that Rittenhouse holds that a pre-petition agreement to pay attorney fees is not one of the exceptions to a Chapter 7 discharge under § 523 of the Bankruptcy Code. But BOC argues that Rittenhouse does not apply to a post-petition agreement to pay attorney fees, and that the Posh-Petition Agreement in this case is unaffected by Rittenhouse. BOC further argues that there is nothing in the law prohibiting it from unbundling the legal services that it renders to an individual pre-petition, and being compensated for those services pre-petition, from the legal services that it renders to such individual post-petition, and being compensated for those services post-petition under a post-petition agreement for payment.
Dischargeability of attorney fees
In In re Gourlay, No. 12-46096, 483 B.R. 496, 2012 WL 4791034 (Bankr.E.D.Mich. Oct. 9, 2012), the Court recently applied Rittenhouse to a UST motion under § 329. In that case, there was only one fee agreement between the individual debtor and the debtor’s attorney, and it was signed pre-petition. The fee agreement in that case provided for a $1,000.00 flat fee for the debtor to file a Chapter 7 bankruptcy case and for the attorney to represent the debtor in such case. The Rule 2016(b) statement indicated that the fee agreement called for the debtor to make a down payment of $100.00 pre-petition, and then pay the balance of the flat fee of $900.00 in post-petition installment payments. Id. at *1. In Gourlay, the Court held that the pre-petition agreement of the debtor to pay $900.00 of the flat fee post-petition was a pre-petition discharge-able debt that the attorney could not enforce. Id. at *3. As a result, the Court granted the UST’s motion under § 329 cancelling the debtor’s agreement to make post-petition installment payments. In reaching its holding, the Court in Gourlay quoted the following passage from Ritten-house:
“The issue of whether pre-petition attorney fees are dischargeable in bankruptcy is res nova in this circuit. We join three other circuits in concluding that pre-petition attorney fees are discharge-able, and we affirm the order of the district court.
“11 U.S.C. § 727(b) provides that a discharge under Chapter 7 relieves a debtor of all debts incurred prior to the filing of a petition for bankruptcy, except those nineteen categories of debts specifically enumerated in 11 U.S.C. § 523(a). A debt for pre-petition legal services is not one of the non-discharge-able debts enumerated in § 523(a).”
Id. at *3 (quoting Rittenhouse, 404 F.3d at 396 (citing In re Fickling, 361 F.3d 172 (2nd Cir.2004); Bethea v. Robert J. Adams & Associates, 352 F.3d 1125 (7th Cir.2003); and In re Biggar, 110 F.3d 685 (9th Cir.1997))).
The facts in this case are different. Unlike Gourlay, this case involves two separate agreements, one of which the Debtors signed before their bankruptcy case was filed, and the other of which the Debtors signed after their bankruptcy case was filed. It is undisputed that the Debtors paid BOC the entire $1,000.00 required by the Pre-Petition Agreement prior to the *582time that they filed their bankruptcy case. There is no debt for unpaid pre-petition fees that would be subject to the discharge. It is only the Debtors’ obligation to make post-petition payments under the Post-Petition Agreement that is at issue in this case.
This factual distinction is important because the Rittenhouse holding is predicated on the discharge of pre-petition debts that a Chapter 7 debtor receives under § 727 of the Bankruptcy Code and the specific exceptions to discharge enumerated in § 523(a). Rittenhouse did not rule on the enforceability of an obligation to pay attorney fees under an agreement made after a bankruptcy case is filed. The only reference in Rittenhouse to a post-petition agreement to pay attorney fees is the court’s observation that “§ 329 covers also post-petition attorney fees, which are not dischargeable.” 404 F.3d at 397. Moreover, in support of its holding that there is no exception to discharge for a pre-petition agreement to pay attorney fees, Rittenhouse expressly relied upon Bethea v. Robert J. Adams & Associates, 352 F.3d 1125 (7th Cir.2003). In Bethea, the Seventh Circuit Court of Appeals held that a pre-petition agreement to pay attorney fees is dischargeable, but distinguished a pre-petition agreement from a post-petition agreement, and noted that a post-petition agreement to pay attorney fees is not dischargeable.
For what it may be worth, however, we do not share the view that taking § 727(b) at face value necessarily injures deserving debtors. Those who cannot prepay in full can tender a smaller retainer for prepetition work and later hire and pay counsel once the proceeding begins-for a lawyer’s aid is helpful in prosecuting the case as well as in filing it.
Id. at 1128; see also In re Lawson, 437 B.R. 609, 664 (Bankr.E.D.Tenn.2010) (suggesting that a retainer agreement that “ ‘expressly designates] pre-petition services, which are paid pre-petition, and post-petition services, which shall be paid post-petition’ ” is one “potentially allowable method” for payment of Chapter 7 debt- or’s attorney fees) (quoting In re Waldo, 417 B.R. 854, 895 (Bankr.E.D.Tenn.2009)).
The UST does not quarrel with Bethea’s and Rittenhouse’s distinction between a pre-petition agreement to pay attorney fees and a post-petition agreement to pay attorney fees. Instead, the UST asserts that the two agreements signed by the Debtors in this case are in substance a single agreement, one that is entirely pre-petition in nature. The UST argues that the Pre-Petition Agreement was a contract to enter into the Post-Petition Agreement, making it all a pre-petition agreement.
As noted, the Debtors signed the Pre-Petition Agreement on March 1, 2012, before their bankruptcy case was filed. It describes the services that BOC would perform pre-petition up to the filing of the case. It contains an explicit statement that BOC will not represent the Debtors once the bankruptcy case is filed “unless a separate post-petition fee agreement is signed.” The Pre-Petition Agreement contains a statement by the Debtors acknowledging “their intention to employ [BOC] for post-petition completion” of their Chapter 7 bankruptcy case, but it does not either state or imply that the Debtors have any obligation to sign a post-petition agreement to hire BOC to represent them after their petition is filed. Further, the Pre-Petition Agreement expressly states that BOC does not have an obligation to represent the Debtors post-petition, and will not do so unless the Debtors sign a separate agreement after *583the bankruptcy case is filed. In their affidavit, the Debtors state “[t]hat although they were in no way obligated to do so, Debtors knowingly and voluntarily decided to retain” BOC after their bankruptcy petition was filed, and that they “knowingly and voluntarily” entered the Posb-Petition Agreement with BOC on April 4, 2012, after their bankruptcy petition was filed.
The UST’s assertion that the Pre-Petition Agreement and the Posb-Petition Agreement are essentially a single, pre-petition agreement giving rise to an entirely pre-petition debt, is not borne out by the facts. The two separate agreements clearly delineate the services that will be rendered pre-petition from the services that will be rendered post-petition, and clearly delineate the amount that the Debtors agreed to pay to BOC for its pre-petition services and the amount that they agreed to pay for its post-petition services. BOC’s Itemized Record of Services shows that its pre-petition services and post-petition services were performed according to the terms of the respective agreements, and the fees for those services were likewise charged in accordance with the terms of the respective agreements. The Debtors’ uncontroverted affidavit shows that the Debtors knew when they filed their bankruptcy petition that they did not have to hire BOC to represent them to complete their bankruptcy case. Their affidavit further shows that their decision to hire BOC to perform the services necessary to complete their Chapter 7 case was a voluntary choice that they made and acted upon after their bankruptcy case was filed. There is nothing in either of the two agreements or the Debtor’s affidavit that supports a finding that the Debtors were somehow obligated or coerced to sign the Post-Petition Agreement or that supports the UST’s assertion that the separateness of the two agreements is a “fiction.” The Debtors’ obligation to pay BOC under the Posb-Petition Agreement was incurred post-petition. As such, it is not governed by Rittenhouse and is not a dischargeable pre-petition debt under § 727(b) of the Bankruptcy Code. Because the undisputed facts do not support the UST’s contention that the Pre-Petition Agreement and the Post-Petition Agreement constitute a single, pre-petition agreement creating an entirely pre-petition debt, the Court rejects the UST’s first argument.
Unbundling of pre-petition and post-petition legal services
The UST’s second argument is tougher. Here, the UST argues that it was improper for BOC to unbundle the legal services that it would perform for the Debtors into pre-petition services and post-petition services. In support, the UST does not cite to any section of the Bankruptcy Code or decision of the Supreme Court or the Sixth Circuit Court of Appeals that controls or directly addresses the question of whether an attorney may unbundle the legal services for an individual Chapter 7 debtor into pre-petition services and post-petition services.1 Instead, the UST relies upon In *584re Egwim, 291 B.R. 559 (Bankr.N.D.Ga.2003). In Egwim, a Chapter 7 debtor’s attorney filed a Rule 2016(b) statement indicating that the agreed upon fee was “$475 for representation of the [d]ebtors in the case, of which $240 had been paid prior to the filing of the statement, leaving a balance of $235 to be paid ‘prior to or at the 341 hearing.’ ” Id. at 564. The Rule 2016(b) statement recited that the attorney “agreed to render legal service for all aspects of the bankruptcy case,” and then went on to describe certain of the tasks that were included, but expressly stated that the agreed upon fee did not include representation of a debtor in “adversary and/or contested matters.” Id. at 564-65 (emphasis omitted). A creditor brought an adversary proceeding objecting to discharge. Another creditor filed a motion for relief from stay. The debtor’s attorney did not represent the debtor either in response to the adversary proceeding or the motion. The court issued an order sua sponte requiring the attorney to show cause why the court should not impose sanctions because of such failure. Id. at 566. The debtor’s attorney appeared at the hearing and explained that he believed that the limitation on the services listed in his fee agreement was appropriate, and that sanctions were not warranted.
Ultimately, the Egwim court held that no sanctions or other disciplinary measures were warranted. However, the court took the opportunity to discuss in detail a number of issues regarding the responsibilities of attorneys representing individual debtors in Chapter 7 cases. Specifically, the court considered whether it is ever permissible for an attorney to exclude certain services from the attorney’s representation of a Chapter 7 debtor even when there is an agreement that limits such representation. The court noted that the two primary objectives for Chapter 7 debtors are to discharge their debts and retain their exempt assets. Id. at 566-67. With those two objectives in mind, the Egwim court looked to the Georgia Rules of Professional Conduct, because the bankruptcy case was filed in Georgia. Id. at 569-71.
Georgia Rule 1.1 states that “[a] lawyer shall provide competent representation,” which the Egwim court interpreted as meaning that the attorney was required “to provide services that are necessary to achieve the basic, fundamental objectives of the representation.” Id. at 572. The court concluded that
[t]he engagement of an attorney to represent a consumer in a bankruptcy case necessarily includes services required to accomplish those objectives. If obstacles arise to the accomplishment of those objectives, such as an objection to discharge, competent representation under Georgia Rule 1.1 requires the lawyer to provide representation essential to the client’s pursuit of the purposes of the representation.
Id. at 569-70.
The Egwim court recognized an exception to this obligation where there is “a valid, professionally appropriate contractual limitation on the scope of services between attorney and chapter 7 debtor[.]” Id. at 570. In determining what constitutes a valid and professionally appropriate limitation, the court looked again to Georgia Rules of Professional Conduct, as *585well as the Restatement (Third) of the Law Governing Lawyers and In re Castorena, 270 B.R. 504 (Bankr.D.Idaho 2001). After reviewing these sources, the Egwim court held that a valid, professionally appropriate contractual limitation on the scope of services has three requirements: (i) “the attorney must consult with the client about the limited representation”; (ii) “the client must provide informed consent” in writing; and (iii) “the limitation must be reasonable in the circumstances or, in the terms of the Georgia Rule, the engagement must not be so limited as to prevent competent representation.” Id. at 571.
Despite recognizing that Georgia Rule 1.2(c) allows an attorney to limit the scope of representation, the Egwim court quoted extensively from In re Castoreña in questioning whether, in the context of representing an individual Chapter 7 debtor, an attorney could ever have a valid, professionally appropriate contractual limitation.
“The ability to adequately explain the lay of the bankruptcy landscape, including all its variations, contingencies and permutations, in order to obtain a truly informed consent is suspect.”
“To send a debtor into a bankruptcy pro se, on the theory that he has had ‘enough’ advice and counseling in the document preparation stage to safely represent himself, is except in the extraordinary case so fundamentally unfair so as to amount to misrepresentation.”
“An attorney, in accepting an engagement to represent a debtor in a chapter 7 bankruptcy case, will find it exceedingly difficult to show that he properly contracts away any of the fundamental and core obligations such an engagement necessarily imposes. Proving competent, intelligent, informed and knowing consent of the debtor to waive or limit such services inherent to the engagement will be required. Compliance with [Rules of Professional Conduct 1.1, 1.2 and 1.4] is mandatory, and must be proved.”
Id. at 571-72 (emphasis omitted) (quoting Castoreña, 270 B.R. at 529-80).
Egwim then held as follows:
In summary, the principles and authorities addressed above establish that an attorney representing a chapter 7 debt- or ordinarily may not limit the scope of that engagement. Absent compliance with the standards discussed above, an attempt to limit the engagement is a violation of Georgia’s Rules of Professional Conduct and subjects counsel to professional discipline. For a limitation on services to be valid, “that limitation must be carefully considered and narrowly crafted, and be the result of educated and informed consent.”
Id. at 572 (emphasis omitted) (quoting Ca-storeña, 270 B.R. at 531).
BOC counters that it may bifurcate the services that it offers into pre-petition and postpetition segments so long as its client has been advised and consents to such arrangement. Like the UST, BOC does not cite to any section of the Bankruptcy Code or other controlling authority. Instead, BOC relies upon In re Mansfield, 394 B.R. 783 (Bankr.E.D.Pa.2008). The fee agreement between the debtor and the attorney in Mansfield closely resembles the fee agreement in Gourlay. In Mansfield, the debtor agreed pre-petition to a flat fee of $2,000.00, of which $1,000.00 was to be paid up front, with the balance to be paid in monthly installments after the debtor filed his Chapter 7 petition. Id. at 784-85. The Mansfield court reached the same conclusion that this Court reached in Gourlay:
*586[T]he Court concludes that a debtor’s obligation under a fee agreement to pay a fixed or flat fee to his attorney for legal services rendered pre- and postpe-tition in a Chapter 7 case, regardless of how the fee is scheduled to be paid, is a prepetition debt that is dischargeable under 11 U.S.C. § 727(b).
Id. at 785; Gourlay, 2012 WL 4791034, at *3. Like Gourlay, Mansfield pointed to § “727(b), which discharges a debtor from ‘all debts that arose before the date of the order for relief unless such debt is excepted under § 523 [of the Bankruptcy Code].” Id. at 787 (quoting 11 U.S.C. § 727(b)). Since § 523(a) contains no exceptions for pre-petition attorney fees, the debtor’s obligation in Mansfield to pay the post-petition installment payments was held to be a dischargeable debt. Id. at 791.
BOC cites Mansfield not for its unremarkable holding that pre-petition agreements to pay attorney fees are dischargea-ble, but instead for its extended discussion of post-petition agreements to pay attorney fees. After reaching its holding, the Mansfield court reviewed various cases that have explored the possible ways for a Chapter 7 debtor’s attorney to be paid for services in representing a Chapter 7 debt- or.2 Drawing on cases that have focused on the definition of “claim” under § 101(5)(A) of the Bankruptcy Code as a “right to payment,” and that have explained that a “right to payment” in the context of legal services does not ordinarily arise until the services are performed, the Mansfield court explained in dicta the distinction between an attorney’s right to payment for legal services performed pre-petition and an attorney’s right to payment for legal services performed post-petition.
It follows that an attorney’s right to payment for legal services performed postpetition pursuant to a fee agreement which, in some manner, segregates pre-petition fees from postpetition fees (as opposed to flat fee agreement pursuant to which an attorney agrees to perform both prepetition and postpetition services for a lump or fixed sum) arises when the postpetition services are performed. Viewed thusly, a client’s debt for postpetition services is a postpetition debt which is not subject to the automatic stay or the Chapter 7 discharge injunction (unless the work is rendered pursuant to a flat fee agreement as discussed above). The key to recovery for postpetition services, therefore, lies in the terms of the attorney’s fee agreement. The fee agreement must segregate the fee(s) for prepetition work from the fee(s) for postpetition work. Once again, this distinction is necessary because a fee for prepetition work constitutes a prepetition debt of, or claim against, the estate which is dischargea-ble, whereas a fee for postpetition work constitutes a postpetition debt of, or claim against, the debtor which is non-dischargeable.
To recapitulate, legal fees which are segregated from prepetition legal fees and incurred for postpetition legal services constitute a postpetition debt and are, therefore, an obligation of the Chapter 7 debtor (as opposed to the estate) which he or she has an obligation to pay out of his or her postpetition earnings or exempt assets.
*587Id. at 792-93 (citations and footnote omitted).
Neither the UST’s citation to Egwim nor BOC’s reliance upon Mansfield controls the Court’s decision on the UST’s motion in this ease. But they do provide the Court with two important starting points. First, the court in Egwim based its ruling that unbundling legal services was impermissible in that specific case, on its review and analysis of the state law rules of professional conduct that applied to the lawyer in that case. 291 B.R. at 572. Second, the court in Mansfield based its statement that unbundling of legal services may be permissible by reference to the specific agreement that is made between the client and the lawyer in a given case: “The key to recovery for postpetition services [ ] lies in the terms of the attorney’s fee agreement.” 394 B.R. at 793. Consistent with both Egwim and Mansfield, to resolve the UST’s motion in this case, the Court must examine both the rules of professional conduct that govern BOC in this case and the terms of the two agreements made by the Debtors and BOC in this case.
BOC filed the Debtors’ bankruptcy case in the Eastern District of Michigan. “Ethical rules involving attorneys practicing in the federal courts are ultimately questions of federal law. The federal courts, however, are entitled to look to the state rules of professional conduct for guidance.” El Camino Res. Ltd. v. Huntington Nat’l Bank, 623 F.Supp.2d 863, 876 (W.D.Mich.2007) (citing In re Snyder, 472 U.S. 634, 645 n. 6, 105 S.Ct. 2874, 86 L.Ed.2d 504 (1985) and Nat’l Union Fire Ins. Co. of Pittsburgh, Pa. v. Alticor, Inc., 466 F.3d 456, 457-58 (6th Cir.2006), vacated in part on other grounds, 472 F.3d 436 (6th Cir.2007)). The U.S. District Court for the Eastern District of Michigan has determined that “[t]he Rules of Professional Conduct adopted by the Michigan Supreme Court ... apply to members of the bar of this court and attorneys who practice in this court as permitted by LR 83.20.” Local R. 83.22(b) (E.D. Mich.). Local R. Bankr.P. 9010-ll(a)(l) provides that an “appearance before the court on behalf of a person or entity may be made only by an attorney admitted to the bar of, or permitted to practice before, the United States District Court for the Eastern District of Michigan, under E.D. Mich. LR 83.20.” The Michigan Rules of Professional Conduct (“MRPC”) therefore govern BOC’s conduct.
There are several MRPC that are relevant here. Rule 1.1 states that “[a] lawyer shall provide competent representation to a client.” Rule 1.2(b) addresses the scope of an attorney’s representation of a client, and states that “[a] lawyer may limit the objectives of the representation if the client consents after consultation.” The Official Comment to this rule contains an additional explanation of the rule, but also cautions that any agreement regarding the scope of representation must not permit the attorney to violate the obligation to provide competent representation contained in Rule 1.1:
The objectives or scope of services provided by a lawyer may be limited by agreement with the client or by the terms under which the lawyer’s services are made available to the client....
An agreement concerning the scope of representation must accord with the Rules of Professional Conduct and other law. Thus, the client may not be asked to agree to representation so limited in scope as to violate Rule 1.1....
Rule 1.4(b) imposes a duty upon an attorney regarding communications with a client by stating that “[a] lawyer shall explain a matter to the extent reasonably *588necessary to permit the client to make informed decisions regarding the representation.” The Official Comment to Rule 1.0 also defines “consult” or “consultation” as “denot[ing] communication of information reasonably sufficient to permit the client to appreciate the significance of the matter in question.”
Rule 1.5 governs attorney fees and sets forth certain requirements for attorney fee agreements. Rule 1.5(b) states that “[w]hen the lawyer has not regularly represented the client, the basis or rate of the fee shall be communicated to the client, preferably in writing, before or within a reasonable time after commencing the representation.” The Official Comment to this rule makes it clear that an attorney has a duty to explain to a client any limitation upon services to be provided that is set forth in a fee agreement. The Official Comment goes on to recognize that a fee agreement may properly limit the services to be rendered, provided that such limitation is both explained and does not improperly curtail services in a way contrary to the client’s interest:
An agreement may not be made whose terms might induce the lawyer improperly to curtail services for the client or perform them in a way contrary to the client’s interest. For example, a lawyer should not enter into an agreement whereby services are to be provided only up to a stated amount when it is foreseeable that more extensive services probably will be required, unless the situation is adequately explained to the client. Otherwise, the client might have to bargain for further assistance in the midst of a proceeding or transaction. However, it is proper to define the extent of services in light of the client’s ability to pay.
Without question, the MRPC and the Official Comments allow an attorney and a client to take into consideration the client’s ability to pay and to agree to limit the scope of representation. But such agreement may only be made where it does not require the attorney to violate the attorney’s duty of competence and where the agreement to limit the scope of representation has been fully explained by the attorney to the client to the extent reasonably necessary to permit the client to make an informed decision regarding such limitation. As noted in the Official Comment to Rule 1.5, an attorney should not enter into an agreement with a client to limit the scope of representation up to a stated dollar amount when it is foreseeable that more extensive services will likely be required “unless the situation is adequately explained to the client.”
There are two ethics opinions issued by the State Bar of Michigan Standing Committee on Professional and Judicial Ethics that discuss the application of the MRPC in Chapter 7 bankruptcy cases. In Michigan Ethics Opinion RI-184, 1994 WL 27231 (Jan. 19, 1994), the Committee addressed the question of whether a retainer agreement between an attorney and an individual Chapter 7 debtor may permissibly limit the scope of representation to exclude representation of such debtor in a later adversary proceeding. The Committee stated that, when read together, Rules 1.2(b), 1.4(b) and 1.5(b)
lead to the conclusion that if the lawyer intended to exclude representation of the debtor in bankruptcy adversary proceedings, the lawyer should have so specified and given the client the opportunity to seek counsel who may offer representation on other terms. It is not the client’s responsibility to know, without it being explained, that adversary proceedings may occur and the consequences arising from them. Therefore, if a retainer agreement is silent or am*589biguous on the subject of representing a debtor client in bankruptcy adversary proceedings, the lawyer would be required to provide that representation.
More recently, Michigan Ethics Opinion RI-348, 2010 WL 3011700 (July 26, 2010) addressed the question of whether an attorney for an individual Chapter 7 debtor may exclude representation with respect to a reaffirmation agreement.3 In that opinion, the Committee reviewed the applicable MRPC, drew on its analysis from Opinion RI-184, and emphasized that any limitation on representation is only permissible if it is adequately explained to the client and the client consents to such limitation after “adequate consultation.” The adequate consultation must, “at a minimum,” include information on “the risks to the client that the proposed limitations would create,” as well as the “technical aspects,” “legal ramifications” and “material risks” of reaffirming a dischargeable debt. The opinion concluded
that the limitation excluding representation as to reaffirmation, if permissible under applicable law, which may vary among jurisdictions, would not of itself result in a violation of Rule 1.1 and is permitted under Rule 1.2(b). In seeking to so limit the scope of the representation, the lawyer will need to obtain the client’s consent after consultation, and in connection with obtaining consent, must explain the material risks of reaffirmation and available alternatives, as required by Rule 1.4.
After reviewing the authorities cited by the UST and BOC, as well as the MRPC, the Official Comments to the MRPC, and Michigan Ethics Opinions RI-184 and RI-348, the Court is persuaded that an agreement to limit an attorney’s legal services in connection with an individual Chapter 7 bankruptcy case by un-bundling the pre-petition legal services from the post-petition legal services, is not per se prohibited by the MRPC and does not necessarily warrant any relief under § 329 of the Bankruptcy Code. That does not mean that all agreements to unbundle legal services are permissible, but only that such agreements are not always barred. Although § 329 of the Bankruptcy Code does not set forth specific criteria governing the unbundling of legal services in a Chapter 7 case, it is clear that, minimally, the MRPC require that (1) the attorney competently represents the individual debtor despite any limitation on the scope of services; (2) the attorney provides adequate consultation to the individual debtor concerning any limitation on the scope of the attorney’s representation and the legal matter in question; and (3) the individual debtor makes a fully informed and voluntary decision to consent to such limitation.
Did BOC’s separation of pre-petition and post-petition legal services in this case comply with the MRPC?
The remaining issue then is whether the specific unbundling of BOC’s legal services *590in the Pre-Petition Agreement and the Post-Petition Agreement in this case complies with the MRPC. The first question is whether BOC’s limitation on its pre-petition services prevented it from acting competently.
The attorney’s competence
Although “competence” is not defined in the MRPC, the Official Comment to Rule 1.1 provides relevant factors in determining whether a lawyer is able to provide competent representation, such as the lawyer’s training, experience, preparation for and study of a matter, and the ability to “determin[e] what kind of legal problems a situation may involve.” The level of competency heightens as the complexity and specialized nature of the matter increase. These factors relate primarily to the particular attorney rendering a legal service rather than a description of the service itself. But the UST in this case does not suggest that BOC is not competent because it lacks the requisite skill, experience and ability to represent the Debtors. Instead, the UST’s argument in this case targets whether the un-bundling of legal services between services that are performed prepetition or post-petition necessarily precludes a finding of competence where the attorney is representing an individual Chapter 7 debtor.
In contrast to the factors identified in the Official Comment to the XRPC, which focus on the attributes of the attorney, such as training, experience, preparation and ability, Egwim defined competency in another way. Egwim defined competency of an attorney in an individual Chapter 7 case by reference to what Egwim described as the two primary objectives of such individual: obtaining a discharge and retaining exempt property.
Competent representation of a chapter 7 debtor requires that the attorney represent the debtor in all matters in the case that are necessary to the pursuit of the client’s primary objectives, including the receipt of a discharge of debts and retention of exempt property. Representation to pursue those goals necessarily involves the provision of services to the debtor in adversary proceedings and contested matters that affect the debt- or’s interests. The scope of that representation ordinarily cannot be limited.
Egwim, 291 B.R. at 579.
Under Egwim, competency demands that an attorney for an individual Chapter 7 debtor must perform all of the legal services needed for that individual to obtain a discharge and retain their exempt property, whether those legal services are performed pre-petition or post-petition. A definition of competence that mandates that the attorney perform all of the legal services in a Chapter 7 case intuitively has great appeal to the Court. But is it legally correct to say that an attorney for a Chapter 7 individual debtor who performs only some legal services but not others is acting incompetently? To answer this question, it helps to understand what exactly an individual debtor must do in a Chapter 7 case.
The Bankruptcy Code and the Federal Rules of Bankruptcy Procedure impose a number of requirements that an individual debtor must fulfill in a Chapter 7 case to achieve the two objectives identified in Eg-wim. Some of those requirements can be met before the bankruptcy case is filed. Others cannot, and instead must be performed by the debtor after the bankruptcy petition is filed. For example, § 521(a)(1) of the Bankruptcy Code requires a debtor to file various documents. Those documents can be prepared before the bankruptcy case is filed. However, § 521(a)(3) requires a debtor to cooperate with the trustee. That can only be done after the bankruptcy case is filed. Section 521(a)(4) *591requires a debtor to surrender property of the estate to the trustee. That too can only be done after a bankruptcy case is filed. Similarly, § 343 requires a debtor to appear and submit to an examination under oath at a meeting of creditors to be held under § 341 within a reasonable time after the order for relief. Obviously, performance of that duty cannot take place until after the bankruptcy case is filed. Section 727 sets forth further requirements that must be met in order for an individual debtor to obtain a discharge. Many of these requirements relate to an individual debtor’s conduct and duties after the petition has been filed (e.g., § 727(a)(4), (6) and (11)). Because of the ongoing post-petition duties that the Bankruptcy Code imposes on an individual Chapter 7 debtor, it is not possible for all of the attorney’s services to be performed pre-petition in every case (e.g., how can an attorney represent the debtor at the § 341 meeting before the petition is filed?). Aside from the duties that an individual debtor must perform only after a petition has been filed, the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure also permit an individual debtor to perform other duties either at the time of filing the petition or after the petition has been filed. For example, Fed. R. Bankr.P. 1007(c) permits some of the debtor’s required documents to be filed 14 days after the petition, and permits still other documents to be filed within a fixed number of days after the § 341 meeting. Further, the rule authorizes extensions of even those deadlines.
Under the Egwim standard of competence (i.e., performing all of the legal services needed by the debtor whether pre-petition or post-petition), those individuals who can afford to pay an attorney in full in advance of filing a bankruptcy petition will be able to have competent counsel represent them throughout the case in connection with all of their duties, both pre-petition and postpetition. But there are many individuals, including the Debtors, who wish to file Chapter 7 but do not have sufficient funds to pay an attorney in full in advance of filing the petition for all of the legal services that will be necessary for such individuals to perform all of their duties, both pre-petition and post-petition, needed for them to obtain a discharge and protect their exempt property, the two goals defined in Egwim. Under Ritten-house, it is clear that such individuals in the Sixth Circuit cannot solve that problem by promising pre-petition to pay for any legal services to be performed after the bankruptcy petition is filed because that pre-petition promise is a dischargeable debt. But if the attorney’s duty of competence requires that the attorney perform all of the legal services that the debtor will need, both pre-petition and post-petition, then every bankruptcy attorney will understandably demand full payment up front for all of the legal services that may be needed in a Chapter 7 case both pre-petition and post-petition, including defense of adversary proceedings, defense of objections to exemptions and discharge, advice and counseling in connection with the § 341 meeting, and advice and counseling throughout the entire bankruptcy case for the debtor to meet the debtor’s duty to cooperate with the trustee.
The combination of the Egwim definition of competence, and the Rittenhouse holding that a pre-petition agreement to pay legal fees is dischargeable, puts the individual who does not have the resources to pay an attorney in full in advance between a rock and a hard place. Without the funds to pay an attorney in full prior to the petition, and without the ability to use post-petition income to pay the attorney, an individual debtor in these circumstances is relegated to having to file pro se or use *592a bankruptcy petition preparer, which in many cases is worse than pro se. If the law provides that competent representation of a Chapter 7 debtor requires in every case that the debtor’s attorney represent the debtor in all matters in the case, both pre-petition and post-petition, many needy debtors will simply not be able to afford an attorney to handle their case. The Court concludes that the law does not so provide.
First, there is no cited provision in either the Bankruptcy Code or the MRPC holding that competent representation of a Chapter 7 debtor requires that the attorney represent the individual debtor in all matters necessary to pursue the client’s ultimate objectives. It seems obvious that an individual debtor will be best served by having an attorney represent them in all facets of a Chapter 7 case, pre-petition and post-petition, start to finish. But the Court declines to use the UST’s motion in this case as the vehicle to impose such a requirement for all Chapter 7 cases.
Second, defining competence by insistence that an attorney perform all of the legal services that may be needed by an individual Chapter 7 debtor intrudes upon the freedom of an individual client to contract with an attorney of their choice to perform specific legal services for them. An individual may well choose to hire one attorney, experienced in filing Chapter 7 bankruptcy cases, to file a Chapter 7 bankruptcy case for such individual, and then choose post-petition to hire a different attorney experienced in litigation, to defend an adversary proceeding under § 523 or § 727, or litigate a contested matter. The law does not prohibit such choice.
Third, defining competence by insistence that an attorney representing the debtor must perform all of the legal services in a Chapter 7 case ignores the span of legal services that is built into Chapter 7 by the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure. It makes no sense to define competence in a way that pretends that all of the post-petition services a debtor may need, either can or should be performed pre-petitión. In most Chapter 7 cases, all of the required documents are filed with the petition. That is certainly optimal in the Court’s view, but it is not always the case. There are many cases where an attorney files a bare bones bankruptcy petition quickly, out of necessity, to stay an action by a creditor before there is a sufficient opportunity pre-petition to completely prepare all of the required documents to obtain a Chapter 7 discharge. There are still other cases where, for one reason or another, the attorney does not prepare and file all of the schedules of assets and liabilities, statement of financial affairs and other required documents until after a bankruptcy petition has been filed. The debtors in many of these cases go on to timely file all of their required documents, attend the § 341 meeting and otherwise fulfill all of the requirements needed to obtain a discharge and retain their exempt property. The Court declines to adopt a definition of competency that necessarily implies that an attorney for a debtor in these circumstances has not acted competently just because some of the attorney’s work was done after the petition was filed.
Fourth, if competence were so defined, and thus required all of these overlapping services to always be bundled together, many needy individuals would simply be shut out of access to bankruptcy. Defining competence as always meaning all of the pre-petition and post-petition services that an individual Chapter 7 debtor may possibly need, and then insisting that the individual debtor pay for all of these services up front before filing a petition, unnecessarily throws up a financial roadblock *593for individual debtors seeking access to Chapter 7 relief. If an individual in need of Chapter 7 relief can only afford pre-petition to pay for an attorney to file a bare bones case, and does not want to file a pro se petition, the Court sees no reason why it should deprive that individual of the right to use their pre-petition funds to hire an attorney to file a petition and then decide postpetition whether to use their post-petition income to hire an attorney post-petition to complete their Chapter 7 bankruptcy case. Such individuals are still much better served by being able to at least hire an attorney to file a bankruptcy petition rather than having to file the petition pro se or pay a bankruptcy petition preparer, only to then hire an attorney post-petition to finish their Chapter 7 cases.
Fifth, defining competency of a Chapter 7 debtor’s attorney by insistence on the attorney handling all aspects of the Chapter 7 case leads to the anomalous result that competence is a higher standard for an attorney filing a Chapter 7 case than for an attorney filing a Chapter 13 case. Individuals often file Chapter 13 cases without all of their schedules, statement of financial affairs and other required documents. In many Chapter 13 cases, these documents are prepared postpetition and the cost for the legal services incurred for the preparation and filing of these documents is paid for by the individual debtor post-petition. It is hard for the Court to find a principled basis to hold that an attorney who files a bare bones Chapter 7 petition for a pre-petition fee, with the balance of the schedules and other documents to be filed post-petition, is automatically acting less competently than an attorney who files a bare bones Chapter 13 petition for a pre-petition fee, with the balance of the schedules and other documents to be filed post-petition. The only difference in these two scenarios is that the attorney in the Chapter 13 case has a source of payment (i.e., the debtor’s post-petition income) for the post-petition services while the attorney in the Chapter 7 case does not.
The Court disagrees with the Egwirn court’s definition of competence for an attorney representing an individual debtor in a Chapter 7 bankruptcy case. The Court agrees that it is critical that an individual who hires an attorney pre-petition be properly advised by that attorney about all of the risks, rewards, rights and responsibilities in a Chapter 7 bankruptcy case before they file a bankruptcy petition. But it is no less important that they have adequate legal representation during the case until its conclusion. Competence in providing pre-petition legal services to an individual Chapter 7 debtor is not best construed as requiring an attorney to do all of the work that a Chapter 7 bankruptcy may eventually require before the petition is filed. Competence does not demand that an attorney perform all Chapter 7 legal services pre-petition when the law either permits or requires the debtor to take some actions post-petition, and the debtor needs post-petition legal representation at the very time that the debtor is taking those actions. Rather, competence of a Chapter 7 debtor’s attorney is most appropriately evaluated by looking at the actual work that was agreed to be performed and then was performed by the attorney, not by looking at the remaining work that will have to be done to complete the case when the individual has not hired the attorney to perform those services and the attorney has not performed those services. An individual debtor’s attorney may well meet his or her duty of competence in preparing and filing a bare bones petition with the intention of preparing and filing the balance of the required documents after the petition has been filed. If the *594bankruptcy petition and the other minimal documents necessary to avoid dismissal are prepared and filed properly by the attorney, in a manner that enables the individual debtor to move forward in such case with a reasonable prospect of completing the case and obtaining a discharge, the Court rejects the proposition that the attorney has automatically failed the duty of competence just because the attorney has not been hired to file and has not filed those documents that the law either requires or permits to be filed post-petition.
In this case, the UST does not allege that there are any facts, other than the fact that BOC unbundled its pre-petition legal services from its post-petition legal services, to show that BOC did not meet its duty of competence in providing pre-petition advice and consultation to the Debtors, and preparing and filing their bankruptcy petition, cover sheet, statement of social security number, and matrix. The UST does not allege, and there is no evidence in the record to indicate, that the documents that BOC did prepare and file with the Debtors’ petition were in any way deficient, or left the Debtors in a position where they could not then timely complete their post-petition duties necessary to obtain a discharge and protect their exempt property. In fact, the Debtors’ file shows that they obtained a discharge on July 17, 2012 without any objection or delay. Absent any evidence that BOC’s pre-petition services were performed in a deficient or untimely manner, the Court finds that BOC’s separation of its legal services in this case between pre-petition services and postpetition services by itself did not breach BOC’s duty of competence under the MRPC.
Adequacy of the attorney’s consultation
The next question in determining whether BOC has complied with the MRPC in this case is whether BOC provided adequate consultation to the Debtors. Michigan Ethics Opinion RI-348, addressing the unbundling of reaffirmation agreements, states that adequate consultation requires the attorney to explain that the attorney is limiting the scope of representation and to explain the technical aspects of reaffirmation agreements, and the legal ramifications, material risks and available alternatives. When an attorney unbundles post-petition services, Michigan Ethics Opinion RI-348 further instructs that adequate consultation means the attorney must explain to the client the limitation of representation, plus what is likely to happen post-petition, including the technical aspects, legal ramifications, material risks and available alternatives.
The Pre-Petition Agreement describes BOC’s pre-petition services in detail. It also contains an express statement by the Debtors that they understand that BOC will not represent them after filing the bankruptcy petition “unless a separate post-petition fee agreement is signed,” and states that BOC “fully advised” the Debtors of their “bankruptcy options and fully disclosed the fees required to file this case.” The Debtors’ affidavit also contains statements by the Debtors that are relevant in determining whether BOC fully explained to the Debtors the limitations on the scope of its representation. In paragraph 7 of their affidavit, the Debtors state that they “understood through counsel with B.O.C. ... that [they] were required to retain legal counsel subsequent to the filing of [their] Bankruptcy Petition to receive legal services for any necessary work required post-petition.” In paragraph 14 of their affidavit, the Debtors state that they believe that BOC “adequately advised [them] as to their legal options as it relates to this Bankruptcy Petition, including all aspects of payment of attorney fees.” Neither the Debtors *595nor the UST allege that the Debtors were in any way coerced into signing the Post-Petition Agreement. The Debtors do not suggest in any way that BOC did not adequately explain to them BOC’s limitation on the scope of its representation or the legal matter in question. In fact, the Debtors’ affidavit contains a number of statements affirmatively expressing their satisfaction with BOC’s representation. For example, in paragraph 11 of their affidavit, the Debtors state that BOC has represented them in a “prompt and professional manner;” and in paragraph 14, that BOC “has represented them competently and professionally.”
The Pre-Petition Agreement and the Debtors’ affidavit unequivocally show that the Debtors believe that BOC adequately informed them about the limitations on BOC’s representation of them pre-petition and the unbundling of BOC’s legal services between pre-petition services and postpetition services. They also show that the Debtors believe that BOC adequately informed them about the technical aspects of a Chapter 7 case, and the legal ramifications, material risks and available alternatives once the petition was filed and BOC’s representation ended under the Pre-Petition Agreement. But the standard under the MRPC is not whether the clients believe that their attorney provided adequate consultation, but whether the attorney in fact adequately advised the clients concerning these matters. The evidence in the record regarding the Debtors’ satisfaction with BOC is important, but it is not, by itself, sufficient to enable the Court to make a finding one way or the other about whether BOC met this standard. That is not to say that BOC failed to provide adequate consultation to the Debtors, but only that it is impossible on this record to ascertain whether its consultation was adequate.
Informed consent
The absence of evidence on the adequacy of BOC’s consultation with the Debtors is important for another reason too. Without knowing what was explained by BOC to the Debtors, it is equally impossible to ascertain whether the Debtors’ consent to the unbundling of legal services, and to BOC’s limitation on its pre-petition services, was a fully informed consent. In paragraph 8 of their affidavit, the Debtors state that “although they were in no way obligated to do so, Debtors knowingly and voluntarily decided to retain B.O.C. ... to perform all necessary post-petition services on behalf of the Debtors.” In paragraph 9 of their affidavit, the Debtors state that they “knowingly and voluntarily executed” the Post-Petition Agreement. Finally, in paragraph 13 of their affidavit, the Debtors state that they “wish to continue paying B.O.C.” the balance due and owing under the Post-Petition Agreement in the amount of $1,333.32 as of the date of their affidavit. These statements all strongly evidence the Debtors’ consent to BOC’s unbundling of legal services between pre-petition and post-petition. That much is clear. But what is not clear from this record is whether that consent was a fully informed consent after BOC provided adequate consultation to the Debtors. For instance, did BOC explain to the Debtors that if they did not file all of their required documents post-petition, such as schedules of assets and liabilities, statement of financial affairs and other documents, then they would not obtain a Chapter 7 discharge despite filing their bankruptcy petition, cover sheet, statement of social security number, and matrix? Did BOC explain the consequences of dismissal and serial filings on the automatic stay? Did BOC explain to the Debtors that a failure to attend the § 341 meeting would mean no discharge? Did BOC explain to the Debt*596ors that failure to cooperate with the Chapter 7 trustee could provide a basis to object to their discharge? The record before the Court is insufficient to answer those questions.
The Court has already found that BOC did not violate its duty of competence under the MRPC by the act of unbundling or breaking out the legal services it would perform pre-petition from those that it would perform post-petition. But the record is insufficient for the Court to determine whether BOC provided adequate consultation to the Debtors. Although the Debtors state unequivocally that they consented to the limitations on BOC’s pre-petition legal services, and that they chose voluntarily to sign the Posb-Petition Agreement to have BOC perform the necessary postpetition legal services to complete their Chapter 7 bankruptcy case, that is not enough under the MRPC. The MRPC require that for the Debtors’ consent to be meaningful, it must be a fully informed consent. To enable the Court to determine whether BOC provided adequate consultation to the Debtors concerning BOC’s limitation on its services pre-petition, and whether the Debtors’ consent to such limitation was fully informed, for purposes of the UST’s motion, the Court requires BOC to file an affidavit within ten days to address these two issues. The UST shall have ten days thereafter in which to file any objection or response to the affidavit. The Court will then enter an order regarding the UST’s motion.
Conclusion
The Court has a very strong preference to see individual debtors hire an attorney to represent them in all aspects of a Chapter 7 bankruptcy case, from start to finish, including the preparation and filing of the petition and all required documents together with all of the steps necessary to complete the case after the petition has been filed. In the Court’s experience, an individual Chapter 7 debtor’s chances of success are greatly enhanced if they have an attorney represent them throughout the entire process.4 Further, it is beyond challenge that individual debtors are also invariably better served by having an attorney represent them in preparing as many as possible of their required documents before their petition is filed and then filing those documents together with their petition. This practice lessens the chance of inconsistency or error, and minimizes the likelihood of problems for a debtor down the road. However, the Court understands that some individual debtors simply cannot afford to pay up front for all of the services required to both file and complete a Chapter 7 case prior to the time that they file their Chapter 7 bankruptcy case. The law does not prohibit such individuals from paying a smaller fee to an attorney to get their case filed and then, once the case is filed, either proceeding pro se or entering into a new agreement either with the same attorney or with another attorney to represent them in completion of their case, with the payment for any postpetition legal services to be paid out of such individual’s future *597earnings.5 As Rittenhouse makes clear, a pre-petition agreement to pay an attorney gives rise to a dischargeable debt. A post-petition agreement does not. 404 F.3d at 396-97. For the Court to insist on an all or nothing approach, in the name of promoting attorneys’ competence, will have the perverse effect of depriving needy individual debtors who cannot afford to pay in advance for all of the legal services they may need in a Chapter 7 case, from hiring an attorney to provide them with any of the legal services that they may need in a Chapter 7 case. Just because those individuals cannot afford to pay for all of an attorney’s fee in advance should not mean that such individuals can only avail themselves of bankruptcy relief by filing either pro se or with the help of a bankruptcy petition preparer.
As long as a Chapter 7 debtor’s attorney competently performs those services that the debtor has hired the attorney to perform, provides an adequate consultation to the debtor concerning any limitations placed upon the services to be rendered in connection with the filing of a case, and obtains such individual’s fully informed consent to such limitations, the attorney may unbundle the pre-petition services from the post-petition services by entering into a separate pre-petition agreement describing the services to be rendered and the fee to be paid prior to filing bankruptcy, and a separate post-petition agreement describing the services to be rendered and the fee to be paid post-petition. Stated another way, the Court holds that if the attorney’s legal services for an individual debtor are unbundled between pre-petition services and post-petition services, in strict conformance with the MRPC, such unbun-dling of legal services does not by itself warrant any relief under § 329 of the Bankruptcy Code.
In this case, the Court will enter an order on the UST’s motion, consistent with this opinion, after the Court reviews the affidavit that BOC is required to file and any objections to it that the UST may file.
. Although § 329 of the Bankruptcy Code authorizes a bankruptcy court to scrutinize the reasonableness of an attorney fee, it does not identify required services that an attorney for a Chapter 7 debtor must always perform.
In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA”), adding §§ 526-528 to the Bankruptcy Code, "to correct perceived abuses of the bankruptcy system. Among the reform measures [BAPCPA] implemented are a number of provisions that regulate the conduct of 'debt relief agenc[ies]’ — i.e., professionals who provide bankruptcy assistance to consumer debtors.” Milavetz, Gallop & Milavetz, P.A. v. United States, 559 U.S. 229, 130 S.Ct. 1324, 1329, 176 L.Ed.2d 79 (2010) (citing 11 U.S.C. §§ 101(3), (12A)). The purpose of these provisions was "to improve bankruptcy law and practice.” Id. at 1330. These *584provisions introduced a new term to the Bankruptcy Code, "debt relief agency,” in § 101(12A). Milavetz held that an attorney who provides bankruptcy assistance to an assisted person is a debt relief agency within the meaning of BAPCPA. Id. at 1333. Neither the UST nor BOC cite to or rely upon any of these provisions to support in any way their positions on the UST's motion in this case. Therefore, the Court expresses no view about these provisions.
. Other cases that have discussed generally the different ways in which attorneys for individual Chapter 7 debtors can be paid include: Bethea, 352 F.3d at 1128-29; Gordon v. Hines (In re Hines), 147 F.3d 1185, 1189-90 (9th Cir.1998); In re Lawson, 437 B.R. at 664; In re Chandlier, 292 B.R. 583, 588 (Bankr.W.D.Mich.2003), aff'd Rittenhouse v. Eisen, 404 F.3d 395 (6th Cir.2005). See also Lois R. Lupica, The Consumer Bankruptcy Fee Study: Final Report, Am. Bankr. Inst. L. Rev., vol. 20, no. 1, 17, 37-39, 105 (West 2012).
. On December 16, 2009, the Bankruptcy Court for the Eastern District of Michigan entered Administrative Order No. 09-32, adopting Guideline 13, which states that an attorney for a debtor in a Chapter 7 case may not exclude from representation services relating to a reaffirmation agreement. Although not cited by either the UST or BOC, the Bankruptcy Court adopted Guideline 13 pursuant to its power to regulate the practice of law in the Bankruptcy Court, setting forth a specific standard of practice regarding a specific issue. There are three relevant points about this Guideline. First, it was not a ruling based upon a request for relief under § 329 in a specific case. Second, it was issued by the entire Bankruptcy Court after the Bankruptcy Court solicited, received and considered input from the Consumer Bankruptcy Association. Third, it provides an example of the MRPC being the floor, but not necessarily the ceiling, of professional conduct that the Court seeks to encourage.
. Although an individual Chapter 7 debtor may represent himself or herself pro se, the likelihood of success for a debtor without an attorney decreases dramatically. During 2010 and 2011, only 1.2% and 1.4%, respectively, of all individual Chapter 7 cases filed by an attorney in the Bankruptcy Court for the Eastern District of Michigan were dismissed without a discharge, while 26.3% and 21.8%, respectively, of pro se individual Chapter 7 cases were dismissed without a discharge. During the same time period, 97.8% and 97.5%, respectively, of individual Chapter 7 cases filed by an attorney received a discharge, while only 67.8% and 75%, respectively, of pro se individual Chapter 7 cases received a discharge.
. Of course, in the Eastern District of Michigan, when an attorney files a petition for an individual debtor, that attorney becomes the debtor's counsel of record pursuant to Local Bankruptcy Rule (E.D.M.) 9010-l(a) and (b). If an individual debtor does not pay in full the fee for all of the attorney’s legal services before the petition is filed, and instead pays a smaller fee just to have the attorney get the case filed, with the intention of deciding post-petition whether or not to hire such attorney to complete the case under a separate post-petition agreement, the attorney who filed the case is still the counsel of record, with all of the responsibilities that are imposed upon the debtor’s counsel of record, unless the attorney obtains permission of the court to withdraw as counsel of record pursuant to Local Bankruptcy Rule (E.D.M.) 9010-l(g). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495326/ | DECISION
JAMES E. SHAPIRO, Bankruptcy Judge.
This adversary proceeding was commenced by the debtor, Lee Steven Dagos-tini, against defendant, Wisconsin Department of Revenue (“Department”), seeking a determination that his tax debt owed to the Department was discharged by virtue of the chapter 7 discharge issued to him on December 23, 2009. The Department answered, asserting that the tax debt was excepted from discharge pursuant to 11 U.S.C. § 523(a)(1)(C). This adversary proceeding came on for trial on October 1, 2012. At its conclusion, this matter was taken under advisement.
This court has jurisdiction pursuant to 28 U.S.C. §§ 1334(a) and (b). This is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(I).
Facts
On December 1, 2005, a federal criminal judgment was entered against the debtor, following his guilty plea, convicting him of money laundering, mail fraud, possession of unauthorized access devices, and conspiracy to launder funds while subject to a release order. The debtor had obtained proceeds from a credit card scheme which he devised, whereby he applied for and received credit cards using fictitious names and then maxed out all available cash advances. Over a period of approximately 10 years, the debtor illegally obtained over $2 million from 15 or more credit card issuers. The debtor was sentenced to 151 months in federal prison and ordered to *600pay restitution in an amount exceeding $1.2 million.
In December, 2007, the Department, upon learning of his conviction, audited the debtor and his wife, Sandra Randall Da-gostini, for purposes of determining whether or not all of the proceeds received from his criminal enterprise were reported. The Department determined that the tax returns in question materially understated the debtor’s tax liabilities. It then assessed the under-reported income to the debtor’s 2002 tax obligation, resulting in a tax assessment in excess of $148,000, which consisted of actual tax, interest, and penalties. The debtor did not appeal or otherwise contest the tax assessment or the Department’s allocation to his 2002 tax return.
On September 10, 2009, the debtor filed for bankruptcy relief under chapter 7 of the Bankruptcy Code. Neither the debt- or nor the Department sought a determination of dischargeability of the Department’s claim while the bankruptcy case was pending, and on December 23, 2009, the debtor was granted a chapter 7 discharge. On June 6, 2011, the debtor filed this adversary proceeding seeking a determination that his income tax debt to the Department was discharged. He further alleged that the Department violated both the automatic stay and the discharge injunction by its attempt to collect on the tax debt.1
Analysis
Section 523(a)(1)(C) excepts from discharge any debt for a tax “with respect to which the debtor made a fraudulent return or willfully attempted in any manner to evade or defeat such tax ...” 11 U.S.C. § 523(a)(1)(C) (emphasis added). This section contains two separate grounds, either of which, if proven, supports a finding of non-dischargeability. The Department relies on both grounds in contending that the tax debt is non-dis-chargeable. The question before this court, therefore, is whether the debtor made a fraudulent return or, in the alternative, willfully attempted to evade or defeat a tax. The Department has the burden of proof by a preponderance of the evidence. See Grogan v. Garner, 498 U.S. 279, 287, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991).
Did the debtor file a fraudulent return?
In order to establish that a tax return is fraudulent within the meaning of 11 U.S.C. § 523(a)(1)(C), the standard for proving fraud is the same as the standard for proving a civil fraud penalty under the Internal Revenue Code. In re Sommers, 209 B.R. 471, 481 (Bankr.N.D.Ill.1997). Because direct evidence of fraud is seldom demonstrated, the court may infer fraud from the record after a survey of the taxpayer’s entire course of conduct. Patton v. Comm’r of Internal Revenue, 799 F.2d 166, 171 (5th Cir.1986).
*601At trial, the debtor argued that to prove fraud the Department must establish that his actual income for the tax year 2002 exceeded $48,000, the amount he reported on his 2002 income tax return2. However, the debtor’s own testimony established that his 2002 tax return was fraudulent. On cross examination, the following testimony was elicited from the debtor:
Q: Is it your statement that the tax returns you did prepare and file were not designed to report your actual income, but were designed to report enough income to avoid detection of your criminal activities?
A: That is correct.
Q: So you had no intention of trying to report an accurate amount of income, but rather sought to report an income that would cause the taxing authorities to ignore you?
A: Um, yes and no, I didn’t believe I needed to file taxes.
Q: But when you structured your reporting of income, it was your intention to evade detection of your criminal enterprise, correct?
A: Correct.
Q: And you knew that if you reported all of the income of your criminal enterprise, you would be detected as a criminal, correct?
A: I do not understand the question.
Q: How did you figure out how much income to report, Mr. Dagostini?
A: Just enough to justify my lifestyle .... It was a guess.
Q: Did it have any relationship to any actual figure of income?
A: No.
In addition, the debtor’s testimony revealed several badges of fraud, which include debtor’s failure to maintain adequate records, implausible behavior, and unreported income derived from illegal activity. See In re Vaughn, 463 B.R. 531, 542 (Bankr.D.Colo.2001) (setting forth the common law badges of fraud which a court may consider). The court is persuaded that the debtor’s tax return was prepared with complete disregard for his actual income and for the sole purpose of evading detection of his ongoing criminal enterprise. Such return was, therefore, fraudulent within the meaning of 11 U.S.C. § 523(a)(1)(C).
Did the debtor willfully attempt to evade or defeat a tax?
Even though the court’s finding that the debtor filed a fraudulent return is sufficient to render this debt non-dis-chargeable, the court shall also address the second ground for non-dischargeability under 11 U.S.C. § 523(a)(1)(C), namely, whether the debtor willfully attempted to evade or defeat a tax. Whether a debtor willfully attempted to evade or defeat a tax is a question of fact to be determined based on the totality of the circumstances. Matter of Birkenstock, 87 F.3d 947, 951 (7th Cir.1996). In Birkenstock, the Seventh Circuit determined that willfulness encompasses both a conduct requirement and a mental state requirement. Id. at 951. Birkenstock declares that a debtor must know he had a duty to pay the tax, *602and voluntarily and intentionally violated that duty. Id. at 952.
The debtor claims that he did not know he had a duty to pay taxes on the proceeds he obtained from of his criminal enterprise. He characterized his criminal proceeds not as income, but rather as “debt” because the proceeds were derived from the use of lines of credit. He then reasoned that he did not have to pay taxes on the “debt”. Counsel for the Department in his closing argument noted that “debt” requires an intent to repay. The debtor did not have any intent to repay. At trial, he testified as follows:
Q: Mr. Dagostini, did you think that the money you were getting from the credit card companies was a gift from them to you?
A: No, I stole it from them.
Further evidence of willfulness is debtor’s extravagant spending. See U.S. v. Clayton, 468 B.R. 763 (M.D.N.C.2012) (extravagant spending is an indication that a debt- or acted willfully in the evasion of his tax obligations). In the case at bar, the debt- or testified that in 2004 he purchased a home for over $700,000.
Although the debtor’s education did not continue beyond high school, he clearly has “street smarts”, as was demonstrated by his ability to concoct an elaborate credit card scheme aimed at avoiding detection. The court rejects debtor’s claim that he did not know he had a duty to pay taxes on his illegally obtained proceeds. The court concludes that the debtor knew the proceeds he derived from his illegal activities were reportable income and, accordingly, the conduct requirement for non-dis-chargeability based on attempting to evade or defeat a tax has been established. The court also concludes that the debtor acted “knowingly and deliberately” and, therefore, the mental state component required to show he willfully attempted to evade or defeat his tax obligation has also been established. See In re Mitchell, 633 F.3d 1319, 1328 (11th Cir.2011) (a debtor acts willfully when his attempt to avoid tax liability is done knowingly and deliberately). The debtor’s attempt to justify his actions by claiming he was “stressed” and “on drugs” was not persuasive. Accordingly, the second ground for non-dis-chargeability under 11 U.S.C. § 523(a)(1)(C) has also been proven.
Conclusion
The court is mindful that exceptions to discharge are to be construed strictly against the creditor and narrowly in favor of the debtor. Matter of Scarlata, 979 F.2d 521, 524 (7th Cir.1992). However, the well-recognized underlying policy of 11 U.S.C. § 523(a)(1)(C) is to limit discharge to the honest but unfortunate debtor. Grogan v. Garner, 498 U.S. 279, 286-87, 111 S.Ct. 654, 112 L.Ed.2d 755 (1991). The debtor in this case does not qualify as an honest but unfortunate debtor.
For these reasons, the court finds that the Department has amply carried its burden of proving by a preponderance of the evidence, (1) that the debtor filed a fraudulent return and, (2) that the debtor willfully attempted to evade or defeat a tax. Therefore, the debt owed from the debtor to the Department is excepted from discharge under 11 U.S.C. § 523(a)(1)(C).
The foregoing constitutes this court’s findings of fact and conclusions of law pursuant to Fed. R. Bankr.P. 7052. A separate order shall be entered.
ORDER FOR JUDGMENT
The court having this date issued its written decision,
IT IS HEREBY ORDERED that judgment be entered in favor of the defendant, Wisconsin Department of Revenue, against the plaintiff, Lee Steven Dagostini, declar*603ing that the debt owed by the plaintiff to the defendant is nondischargeable pursuant to 11 U.S.C. § 523(a)(1)(C).
IT IS FURTHER ORDERED that no sanctions shall be imposed against the defendant, Wisconsin Department of Revenue, for its violation of the automatic stay and which was found to be a technical violation with no proven damages.
. The Department admitted in its response to plaintiff's first motion for partial summary judgment that there was a technical violation of § 362 when it issued a tax warrant on September 30, 2009. This tax warrant was later withdrawn on March 24, 2011. By order dated April 19, 2012, the court granted plaintiffs motion for partial summary judgment on the issue of whether or not the defendant violated the automatic stay and reserved for trial a determination of what damages, if any, resulted from such violation. At trial the debtor elicited no testimony as to damages. The court concludes that the Department’s actions constituted a mere technical violation and declines to award damages. See Miller v. U.S., 422 B.R. 168 (W.D.Wis.2010) (a court need not impose sanctions when there has been a mere technical violation of the automatic stay) (citation omitted).
. On August 27, 2012, the debtor filed a motion in limine seeking a “ruling permitting [him] to challenge the validity of the amount ($1.2 mil) of illegal proceeds allocated to the tax year 2002 ...") By order dated September 13, 2012, the court denied the debtor's motion finding that issue preclusion applies to exclude any evidence or testimony contesting the validity or amount of the Department's claim. On September 4, 2012, the court entered an order denying the debtor’s motion to reconsider the court’s September 13, 2012 order. | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495327/ | MEMORANDUM DECISION
ROBERT S. BARDWIL, Bankruptcy Judge.
On July 12, 2012, this court issued an order to show cause directing the debtor’s attorney, C. Anthony Hughes (“Counsel”),1 to show cause, if any he had, why the court should not reconsider the amount approved under an earlier fee award in his favor and why he should not be sanctioned for violating Fed. R. Bankr.P. 9011(b) (the “OSC”).2 Counsel has now filed four declarations addressing the court’s concerns raised in the OSC and an additional concern that came to light following the issuance of the OSC. The OSC hearing was concluded on October 10, 2012.
For the following reasons, the court will issue an order disallowing all compensation *618previously approved and requiring Counsel to disgorge to the estate of the debtor, Sundance Self Storage-El Dorado LP (“Sundance”), all monies Counsel received as compensation for services and reimbursement of expenses in and in connection with this case and Sundance’s earlier case, discussed below.
I. BACKGROUND
This case presents a graphic illustration of the policies underlying the rules that professionals employed in chapter 11 cases must make full and complete disclosure of their connections with the debtor and other parties-in-interest, must not hold or represent an interest adverse to the estate, and must be “disinterested.” This decision is meant to underscore the need for professionals employed by a bankruptcy estate to make full and candid disclosure of all connections, both when applying for approval of their employment and during the pendency of the case. This duty to disclose must be taken seriously — if a professional fails to do so, he or she risks disallowance of all compensation.
Here, Counsel’s omissions were so obvious, there can be only two explanations. Either Counsel actively attempted to conceal his disqualifying connections, or, more likely, Counsel’s declarations in support of his applications to employ and in response to the OSC were so perfunctory as to render them meaningless. Either scenario is troubling; either scenario warrants dis-allowance of all fees in this case.
A. The Transfer of Sundance’s Principal Asset
In May 2012, after its two-year attempt to obtain confirmation of a plan of reorganization came to an unsuccessful end, Sun-dance faced foreclosure on virtually its only asset, a self-storage facility in El Do-rado Hills, California (the “Property”), by U.S. Bank (the “Bank”), and a motion by the United States Trustee (the “U.S. Trustee”) to dismiss or convert this case.3 Counsel filed his final fee application and set it for hearing on May 80, 2012, the same day the U.S. Trustee’s motion was set for hearing.
On May 24, 2012, after Sundance’s attempt to stay the foreclosure in state court had failed, and just six days before the hearings on the U.S. Trustee’s motion and Counsel’s fee application, Howard Brown (“Brown”), on behalf of Sundance, signed a grant deed transferring the Property to West Coast Real Estate & Mortgage, Inc. (“West Coast”), a corporation wholly owned by Don Smith (“Smith”).4 On May 29, 2012, the day before the hearings, the grant deed was recorded. Six days later, on June 4, 2012, West Coast filed a chapter 11 petition in this court; its bankruptcy counsel is Mohammad Mokarram (“Mokar-ram”). The same day, the court issued an order granting the U.S. Trustee’s motion and converting the Sundance case to a case under chapter 7. On June 6, 2012, the court issued an order approving Counsel’s fee application in part, awarding fees of $57,270 and costs of $4,631.
*619Smith has admitted he initiated the transfer of the Property from Sundance to West Coast. The transfer was made without the court’s approval or knowledge and without notice to the U.S. Trustee or any of the other parties in the Sundance case. The transfer of the Property came to the court's attention in mid-June, when the Bank sought relief from the automatic stay in the West Coast case.
B. Issuance of the OSC and Counsel’s Declarations in Response
The court issued the OSC out of a concern that Counsel may have played a role in the unauthorized transfer of the Property from Sundance to West Coast, a transfer that the court had by then concluded was made in bad faith. As noted in the OSC, the circumstances suggested Counsel may have known of the transfer and the intention of Smith, Brown, or both to put West Coast into chapter 11. In the OSC, the court quoted the Bankruptcy Code’s dual requirement that bankruptcy professionals must not hold or represent an interest adverse to the estate and must be disinterested, emphasizing that these requirements continued to apply to Counsel as counsel for the debtor-in-possession up to the date the case was converted to chapter 7. The court also impressed upon Counsel the policies underlying these requirements: ensuring undivided loyalty to the bankruptcy estate and preserving public confidence in the fairness of the bankruptcy system.
Thus, the OSC required Counsel to file a declaration detailing the knowledge and involvement of Counsel, or anyone in his office, of and in the transfer of the Property from Sundance to West Coast and the filing of the West Coast case.5
1. The first declaration
Counsel’s first declaration in response to the OSC was equivocal. Counsel stated that at the time of the hearing on the motion to dismiss or convert the case, on May 30, 2012, “[he] did not know that a deed was created to transfer the property and [he] did not know it had been recorded.... [He] was told about the transfer by [Smith] sometime after the hearing....”6 Counsel acknowledged that he “recommended [Smith] seek legal advice from Mikalah Liviakis, Gerald Glazer, Mo Mok-arram, or any other chapter 11 Attorney he could find,”7 but stated he did not have any meetings or discussions with Smith, Brown, or Mokarram on the subject of the grant deed until after it was recorded. Counsel did not indicate whether he asked Smith why he needed advice from a chapter 11 attorney other than Counsel.
The U.S. Trustee filed a response to Counsel’s first declaration, pointing out that Counsel had failed to address whether he was aware, prior to the transfer, that Smith and Brown were contemplating transferring the Property. The U.S. Trustee noted that the 41-day gap from entry of the order lifting the stay to the date of the transfer suggested Counsel may have become aware of their plan to transfer the Property.
2. The second declaration
In response to the U.S. Trustee’s concerns, Counsel filed a supplemental declaration in which he simply denied any awareness that Smith, Brown, or anyone *620else was contemplating the transfer before it occurred. As to the U.S. Trustee’s suggestion that Counsel abdicated control of the Sundance case to others, Counsel stated he took a “step back in the case,” and in doing so, “saved the estate a huge amount of money....”8
Counsel testified that when he accepted the Sundance case, he “did not have all the procedures that [he has] in place now such as having clients sign letters of understanding which outline the responsibilities of the Debtor in Possession.”9 He stated it was, however, his practice at that time to “instill in the Debtor’s representatives that a motion is required for any action outside the ordinary course of business. This was instructed early on in the case and [he] had no reason to believe there was any misunderstanding.” 10
Counsel added, however, that at some point, he “recommended [Smith] seek other counsel, but [he] did not recommend other counsel for the purpose of only filing a chapter 11 case.” 11 This indicates Counsel knew a chapter 11 filing was one of the avenues being contemplated; he must have known such a filing was intended in some way to protect the Property from the Bank’s foreclosure. Yet he did not inquire what entity would be doing the filing or what that entity’s relationship to the Property would be.
Instead, “[he] recommended Mr. Smith seek advice from other counsel for all purposes because Mr. Smith had numerous types of lawsuits and motions he wanted filed and there was no money to pay administrative expenses and [Counsel’s] recommendation was for [a] short sale or chapter 7 conversion.”12 “[T]o an extent, I did know that Mr. Smith was looking into many other approaches and I did not inquire. So to that extent I take responsibility for not taking the time or asking the questions.”13
In this second declaration, Counsel included one more “additional disclosure.” He stated that Smith had told him Brown would cover his attorney’s fees. He “may have disclosed” this at the hearing on his fee application. “I definitely disclosed it to the Attorney for [the Bank] because she had the concern that cash collateral would be used and I explained that if any money were to be paid to me it would come from the Debtor’s principals.”14 At no time prior to the filing of this declaration had Counsel disclosed to the court that a guarantee by Brown was or might be a part of his fee arrangement for the Sundance case.
3. The third declaration
In response to the court’s interim ruling *621on the OSC,15 Counsel filed a third declaration in which he maintained he “did not have any specific knowledge that certain individuals and entities were contemplating the transfer of the [Property] prior to the conversion of this case to chapter 7.”16 Nevertheless, Counsel now confirmed that he knew a new bankruptcy filing was being considered, and revealed for the first time the possibility that Sundance might have a co-owner in the Property:
Don Smith did mention a few things.... One was that some other person (I don’t recall if the other person was the 2nd mortgage holders or Howard Brown, but it was someone along those lines) owned some percentage of the property which I also recalled from reading the title report earlier in the case.... Don Smith didn’t state that he was going to cause a bankruptcy filing based on the title report showing some other partial owner of the property but I did sense that he saw a possibility of the other party who owns the property filing a bankruptcy case. The other owner of the property (if any) would not have needed a transfer of the property to file because they were already allegedly on title.17, 18
What Counsel failed to disclose, in his third declaration or at any other time, was that during virtually the entire two years he represented Sundance as debtor-in-possession in this case, he was also representing Smith in Smith’s personal chapter 13 case, Case No. 10-38537-B-13, in another department in this court. Instead, Counsel independently determined that his representation of Smith in Smith’s chapter 13 case was not a connection he needed to disclose in the Sundance case.19
The court unearthed the fact of Counsel’s representation of Smith on its own immediately before the August 29, 2012 continued hearing on the OSC. At the hearing, the court shared its discovery with Counsel, highlighting the severity of his failure to make the appropriate disclosure. The court continued the hearing again, requiring Counsel to disclose the nature and extent of all past and present connections between Counsel and his law office with Smith and his accounting office.20
4. The fourth declaration
In response to this new concern, Counsel began his fourth declaration by stating *622unequivocally, “I have no connection with Don Smith’s accounting office. I have no professional arrangements with Don Smith nor [sic] his accounting office.”21 Counsel added, however, that (1) Smith may have filed for an extension on one of Counsel’s tax returns, (2) Smith may have filed one of Counsel’s business’s or corporation’s tax returns, and (3) Smith may have prepared a tax return for one of Counsel’s employees. In all three cases, Counsel was not sure. As with Counsel’s representation of Smith in Smith’s chapter 13 case, at no time prior to the filing of his fourth declaration did Counsel disclose any of these possible tax-related connections.
Indeed, Counsel appears to have understood his connections with Smith, both as Smith’s attorney and possibly as a tax client of Smith’s, to be innocuous circumstances not worthy of disclosure:
I didn’t see any connection with Don as being any conflict because Don was not an officer, director of the Debtor and was not the Debtor and was not the decision making person for the Debtor. I’m not saying that I disagree that the court should be concerned; Im [sic] just saying that at the time I didn’t think that was a “connection with the Debtor” and therefor had any relevance to the case. From a practical view, I understood the “prior connection” disclosure to be to disqualify a professional to protect against creditors having influence on that professional or to prevent the professional for [sic] having motivation for their self rather than their fiduciary responsibility to the client. I didn’t see any of those [as] potential issues or connections.22
As will be seen, Smith was the primary representative of the debtor from the beginning — he was the very face of the debt- or. It is difficult to see how any knowledgeable bankruptcy attorney could view connections as significant as representing Smith personally and having Smith prepare Counsel’s or Counsel’s corporation’s tax returns as so insignificant that they did not warrant disclosure. It is not up to the bankruptcy professional to weigh the significance of a particular connection; as discussed below, his role is to disclose it fully.
Finally, at no time did Counsel disclose to the court in this case that he had represented Sundance in an earlier case, Case No. 10-34414-D-ll in this court,23 and was, at the time the present case was filed, still owed money by Sundance for his services in that earlier case. Sundance’s earlier case was disclosed in Counsel’s interim fee application in this case; Counsel did not, however, disclose that he had been Sundance’s attorney in that case or that he was still owed money for his services in that case. In fact, in two declarations in support of his employment in the present case, Counsel stated, “I do not have a pre-petition claim against the Debtor or the Bankruptcy estate.... Also, to the best of my knowledge, ... I have no prior connection with the Debtor....”24
*623C. Don Smith’s Role in This Case
The petition in this case was signed by-Smith as the debtor’s “Manager of Operations.” Smith signed all the debtor’s schedules, statements, and lists filed in the case, original and amended. According to the debtor’s initial status report, Smith had been given authority to act as manager of operations “and [was] working on site as well as assisting in tasks necessary for reorganization.”25 The report also stated that Smith had been hired to “oversee reorganization of the business, increase income, decrease expenses, and play a hands on role in the day to day business activities”; that Smith “project[ed] [a] steady increase in income for the coming months”; and that Smith “plan[ned] on investigating a potential $180,000 debt that may be owed to the business that could be used to help reorganize, and to apply for a reassessment to bring the property taxes down.”26 In short, it was plainly intended, and Counsel understood, that Smith would play a central role in the debtor’s reorganization.
Smith’s conduct throughout the case was emblematic of managerial control. Smith was the only representative of the debtor to appear at the meeting of creditors. For the first ten months of the case, the bank statements for the debtor-in-possession account were mailed to the address from which Smith operated his tax and accounting practice, as well as several other businesses and investment enterprises, including West Coast. Smith prepared and signed all the debtor’s monthly operating reports; signed almost all the declarations filed by the debtor in the case, including the only declarations in support of its motions to use cash collateral, to assume unexpired leases, and to value real property collateral; and signed the debtor’s primary declaration opposing the Bank’s relief from stay motion.27
In that declaration, Smith testified that his duties included “day to day management of the employees, negotiations with suppliers and creditors, and marketing and pricing strategy”; that he assisted counsel with “compiling the statistical and financial information” in the plans and disclosure statements; and that he prepared the plan projections.28 Smith testified extensively and in great detail about his projections, alleged improvements in the debtor’s performance, maintenance and repairs, and prospective new financing.
Smith signed the debtor’s plans of reorganization and disclosure statements filed June 10, August 19, and October 14, 2011 (the latter re-filed as modified on November 16, 2011) as “Authorized signer for Howard A. Brown, III, President of Peninsula Capital Group, Inc., General Partner of Debtor.”
*624The debtor’s various disclosure statements described Smith’s role in the case as follows:
Don Smith, a professional real estate investor, real estate broker, property manager, and income tax professional [¶]... ] has co-managed the on-site operations and staff, overseen monthly budgets, managed communications with the [debtor’s] legal counsel, communications with the bank and the limited partnership members.29
Aside from an expert witness’s declaration regarding commercial lending rates, the only declaration Sundance filed in support of plan confirmation was that of Smith, who testified that, since the commencement of the case, he had been “involved on a daily basis with the marketing, maintenance, income and expense management, and all of the other related duties necessary to effectuate a successful business operation.”30 He also testified about the debtor’s financial performance, his opinion of the plan’s feasibility, and the debtor’s specific intentions for satisfying the secured debt post-confirmation.
In short, Smith was without question the representative of the debtor who played the most active and important role in its reorganization effort. From the outset, he was involved in and'essentially in charge of virtually every facet of the chapter 11 administrative process. While Brown may have made certain decisions behind the scenes, Smith made the day-to-day ones and controlled all aspects of the business and bankruptcy processes. In the end, Smith was sufficiently in control of the debtor to arrange for the transfer of the Property to a corporation wholly owned by him. And as will be seen, in light of his personal circumstances, he had a powerful motivation to do so.
II. ANALYSIS
After accounting for the true nature of the relationships in this case, the court finds that Counsel held and represented interests adverse to the estate and was not a “disinterested person.” Therefore, Counsel’s employment by Sundance should not have been approved. Further, Counsel failed to disclose his connections with Sundance, with Smith, and with Brown. For both reasons, the court concludes that all compensation and reimbursement of expenses for services provided by Counsel to Sundance before the case was commenced and while Sundance was a debtor-in-possession should be disallowed and all monies received by him for those services and expenses and those he provided and incurred in connection with Sundance’s earlier chapter 11 case should be disgorged.
A. Jurisdiction and Authority
This court has original and exclusive jurisdiction over the employment of counsel, their compensation, and their disclosure obligations, pursuant to 28 U.S.C. § 1334(e)(2), and has the authority to hear and determine this matter pursuant to 28 U.S.C. § 157(b)(1). The matter is a core proceeding under 28 U.S.C. § 157(b)(2)(A), as it concerns the administration of the estate.
B. The Dual Requirement of § 327(a)
The Bankruptcy Code imposes significant restrictions on professionals who are employed or compensated by a bankruptcy estate so as to prevent professionals from representing interests adverse to *625the estate. The overarching goals of these restrictions are to ensure undivided loyalty to the estate and to preserve public confidence in the fairness of the bankruptcy system.31
“[T]he [debtor-in-possession], with the court’s approval, may employ one or more attorneys ... that do not hold or represent an interest adverse to the estate, and that are disinterested persons, to represent or assist the [debtor-in-possession] in carrying out the [debtor-in-possession]’s duties under this title.” §§ 327(a) and 1107(a); see also DeRonde v. Shirley (In re Shirley), 134 B.R. 940, 943 (9th Cir. BAP 1992) (holding that § 327 “is made equally applicable to a debtor in possession as it is to a trustee by § 1107(a)”).
The dual requirement that professionals representing trustees and debtors-in-possession may not hold or represent “an interest adverse to the estate” and must be “disinterested persons” does not evaporate once the attorney’s employment is approved.32 In fact, “the court may deny allowance of compensation for services and reimbursement of expenses of a professional person employed under section 327 ... if, at any time during such professional person’s employment ..., such professional person is not a disinterested person, or represents or holds an interest adverse to the interest of the estate .... ” § 328(c) (emphasis added). Essentially, § 328(c) operates as a “penalty” for a professional’s failure to avoid a disqualifying conflict of interest. See Rome v. Braunstein, 19 F.3d 54, 58 (1st Cir.1994).
The term “disinterested person” is defined in the Bankruptcy Code to include one who is not a creditor and “does not have an interest materially adverse to the interest of the estate or of any class of creditors or equity security holders, by reason of any direct or indirect relationship to, connection with, or interest in, the debtor, or for any other reason.” § 101(14)(A) and (C). A person who is disinterested “is one that can make unbiased decisions, free from personal interest, in any matter pertaining to the debtor’s estate.” Shat v. Kistler (In re Shat), BAP No. NV-09-1092-MoDK, 2009 WL 7809004, at *6 (9th Cir. BAP Nov. 25, 2009) (citation omitted) (internal quotation marks omitted). The goal is to achieve undivided loyalty to a cause that is being administered for the benefit of many.33
The phrase to “hold or represent an interest adverse to the estate” has been given meaning by case law.
A generally accepted definition of “adverse interest” is the (1) possession or assertion of an economic interest that would tend to lessen the value of the bankruptcy estate; or (2) possession or assertion of an economic interest that would create either an actual or potential dispute in which the estate is a rival *626claimant; or (3) possession of a predisposition under circumstances that create a bias against the estate.
Dye v. Brown (In re AFI Holding, Inc.) (AFI Holding I), 355 B.R. 139, 148-49 (9th Cir. BAP 2006). See also In re Martin, 817 F.2d 175, 180 (1st Cir.1987) (stating that a bankruptcy court must inquire whether the connection created “either a meaningful incentive to act contrary to the best interests of the estate and its sundry creditors — an incentive sufficient to place those parties at more than acceptable risk — or the reasonable perception of one”). “To represent an adverse interest means to serve as an attorney for an entity holding such an adverse interest. For the purposes of disinterestedness, a lawyer has an interest materially adverse to the interest of the estate if the lawyer either holds or represents such an interest.” Tevis v. Wilke, Fleury, Hoffelt, Gould & Birney, LLP (In re Tevis), 347 B.R. 679, 688 (9th Cir. BAP 2006) (citations omitted).
The “adverse interest” language under § 327(a) and the “material, adverse interest” prong of the “disinterested person” definition under § 101(14)(C) “telescope into what amounts to a single hallmark.” Martin, 817 F.2d at 180. This unitary hallmark is designed to filter out conflicts that may jeopardize a fair and equitable administration of the bankruptcy estate.
It is equally important in terms of policy that these rules are also meant to preserve the integrity of the bankruptcy system. Therefore, in addition to avoiding conflicts detrimental to a particular case, the rules were drafted to avoid conflicts and questionable relationships that had historically cast the bankruptcy system itself in an unfavorable light. See, e.g., In re Kendavis Indus. Int’l, Inc., 91 B.R. 742, 747 n. 1 (Bankr.N.D.Tex.1988) (citing legislative history of disinterestedness requirement).
“There can be a disqualifying conflict even absent proof of actual loss or injury.” Beal Bank, S.S.B. v. Waters Edge Ltd. P’ship, 248 B.R. 668, 695 (D.Mass.2000).34 Further, a conflict need not be actual to be disqualifying. “An actual conflict mandates disqualification of a professional to serve in a bankruptcy case. A potential conflict also provides sufficient grounds for a court to deny a professional’s employment.” Shat, 2009 WL 7809004, at *6 (citation omitted); see also In re B.E.S. Concrete Prods., Inc., 93 B.R. 228, 236 (Bankr.E.D.Cal.1988) (“Appearances count. Even conflicts more theoretical than real will be scrutinized.”).35
In addressing the standards for removing a trustee due to a conflict of interest, *627under § 324(a), the Ninth Circuit has recognized that “a potential for a materially adverse effect on the estate and an appearance of impropriety” may be sufficient, and that the § 101(14)(C) definition of a disinterested person “is broad enough to include a [person] with some interest or relationship that would even faintly color the independence and impartial attitude required by the Code.” See Dye v. Brown (In re AFI Holding) (AFI Holding II), 530 F.3d 832, 838 (9th Cir.2008) (citing AFI Holding I, 355 B.R. at 149) (internal quotations omitted).
C. Application of the Employment Standards to Counsel’s Employment
The employment of Counsel in this case is a textbook example of a professional who was actually disqualified from employment at the outset on two grounds: he was not a disinterested person (for two independent reasons), and he both held and represented interests adverse to the estate. The court takes each of these disqualifying factors in turn.
1. Counsel was not a disinterested person.
a. Counsel was himself a creditor.
Counsel was not a disinterested person within the meaning of the Bankruptcy Code, for two reasons. First, Counsel had represented Sundance in an earlier chapter 11 case; when the present case was commenced, Sundance owed Counsel $3,000 for his services in and in connection with the earlier case.36
Although there well may have been ways for Counsel to avoid his creditor status,37 Counsel did not avail himself of any of those options; thus, he was clearly a creditor when he filed the Sundance case.38 As a result, Counsel was, by definition, not a disinterested person. § 101(14)(A).39 And when he applied for and received approval of those pre-petition fees, as part of his application for compensation in the instant case, he improperly elevated a general unsecured claim to a priority administrative expense.
b. Counsel had an interest materially adverse to the estate’s interest by reason of his connection with Smith.
Second, Counsel was not a disinterested person because by virtue of his simultaneous representation of Smith in Smith’s personal chapter 13 case and his representation of the debtor-in-possession in the Sundance case, Counsel had a direct relationship to and connection with the debtor. As explained below, this relationship resulted in Counsel having “an inter*628est materially adverse to the interest of the estate.”40 § 101(14)(C).
“Whether an interest is ‘materially adverse’ necessarily requires an objective and fact-driven inquiry,” which, in turn, requires an analysis of the totality of the circumstances. AFI Holding I, 355 B.R. at 151 (adopted by the Ninth Circuit in AFI Holding II, 530 F.3d at 838). Smith’s position as Sundance’s “Manager of Operations” and the level of control he exercised in everything from financial reporting and projections, marketing and pricing strategies, management of employees, negotiations with creditors and suppliers, and providing support for virtually all the debtor’s motions, as well as its plan, leave no doubt that Smith was a “person in control of the debtor.” 41 Thus, Smith fell within the Code’s definition of an “insider.” See § 101(31)(C)(v).42
Counsel’s representation of Smith in his chapter 13 case cannot be dismissed as a short-term or insubstantial one. Counsel filed Smith’s petition less than one month after he had filed Sundance’s petition and before Counsel filed his first application for approval of his employment in the Sun-dance case. The feasibility of Smith’s chapter 13 plan depended in part on his income from Sundance. It appears the sole reason for Smith’s chapter 13 case was to enable him to keep his home.43 He succeeded, through Counsel, in valuing a second deed of trust against the home at $0 and filed, through Counsel, an objection to the first trust deed holder’s claim, which the court converted to an adversary proceeding. Smith alleged his lender had failed to honor a loan modification agreement and was wrongfully foreclosing on the home.
In Smith’s personal case, Counsel filed seven different motions to confirm a chapter 13 plan — one every two to four months. The first six motions were denied. The seventh was filed in February 2012, immediately after Smith’s mortgage lender agreed to a new loan modification agreement. The motion was granted and a chapter 13 plan was finally confirmed on April 11, 2012, coincidentally, the day before this court issued its ruling denying confirmation of Sundance’s plan of reorganization and announcing its decision to grant relief from stay to the Bank.
*629Thus, Counsel was not just attorney of record but was actively representing Smith — during virtually the entire two-year period of Sundance’s chapter 11 case — in Smith’s two-year battle to keep his home. Almost as soon as Smith won that battle, one of his primary sources of income, Sundance, was losing its battle, a situation that would again put Smith in danger of losing his home. Thus, Smith had a powerful motive to protect Sun-dance’s property from foreclosure.
In short, during almost the entire pen-dency of the Sundance case, Counsel owed his loyalty to two clients. What transpired was that the interests of one client, Smith, in keeping his income stream, and thus, his home, ran head-on into the fiduciary duty of the other client, Sundance, to its creditors. The result was that Smith caused Sundance to divest its bankruptcy estate of virtually its only asset at a time when Counsel was representing both, and Counsel failed to investigate the scheme despite the fact that Smith sought advice from him on the “many other approaches” to the problem Smith was considering (Counsel’s words).
That the conflict of interest inherent in Counsel’s concurrent representation of Smith and Sundance was only a possibility at the beginning of this case does not change the analysis. To be sure, when the conflict materialized, it became a classic illustration of the reasons bankruptcy courts should nip a potential conflict in the bud rather than await its destructive effects.
2. Counsel held and represented interests adverse to the estate.
The notion that a professional is not disinterested if he or she has “an interest materially adverse to the interest of the estate” and the requirement of § 327(a) that a professional “not hold or represent an interest adverse to the estate” distill into “a single hallmark.” Martin, 817 F.2d at 180.
As a creditor of the Sundance estate, Counsel held an interest materially adverse to the interest of the estate. And when Counsel caused his pre-petition claim to be paid as an administrative expense, he elevated his own interest above that of the estate.
In addition, in representing Smith’s personal interest as a chapter 13 debtor, Counsel represented an interest adverse to the Sundance estate. Though it may not have been known at the outset that this dual representation would develop into anything nefarious, the potential was there all along, and in the end, came to fruition. When plan confirmation was denied and the stay was lifted, with the prospect that Smith could lose a portion of his income, and thus, his home, he scrambled to do whatever was necessary to prevent the Bank from foreclosing on the Property. Finally, he orchestrated the transfer of the Property to West Coast, thereby divesting the estate of its only significant asset and frustrating the effect of the court’s orders granting relief from stay and converting the case to chapter 7.44
*630It must have been clear to Counsel at the time that Smith had in mind various courses of action outside the ordinary-course of Sundance’s business, all designed to protect the Property from foreclosure. Yet Counsel failed to make clear to Smith what Smith could and could not do without prior court approval and outside the context of Sundance’s pending case. Counsel failed to explore with Smith the various avenues Smith was contemplating, and failed to caution him against taking any action involving the Property that would conflict with Smith’s duties as a fiduciary to the Sundance estate and its creditors.
As far as the court can tell, Counsel did not play a direct role in the transfer. But when Smith consulted him, Counsel was duty-bound, as Sundance’s attorney, to inquire into the details of the many avenues Smith was considering and their possible consequences to the estate and creditors, and to remind Smith of his duty to maintain as his paramount concern the interests of the Sundance estate and its creditors.45 Instead, Counsel simply sent Smith on his way with referrals to several other attorneys, and in so doing, failed to avert the chicanery to which Smith ultimately resorted.
In summary, Counsel’s employment fell short of compliance with either of the requirements of § 327(a). From the moment the petition was filed, Counsel was not a “disinterested person” because he was a creditor of the estate. From the moment he began simultaneously representing Smith and Sundance, Counsel was not a “disinterested person” for the additional reason that he had an interest materially adverse to the interest of the estate by virtue of his connections to Smith. Similarly, for both these reasons, Counsel held and represented interests adverse to the estate. Thus, Counsel was disqualified from employment as attorney for the debt- or-in-possession; accordingly, the court will exercise its authority to deny allowance of any compensation to Counsel pursuant to § 328(c).
D. Disclosure Requirements&emdash;Fed. R. Bankr.P. 2014(a)
Rule 2014(a) establishes the procedure for the employment of professionals by a trustee or debtor-in-possession. It requires the professional to file an applica*631tion disclosing, “to the best of the applicant’s knowledge, all of the person’s connections with the debtor, creditors, any other party in interest, their respective attorneys and accountants, the United States trustee, or any person employed in the office of the United States trustee.” Rule 2014(a).
“This rule assists the court in ensuring that the attorney has no conflicts of interest and is disinterested, as required by 11 U.S.C. § 327(a).” Neben & Starrett, Inc. v. Chartwell Fin. Corp. (In re Park-Helena Corp.), 63 F.3d 877, 881 (9th Cir.1995). The disclosure requirements of Rule 2014 are applied strictly, id., such that “the [professional] has the duty to disclose all relevant information to the court, and may not exercise any discretion to withhold information.” Woodcraft Studios, Inc., 464 B.R. at 8 (collecting cases).
It is the bankruptcy court that determines whether a professional’s connections render him or her unemployable under § 327(a)&emdash;not the other way around.46
The duty of professionals is to disclose all connections with the debtor, debtor-in-possession, insiders, creditors, and parties in interest.... They cannot pick and choose which connections are irrelevant or trivial.... No matter how old the connection, no matter how trivial it appears, the professional seeking employment must disclose it.
Park-Helena Corp., 63 F.3d at 882 (quoting another source).
“The duty to disclose is a continuing obligation as to which the risk of defective disclosure always lies with the discloser. Disclosure that later turns out to be incomplete can be remedied by denial of fees.” In re Kobra Props., 406 B.R. at 402 (citations omitted). “Even a negligent or inadvertent failure to disclose fully relevant information may result in a denial of all requested fees.” Park-Helena Corp., 63 F.3d at 882. Thus, if the bankruptcy court discovers that a professional holds an undisclosed adverse interest, the court has the power to deny all compensation and reimbursement of expenses. Section 328(c); Woodcraft, 464 B.R. at 8; Kobra Props., 406 B.R. at 402 (“[T]his Sword of Damocles should be omnipresent in the mind of counsel.”).
E. Application of the Disclosure Standards to Counsel’s Employment
1. Counsel’s status as a creditor and his prior connection with the debt- or
Counsel failed to disclose that he had represented Sundance in an earlier case and that he was a creditor of Sundance; in fact, as to both, he testified twice to the contrary.47 As seen above, under black-letter law, Counsel’s status as a creditor would have rendered him ineligible to serve as counsel for the debtor-in-possession.48
*6322. Counsel’s compensation arrangements
Counsel was required to file with the court “a statement of the compensation paid or agreed to be paid” to him and “the source of such compensation.” § 329(a). More explicitly, he was required to include in his fee applications “a statement as to what payments [had] theretofore been made or promised to [him] for services rendered or to be rendered in any capacity whatsoever in connection with the case, [and] the source of the compensation so paid or promised_” Rule 2016(a) (emphasis added).
In his Rule 2016(b) statement, filed with the petition in the Sundance case, when asked to identify the source of the compensation to be paid to him, Counsel checked the box “Debtor”; he did not check the box “Other (specify).” His signature on that document was a certification that “the foregoing is a complete statement of any agreement or arrangement for payment to [him] for representation of the debtor(s) in this bankruptcy proceeding.”49
That statement was untrue. On August 8, 2012, in his second declaration in response to the OSC, Counsel disclosed for the first time that Smith had told him Brown would cover his attorney’s fees. Counsel recalled telling the Bank’s counsel, in response to her concern that cash collateral would be used, that “if any money were to be paid to [him] it would come from the Debtor’s principals.”50 Thus, apparently, Counsel was relying solely on Brown, and not on the debtor, for any compensation over and above the amount of his retainer. This is a disclosure Counsel was required to make in his Rule 2016(b) statement and in his fee applications, pursuant to Rule 2016(a), but did not.51
The rule makes no distinction for a “verbal” promise, as Counsel characterizes it. Nor is it relevant that Counsel made the disclosure to the Bank’s counsel: the rule requires disclosure to the court.52 Further, Counsel would be hard-pressed to now argue Brown’s promise was not a firm promise: it is clear Counsel intended the Bank’s counsel to rely on it to conclude that additional payments to Counsel would not be made from the Bank’s cash collateral. Finally, Counsel’s current conclusion that “the verbal promise to pay had no effect on [his] loyalty to the debtor”53 is dismissed: it is self-serving, after the fact, irrelevant, and again, simply not Counsel’s conclusion to draw.
3. Counsel’s connections to Smith
The impetus for the OSC was the court’s concern that Counsel may have played a role in the transfer of the Property from Sundance to West Coast. The court had no inkling at the time it issued the OSC that Counsel had concurrently *633represented Smith during almost the entire pendency of the Sundance case or that Counsel may have utilized Smith’s tax preparation services.
As indicated above, in the OSC, the court quoted the sections from the Code establishing the requirements that bankruptcy professionals must not hold or represent an interest adverse to the estate and must be disinterested; the court also set forth the policies underlying these requirements.
Counsel’s first declaration in response to the OSC was, as discussed above, ambiguous. He stated only that at the time of the hearing on the U.S. Trustee’s motion to dismiss or convert the case, he did not know a grant deed had been prepared or recorded; he had no role in preparing or recording it; he had no role in arranging or assisting with West Coast’s chapter 11 filing; and he had no meetings or discussions with Smith, Brown, or Mokarram regarding the grant deed before it was recorded or regarding the West Coast case before the petition was filed.
Counsel closed his first declaration as follows: “I do not and have not represented an interest adverse to the estate.... I was always a ‘disinterested person’ in my representation of the estate.”54
In response to the U.S. Trustee’s concerns, the second declaration revealed that Counsel knew Smith was contemplating a chapter 11 filing by someone or some entity, among other courses of action. After further poking and prodding by the court, Counsel disclosed in the third declaration that he understood Sundance had a co-owner in the Property and that the co-owner might be contemplating a bankruptcy filing, but he made no further inquiry.55
Despite the court’s concerns, at no point did Counsel disclose — in any of his first three declarations in response to the OSC — that he had been and was still representing Smith in Smith’s own chapter 13 case, a case in which the feasibility of Smith’s very recently confirmed plan had become shaky because of what had happened in the Sundance case. Nor did Counsel disclose, until his fourth declaration, that he, one of his corporations, and one of his employees may have been tax clients of Smith’s.56
Counsel had numerous opportunities to supplement his grossly inadequate initial disclosures, knowing the court had serious concerns about the transfer of the Property and the nature of Counsel’s connections. Remarkably, Counsel filed three separate declarations, each in response to the court’s insistence on further information, each time revealing more about his dealings with Smith regarding Sundance, yet not once did Counsel disclose that he had been and was still representing Smith personally. Instead, it was the court’s own fortuitous discovery, immediately before the second hearing on the OSC and after the first three declarations had been filed, that revealed what was clearly a connec*634tion disqualifying Counsel from employment in this case.
After the court brought to Counsel’s attention that it had discovered the connection, in a last-ditch effort to justify his omission, Counsel stated he “understood Don Smith to be an independent contractor consultant charged with the duty to oversee management of Sundance through reorganization.”57 Counsel did not see this as a “connection with the Debtor” that “had any relevance to the case.”58
Aside from whether this statement was genuine, in making this determination, Counsel appointed himself the arbiter of his status as a disinterested person and as the holder or representative of an interest adverse to the estate in the Sun-dance case. Thus, he defied the fundamental rule that the attorney does not get to pick and choose what connections to disclose based on his or her own perceptions of their relevance.59
The court has previously found it necessary to admonish Counsel in other cases of the need for full, candid, and accurate disclosures in regard to employment and bankruptcy cases generally. Despite these cautions and the repeated opportunities he had to bring these critical connections to light, Counsel failed to do so. Counsel’s failure to disclose these connections at the outset may well have played a part in the debacle that followed — namely, the transfer of the Property. Further, the transfer of the Property after relief from stay was granted, and Counsel’s woeful failure to disclose his connections in the case, are the sorts of things that negatively affect the public’s confidence in the judicial system and the bar.60
Bankruptcy is a realm in which “the paramount requirement [is] that the court act so as to assure public confidence in the integrity of the judicial process.” Kobra Props., 406 B.R. at 405. Here, Counsel took it upon himself to determine which connections and compensation arrangements to disclose and which not to disclose; in doing so, he interfered with the court’s exercise of its duty. If he had made the appropriate and required disclosures at the beginning, his employment would have been denied, and this regrettable and unnecessary episode would never have transpired.
III. CONCLUSION
Counsel’s connections with the debtor and its representatives so obviously should have been disclosed that Counsel’s failure to disclose them reduced the preparation and signing of his declarations supporting his employment to a perfunctory exercise as to which he either gave no thought at all or made grossly incorrect choices. Moreover, Counsel’s failure to make the necessary disclosures as various developments in the case arose, including after the court had plainly expressed the seriousness of the situation, exacerbated the problem.
*635For the reasons stated, the court concludes that at all times during his representation of the debtor in possession in this case, Counsel was not a disinterested person and held an interest adverse to the interest of the estate. The court also concludes that from, at the latest, the date Smith’s chapter 13 petition was filed, Counsel represented an interest materially adverse to the estate. Finally, the court concludes that Counsel, from the time he filed his first employment application until he filed his fourth declaration in response to the OSC, exhibited a casual — if not willful — disregard of his disclosure obligations under the Code and the Rules. For all these reasons, all compensation for services and reimbursement of expenses will be denied, and all funds Counsel has received in or in connection with this case or with Sundance’s prior chapter 11 case must be disgorged, within 10 days from the date of the order issued herewith, to the Sundance chapter 7 trustee for the benefit of the estate.
The court will issue an appropriate order.
. Counsel is not to be confused with Gregory J. Hughes and Christopher D. Hughes, of Hughes Law Corporation, counsel for the chapter 7 trustee in this case.
. Unless otherwise indicated, all Code, chapter, and section references are to the Bankruptcy Code, 11 U.S.C. §§ 101-1532. All rule references are to the Federal Rules of Bankruptcy Procedure, Rules 1001-9037.
. The court may refer to this case as the “Sundance case” to distinguish it from the West Coast case or the Smith case, discussed below.
. Brown is the president and sole owner of Peninsula Capital Group, Inc., the general partner of Sundance. Smith was, from the commencement of this case to its conversion to chapter 7, Sundance's "manager of operations.” Both had participated heavily in the Sundance case; both were aware that plan confirmation had been denied, that the court had lifted the automatic stay in favor of the Bank, and that the U.S. Trustee was seeking dismissal or conversion of the case.
. See Order to Show Case, filed July 12, 2012, Dkt. No. 494.
. Declaration of C. Anthony Hughes in Response to Order to Show Cause, filed July 23, 2012, Dkt. No. 499 ("Counsel’s Decl. # 1”), 2:2-5.
.Id. at 2:25-28.
. Supplemental Declaration of C. Anthony Hughes in Response to United States Trustee Response on Order to Show Cause, filed August 8, 2012, Dkt. No. 505 ("Counsel’s Decl. #2”), 2:18, 2:21-22.
As an Attorney in private practice, I have to balance many forces including the likelihood I will get paid ..., the client's commands and desires, the duty to the court and to my profession. In this instance, the Bank had obtained relief from stay on the only asset of value in the case. There was going to be no estate left to administer. I was keeping my time on the case to a bare minimum.... I didn't imagine any time I would spend on the case after relief from stay was granted would be of any benefit to the estate.
Id. at 4:20-5:4.
. Id. at 3:23-26.
. Id. at 3:26-7:2.
. Id. at 4:7-9 (emphasis added).
. Id. at 4:9-13.
. Id. at 5:5-7.
. Id. at 5:14-18.
. See civil minutes for the August 15, 2012 hearing date, Dkt. No. 507.
. Supplemental Declaration of C. Anthony Hughes in Response to Order to Show Cause, filed August 22, 2012, Dkt. No. 509 ("Counsel's Decl. # 3”), 2:6-9.
. Id. at 2:9-21.
. This was the first time the possibility that Sundance had a co-owner was ever mentioned in the case, although it is next to impossible to see how creditors and equity security holders could have made an informed decision about the plan of reorganization without knowing the Property might be co-owned by Sundance and some other person or entity.
. Thus, in two declarations in support of his employment in the Sundance case, both filed after he had filed Smith's chapter 13 petition, Counsel stated the following:
I am not an equity security holder or an insider, and do not have any connection with any insider of the Debtor or any insider of an insider of the Debtor. [¶] I do not hold or represent any interest adverse to the Debtor or It [sic] estate, and I am a "disinterested person” as defined by Bankruptcy Code § 101(14). Also, to the best of my knowledge, ... I have no prior connection with the Debtor, any creditors of the Debtor, or any other party in interest in this case, or their respective attorneys or accountants ....
Counsel's Employment Decís., 2:7-13.
.See Order, filed August 30, 2012, Dkt. No. 512.
. Second Supplemental Declaration of C. Anthony Hughes in Response to Order to Show Cause, filed September 12, 2012, Dkt. No. 517 (“Counsel's Deck # 4”), 2:8-10.
. Id. at 3:27-4:9.
. The petition was filed May 31, 2010, and the case was dismissed June 21, 2010 for failure to file required schedules and statements.
.Declarations of C. Anthony Hughes in Support of Application of Debtor and Proposed Debtor in Possession to Employ C. Anthony Hughes as Bankruptcy [Attorney], filed August 3, 2010 and September 26, 2010, Dkt. Nos. 31 and 81 (“Counsel’s Employment Decís.”), 2:7, 2:10-12.
. Status Report, filed July 9, 2010, Dkt. No. 11, 5:1-2.
. Id. at 2:17-19, 2:21-22, 3:3-5.
. By contrast, the only declarations signed by any other representative of the debtor were declarations of Brown, president of the debt- or’s corporate general partner, who signed (1) declarations in support of motions for permission to file his personal financial statements under seal, (2) declarations in opposition to the Bank’s objections to Brown’s and his sister’s claims against the estate, and (3) a single declaration in opposition to a relief from stay motion in which Brown testified only to his own intention to personally guarantee the debtor’s plan payments to the Bank. Brown did not sign a declaration in support of plan confirmation and did not appear at the plan confirmation hearing.
.Declaration of Don Smith in Support of Opposition to Supplemental Brief in Support of Third Motion for Relief from the Automatic Stay, filed September 8, 2011, Dkt. No. 209, 2:14-15, 2:22-24, 3:8.
. Sundance Self-Slorage-El Dorado LP’s Disclosure Statement, filed August 19, 2011, Dkt. No. 196, at 4.
. Declaration of Don Smith in Support of Confirmation of Plan of Reorganization, filed January 17, 2012, Dkt. No. 348, 2:21-23.
. See generally Anne E. Wells, Navigating Ethical Minefields on the Bankruptcy Bandwagon, 31 Cal. Bankr.J. 767 (2011) (surveying ethical duties in bankruptcy cases).
. "[T]he need for professional self-scrutiny and avoidance of conflicts of interest does not end upon appointment.” Rome v. Braunstein, 19 F.3d 54, 57-58 (1st Cir.1994). This continuing duty to disclose preserves the integrity of the bankruptcy system by ensuring that professionals working for a trustee or debtor-in-possession do not have conflicts at any point during their employment. In re Granite Partners L.P., 219 B.R. 22, 35 (Bankr.S.D.N.Y.1998).
.The dual requirement "serves the important policy of ensuring that all professionals appointed pursuant to section 327(a) tender undivided loyalty and provide untainted advice and assistance in furtherance of their fiduciary responsibilities.” Rome, 19 F.3d at 58.
. See also In re Maui 14K, Ltd., 133 B.R. 657, 660 (Bankr.D.Hawai'i 1991) (citation omitted) (“Denial of all compensation is justified regardless of actual harm to the estate.”).
- The distinction between an actual conflict and a potential one is often difficult to draw; one court would eliminate it altogether.
[WJhenever counsel for a debtor corporation has any agreement, express or implied, with management or a director of the debt- or, or with a shareholder, or with any control party, to protect the interest of that party, counsel holds a conflict. That conflict is not potential, it is actual, and it arises the date that representation commences. This holding would apply equally to partnerships. An attorney who claims to represent a partnership, but also has some agreement, whether express or implied, with the general or limited partners, or with any control person, to protect its interest, that attorney has an actual conflict of interest, and is subject to disqualification and a disallowance of fees. The concept of potential conflicts is a contradiction in terms. Once there is a conflict, it is actual — not potential.
Kendavis Indus., 91 B.R. at 754.
. The time sheets filed with Counsel’s interim application for compensation in the present case reveal that 10 hours of services (billed at $300 per hour) for which Counsel sought compensation in this case were in fact performed in the earlier case.
. Counsel could have withdrawn $3,000 from his retainer before the new case was commenced, applied it to his pre-petition services in the earlier case, and disclosed those circumstances to the court. See, e.g., Kun v. Mansdorf (In re Woodcraft Studios, Inc.), 464 B.R. 1, 14 (N.D.Cal.2011) ("[Attorneys properly receive pre-filing compensation that they draw down prior to filing—so as to avoid the potential of being a pre-petition creditor of the estate—and which are fully disclosed so as to comply with disclosure laws.”). Or Counsel could have agreed to waive his $3,000 pre-petition claim against the estate, and disclosed the same to the court.
. One who “has a claim against the debtor that arose at the time of or before the order for relief concerning the debtor” is a creditor. § 101(10)(A). A "claim” is simply a "right to payment.” § 101 (5)(A).
. "It is black-letter law that a creditor’ is not 'disinterested.' ” In re Kobra Props., 406 B.R. 396, 403 (Bankr.E.D.Cal.2009).
. A "disinterested person” does not have "an interest materially adverse to the interest of the estate ... by reason of any direct or indirect relationship to, connection with, or interest in, the debtor....” § 101(14)(C).
. Counsel's time sheets demonstrate that Smith was virtually Counsel's sole contact person for Sundance. Counsel’s communications with Brown were far fewer and generally included Brown's own attorneys; in other words, it appears that in Counsel’s communications with Brown, Brown was usually acting on his own behalf, not as a representative of Sundance.
. The Code’s list of examples is not exclusive.
[IJnsider status may be based on a professional or business relationship with the debtor, in addition to the Code’s per se classifications, where such relationship compels the conclusion that the individual or entity has a relationship with the debtor, close enough to gain an advantage attributable simply to affinity rather than to the course of business dealings between the parties.
AFI Holding I, 355 B.R. at 152-53 (quoting Friedman v. Sheila Plotsky Brokers, Inc. (In re Friedman), 126 B.R. 63, 70 (9th Cir. BAP 1991)).
.Smith had no tax or other priority debt, and his plan proposed a 0% dividend on general unsecured claims. Smith, however, had received a chapter 7 discharge in a case commenced two years earlier; thus, he was not eligible for a discharge in the chapter 13 case and in fact waived any discharge in that case. Thus, the plan had no effect on Smith’s general unsecured debt.
. It cannot be disputed that in doing so, Smith breached his fiduciary duty to the estate. The fiduciary duties of a trustee or a debtor-in-possession "also fall upon the officers and managing employees who conduct the debtor in possession’s affairs.” In re Centennial Textiles, 227 B.R. 606, 612 (Bankr.S.D.N.Y.1998). "Indeed, the willingness of courts to leave debtors in possession is premised upon an assurance that the officers and managing employees can be depended upon to carry out the fiduciary responsibilities of a trustee.” Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 355, 105 S.Ct. 1986, 85 L.Ed.2d 372 (1985) (citation omitted) (internal quotation marks omitted).
*630As fiduciaries, the debtor in possession and its managers are obligated to treat all parties to the case fairly, maximize the value of the estate, and protect and conserve the debt- or’s property. These duties parallel those imposed by section 549 [unauthorized post-petition transfers]: to avoid depletion of the estate. Not surprisingly, therefore, the debtor in possession and the managers breach their fiduciary duties when they violate section 549.
Centennial Textiles, 227 B.R. at 612 (citations omitted) (emphasis added).
. "A debtor in possession’s attorney must be proactive, i.e., prepared to render unsolicited legal advice regarding preventative or corrective action that may be necessary for the debtor in possession to properly discharge its fiduciary obligations.” In re Count Liberty, LLC, 370 B.R. 259, 281 (Bankr.C.D.Cal.2007) (emphasis added).
Because the attorney for [a] debtor in possession is a fiduciary of the estate and an officer of the Court, the duty to advise the client goes beyond responding [to] the client’s requests for advice. It requires an active concern for the interests of the estate, and its beneficiaries, the unsecured creditors. Consequently, the attorney may not simply close his or her eyes to matters having a legal and practical consequence for the estate&emdash;especially where the consequences may have an adverse effect. The attorney has the duty to remind the debtor in possession, and its principals, of its duties under the Code, and to assist the debtor in fulfilling those duties.
In re Wilde Horse Enters., Inc., 136 B.R. 830, 840 (Bankr.C.D.Cal.1991) (emphasis added).
. For a striking example of the consequences of not disclosing connections in a bankruptcy case, see Milton C. Regan Jr., Eat What You Kill (The University of Michigan Press 2004); United States v. Gellene, 182 F.3d 578 (7th Cir.1999).
. "I do not have a pre-petition claim against the Debtor or the Bankruptcy estate.... Also, to the best of my knowledge, ... I have no prior connection with the Debtor....” Counsel's Employment Decís, at 2:7, 2:10-12.
.In Woodcraft, the bankruptcy court denied all compensation to an attorney who failed to disclose he had performed work for the debt- or in preparation for the filing for which he had not drawn down on his retainer; in other words, for failing to disclose that he was a pre-petition creditor. See 464 B.R. at 5-6. The decision was affirmed by the district court. Id. at 10.
. Disclosure of Compensation of Attorney for Debtor(s), filed June 25, 2010, p. 29 of Dkt. No. 1.
. Counsel’s Deck # 2, 5:14-18.
. In Park-Helena Corp., the debtor’s counsel stated in its Rule 2016 statement that its retainer had been “paid by the debtor,” when in fact, it had been paid by the debtor's president from his personal checking account. The court rejected counsel’s argument that the check represented funds the president owed to the debtor, and thus, that the retainer was actually paid with funds of the debtor. 63 F.3d at 881. Thus, the court affirmed the bankruptcy court’s denial of all fees. Id. at 882.
. See Shat, 2009 WL 7809004, at *9 (holding disclosure to U.S. Trustee's office, rather than to court, not sufficient for purposes of Rule 2014(a)).
. Counsel’s Decl. # 2, 5:20-21.
. Counsel's Decl. # 1, 5:1, 5:4.
. “Since I had not been paid anything post-petition in the case, I did not think that Don Smith would pay another Attorney to explore any other options because I didn’t think there was [sic] available funds. I thought that the case would end in either a trustee litigating with U.S. Bank or the property being foreclosed or a short sale.” Counsel's Decl. # 3, 4:7-12.
.It is particularly troubling that, although the court had made clear to Counsel that his undisclosed connections with Smith were of grave concern, Counsel still did not bother to determine with certainty whether Smith had provided the tax services mentioned in Counsel's fourth declaration. This underscores Counsel’s cavalier attitude and mindless approach toward the disclosure requirements.
. Counsel’s Decl. # 4, 3:24-26.
. Id. at 4:3-5.
. "This decision should not be left to counsel, whose judgment may be clouded by the benefits of the potential employment.” In re Lee, 94 B.R. 172, 176 (Bankr.C.D.Cal.1988).
. "The paramount concern must be to preserve public trust in the scrupulous administration of justice and the integrity of the bar. The important right to counsel of one's choice must yield to ethical considerations that affect the fundamental principles of our judicial process.” People ex rel. Dep't of Corporations v. SpeeDee Oil Change Systems, Inc., 20 Cal.4th 1135, 1145, 86 Cal.Rptr.2d 816, 980 P.2d 371 (1999). | 01-04-2023 | 11-22-2022 |
https://www.courtlistener.com/api/rest/v3/opinions/8495328/ | ORDER GRANTING PLAINTIFF’S MOTION FOR SUMMARY JUDGMENT AND DENYING DEFENDANT’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, Peter George Martin (“Plaintiff’ or “Debtor”), and by the United States of America (“Defendant” or “United States”). The Court, having reviewed the file and being otherwise advised in the premises, finds as follows.
Background
In this adversary proceeding, Debtor seeks a declaration that the debt he owes the United States for his 2000 and 2001 federal income taxes was discharged in his Chapter 7 bankruptcy. The United States asserts that this tax debt is non-discharge-able under 11 U.S.C. § 523(a)(1)(B)®. This outcome of this ease turns on the Court’s interpretation of this section’s exception from discharge of debts for taxes “with respect to which a return ... was not filed.”
This issue was addressed by another division of this Bankruptcy Court in Wogoman v. Internal Revenue Service (In re Wogoman), 2011 WL 3652281 (Bankr.D.Colo.2011). Pending the appeal of the Wogoman decision to the Bankruptcy Appellate Panel for the Tenth Circuit, the parties’ cross-motions for summary judg*637ment in this case were held in abeyance. The Tenth Circuit BAP’s opinion affirming Judge Brooks’ decision was recently issued. See, Wogoman v. Internal Revenue Service (In re Wogoman), 475 B.R. 239 (10th Cir. BAP 2012).1 The time for appeal of the BAP’s decision has passed without further appeal. The parties cross-motions for summary judgment in this case are now ripe for consideration.
Undisputed Facts
The parties have stipulated to the following material undisputed facts.2
1. Debtor filed his voluntary Chapter 7 case on October 28, 2010. The Court issued a discharge to Debtor on February 18, 2011.
2. At the time the petition was filed, Debtor owed tax liabilities for 2000 and 2001.
3. The Internal Revenue Service (“IRS”) made an assessment of Debtor’s tax debt for the 2000 and 2001 periods after conclusion of an examination and issuance of statutory notices of deficiency pursuant to 26 U.S.C. §§ 6212-13. The assessment was made on November 8, 2004.
4. Debtor submitted Forms 1040 signed under penally of perjury to the IRS for his 2000 and 2001 federal income tax liability on or about May 5, 2005.
5. The IRS partially abated Debtor’s 2000 and 2001 liabilities in September 2005. After abatement, the amount of the tax liabilities for 2000 and 2001 are equal to the amounts reported on the Forms 1040 submitted by Debtor in May 2005.
6. Debtor does not dispute the amount of his 2000 and 2001 federal income tax liabilities currently outstanding.
Arguments of the Parties
The dispute in this adversary proceeding concerns whether the Debtor’s 2000 and 2001 Forms 1040, filed some 5 months after his tax liability for these years was assessed by the IRS, were “returns” such that the taxes owed by Debtor for 2000 and 2001, after the IRS abated a portion of its assessment, are dischargeable.
Debtor relies on a literal reading of § 523(a)(1)(B)®. He notes that it is not disputed that all other requirements for discharge of tax debt are met in this case.3 Debtor argues that whether a “return” was filed should depend on an objective analysis of the document filed, not a subjective test of the taxpayer’s motivation for filing the return. Finally, he asserts that the United States’ position — that a return filed after a tax debt is assessed is not a “return”- — is not logical. Debtor contends that the BAPCPA amendment to § 523(a) does not change the analysis in this case.
*638The United States argues that tax returns filed after assessment of a tax liability are not “returns” under § 523(a)(l)(B)(i). It contends that such a return does not “satisffy] the requirements of applicable nonbankruptcy law,” as required by the BAPCPA amendment, because the purpose of the filing — to generate a self-assessment of tax — has been made moot by the prior IRS tax assessment. The taxpayer, by post-assessment filing, “cannot alter the fact that the tax debt was not self-assessed [and is, therefore,] a tax debt ‘for which no return was filed.’ ” United States’ Motion for Summary Judgment [Docket # 20] at p. 5-6. The United States notes that this was also the majority view of cases that considered this issue prior to BAPCPA.
Discussion
1. Summary Judgment Standards
Fed.R.Civ.P. 56(a), made applicable in this adversary proceeding Fed. R. Bankr.P. 7056, provides that summary judgment shall be granted “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” Both Debtor and the United States contend that the undisputed facts of this case entitle them to judgment as a matter of law.
2. Section 523 of the Bankruptcy Code
This section provides in relevant part that:
(a) A discharge under section 727, 1141, 1228(a), 1228(b) or 1328(b) of this title does not discharge an individual debtor from any debt—
(1) for a tax ...—
(B) with respect to which a return ... if required—
(i) was not filed....
3.The BAPCPA Amendment
Prior to October, 2005, the Bankruptcy Code had no definition of the term “return.”4 BAPCPA added the following definition of “return” in an unnumbered section at the end of § 523(a) (the “BAPC-PA Amendment”):
For purposes of this subsection, the term “return” means a return that satisfies the requirements of applicable non-bankruptcy law (including applicable filing requirements). Such term includes a return prepared pursuant to section 6020(a) of the Internal Revenue Code of 1986, or similar State or local law, or a written stipulation to a judgment or a final order entered by a nonbankruptcy tribunal, but does not include a return made pursuant to section 6020(b) of the Internal Revenue Code of 1986, or a similar State or local law.
Neither Debtor nor the United States argues that this case involves returns prepared pursuant to section 6020(a) or 6020(b) of the Tax Code. See, United States’ Motion for Summary Judgment at p. 6. Nor does it involve a written stipulation to a judgment or a final order of a nonbankruptcy tribunal. Thus, the only sentence of the BAPCPA Amendment that impacts the analysis in this case is the first — which defines a return as something that “satisfies the requirements of applicable nonbankruptcy law (including applicable filing requirements).”
Some courts have interpreted “applicable filing requirements” in the BAPC-PA Amendment to encompass the time for filing a tax return. Under this reading any late-filed return, other than one prepared pursuant to section 6020(a) of the *639Tax Code, or a similar provision in a State or local law, does not meet the BAPCPA definition of a “return,” and all taxes relating to late-filed returns are non-discharge-able under § 523(a)(1)(B)®. See, McCoy v. Miss. State Tax. Comm (In re McCoy), 666 F.3d 924, 932 (5th Cir.2012). This interpretation says too much, however, essentially rendering § 523(a) (1) (B) (ii) superfluous. Section 523(a)(1)(B)(ii) provides that taxes for which a return was filed “after such return was last due” and less than 2 years prior to the date of bankruptcy are not discharged. This section refers specifically to late-filed tax returns, and is the only place in § 523(a) where late filing is specifically referenced. To read “return” in § 523(a)(1)(B)® as meaning “timely-filed return” would make the discharge exception of § 523(a)(l)(B)(ii) entirely coincidental with that of § 523(a)(1)(B)®, except in the case of tax returns prepared under section 6020(a) of the Tax Code more than 2 years prior to bankruptcy.
A statute should be construed so that effect is given to all its provisions, so that no part will be inoperative or superfluous, void or insignificant.
Hibbs v. Winn, 542 U.S. 88, 101, 124 S.Ct. 2276, 159 L.Ed.2d 172 (2004)(quoting 2A N. Singer, Statutes and Statutory Construction § 4606, pp. 181-186 (rev. 6th ed. 2000)).
Such an interpretation also requires the use of a different definition of the term “return” in § 523(a)(1)(B)® and in § 523(a)(l)(B)(ii), because § 523(a)(l)(B)(ii) speaks of “returns” filed “after the date on which such return ... was last due.” This contravenes
the normal rule of statutory construction that identical words used in different parts of the same act are intended to have the same meaning.
Gustafson v. Alloyd, Co., Inc., 513 U.S. 561, 570, 115 S.Ct. 1061, 131 L.Ed.2d 1 (1995). There is nothing in the legislative history to the BAPCPA Amendment that indicates it was intended to have such an effect on § 523(a)(l)(B)(ii). The legislative history says only that the amendment was intended
to provide that a return prepared pursuant to section 6020(a) of the Internal Revenue Code, or similar State or local law, constitutes filing a return (and the debt can be discharged), but that a return filed on behalf of a taxpayer pursuant to section 6020(b) of the Internal Revenue Code, or similar State or local law, does not constitute filing a return (and the debt cannot be discharged).
H.R.Rep. No. 109-31(1) (2005), reprinted in 2005 U.S.C.C.A.N. 88,167.
For all these reasons, the Court rejects the interpretation of the BAPCPA Amendment in which timeliness of a return is deemed an “applicable filing requirement.” “Applicable filing requirements” must refer to considerations other than timeliness, such as the form and contents of a return, the place and manner of filing, and the types of taxpayers that are required to file returns. These “applicable filing requirements” are found in statutes, e.g. 26 U.S.C. § 6011, regulations, and in ease law. Pre-BAPCPA case law is therefore relevant to determine whether a disputed document sufficiently complies with requirements concerning form, manner, contents, and place of filing, and whether a document otherwise “satisfies the requirements of nonbankruptcy law” so to be considered a “return” for purposes of § 523(a).
4. Pre-BAPCPA Case Law
Prior to the effective date of BAPCPA, courts looked to Supreme Court and Tax Court cases to determine whether *640a document filed by a debtor constituted a “return” sufficient to avoid the discharge exception of § 528(a)(l)(B)(i). The most common rubric used, referred to as the “Beard test,” has four elements. To be considered a “return,” a document must: (1) contain sufficient information to permit a tax to be calculated; (2) purport to be a return; (3) be sworn to as such; and (4) evince an honest and genuine endeavor to satisfy the law. Beard v. Commissioner, 82 T.C. 766, 774-79, 1984 WL 15573 (1984), aff'd, 793 F.2d 139 (6th Cir.1986). The Beard test is a compilation of factors from two Supreme Court decisions involving whether forms filed by taxpayers constituted “returns” for the purpose of determining the date on which the statute of limitations for deficiency assessments began to run. In Zellerbach Paper Co. v. Helvering, 293 U.S. 172, 180, 55 S.Ct. 127, 79 L.Ed. 264 (1934), the Court explained that “[p]erfect accuracy or completeness is not necessary to rescue a return from nullity, if it purports to be a return, is sworn to as such, and evinces an honest and genuine endeavor to satisfy the law.” In Germantown Trust Co. v. Commissioner, 309 U.S. 304, 309, 60 S.Ct. 566, 84 L.Ed. 770 (1940), the Court stated that “where a [taxpayer], in good faith, makes what it deems the appropriate return, which discloses all of the data from which the tax ... can be computed,” a return has been filed.
When faced with the question of whether a “return” has been filed for discharge purposes, if a taxpayer files a sworn 1040 containing accurate information after an assessment is made by the IRS, the Courts of Appeals have differed in their application of the fourth element of the Beard test. The Sixth Circuit has ruled in favor of the government in this situation, finding that 1040 forms filed after an assessment has been made “serve no tax purpose,” thus the debtor’s actions in filing the 1040s were not an “honest and reasonable attempt to satisfy the requirements of the tax law,” the 1040s were not “returns” for purposes of § 523(a)(l)(B)(i), and the assessed liabilities were not dischargeable. United States v. Hindenlang (In re Hindenlang), 164 F.3d 1029, 1034-35 (6th Cir.1999). The Fourth and Seventh Circuits have come to the same conclusion. See, Moroney v. United States (In re Moroney), 352 F.3d 902, 906 (4th Cir.2003)(form filed after assessment does not serve the basic self-reporting purpose of tax return) and In re Payne 431 F.3d 1055, 1059-60 (7th Cir.2005).
The opposite conclusion was reached by the Eighth Circuit in Colsen v. United States, 446 F.3d 836 (8th Cir.2006). Agreeing with the reasoning and conclusion of Judge Easterbrook’s dissent in Payne, the Eighth Circuit ruled that, for the purposes of § 523(a)(l)(B)(i), the determination of whether a document evinces an honest and genuine attempt to satisfy the law under the Beard test does not require consideration of the timing of the taxpayer’s filing or of the filer’s intent. Rather, this prong of the test should be an objective one, “determined from the face of the form itself, not from the filer’s delinquency or the reasons for it. The filer’s subjective intent is irrelevant.” 446 F.3d at 840. Thus, where the debtor’s 1040s contained data that allowed for the accurate computation of his taxes, they served a valid purpose of the tax laws and were properly found to be “returns.” Accordingly, the tax liability shown on the returns was dischargeable in the debtor’s bankruptcy filed four years later.
This Court agrees with the analysis of Judge Easterbrook and the Eighth Cir-euit.*6415 The policies promoted by excepting taxes resulting from untimely and/or fraudulent tax returns from discharge are addressed in other sections of § 523(a)(1). Section 523(a)(l)(B)(ii) provides that if a return is not filed when it is due, the taxes are not discharged in any bankruptcy filed within the two-year period after the return is actually filed. Section 523(a)(1)(C) provides no discharge at all for tax debts resulting from fraudulent returns or if the debtor willfully attempts to evade or defeat a tax. To graft the concepts of timeliness and fraud into the meaning of “return” in § 523(a)(1)(B)® is not only unnecessary in light of §§ 523(a)(l)(B)(ii) and 523(a)(1)(C), but distorts what is otherwise plain statutory language concerned only with whether a “return” was “filed.”
Adding the further distinction, as the United States argues in this case, between a return filed prior to an assessment and one filed after an assessment, with the former considered a “return” for purposes of § 523(a)(1)(B)®, but the latter not, does violence to the convention of statutory interpretation referenced above. Moreover, the only purpose served by this distinction is to promote self-assessment of tax liability. No matter the importance of self-assessment to the functioning of our system of tax collection, Congress has so far elected not specifically to include it as an additional condition to discharge of tax liability under § 523(a)(1)(B)®. Congress knew how to make the date of assessment relevant to dischargeability as it did by incorporating § 507(a)(8)(A)(ii) (taxes “assessed within 240 days before the date of the filing of the petition”) into the discharge exception of § 523(a)(1)(A). If filing a return after an assessment is made was relevant to discharge under § 523(a)(1)(B)®, one would certainly expect more explicit reference in the statute.6
Conclusion
A document is a “return” for purposes of § 523(a)(1)(B)® if it complies with “applicable filing requirements” concerning the form and contents of a return, the place and manner of filing, and the types or classifications of taxpayers that are required to file returns, and if it otherwise complies with requirements of nonbank-ruptcy law. In making the determination of whether a document “evinces an honest and genuine endeavor” to satisfy the law, an objective test, based on the face of the document, not the timeliness of its filing, must be used. Using these tests, the undisputed facts in this case demonstrate that Debtor’s 2000 and 2001 Forms 1040 were “returns,” and the debt owed to the United States as shown on these returns is not within the discharge exception of § 523(a)(1)(B)®. Accordingly, it is
*642ORDERED that Plaintiffs Motion for Summary Judgment is GRANTED; and it is
FURTHER ORDERED that Defendant’s Motion for Summary Judgment is DENIED; and it is
FURTHER ORDERED that judgment shall enter in favor of Plaintiff declaring that the debt owed by Plaintiff to the United States for his 2000 and 2001 taxes was discharged by the discharge issued on February 18, 2011 in Case No. 10-37360 ABC.
. The BAP affirmed Judge Brooks’ opinion, but declined to affirmatively adopt his reasoning. It also declined to adopt any single one of the other criteria it considered for determining whether a return filed after an IRS assessment qualifies as a "return,” for purposes of § 523(a)(l)(B)(i). Instead the BAP affirmed, applying various standards, without specifying which was controlling on the facts of Wogoman.
. See, Joint Stipulation Regarding Undisputed Facts, filed on February 27, 2012 at Docket # 19. For simplicity, some of the undisputed facts are paraphrased in this Order.
.Other types of non-dischargeable taxes are: taxes for which a return was last due less than three years prior to the date of filing of the petition, or those assessed within 240 days before the date of the filing of the petition (§§ 523(a)(1)(A) and 507(a)(8)); taxes for which a return was filed late and less than two years before the date of the filing of the bankruptcy petition (§ 523(a)(l)(B)(ii)); and taxes with respect to which the debtor made a fraudulent return or willfully attempted to evade or defeat the tax (§ 523(a)(1)(C)). None of these exceptions from discharge apply to the taxes in this case.
. The Tax Code still contains no definition of "return."
. The Court acknowledges that in dicta in Payne, Judge Easterbrook said of the BAPCPA Amendment: "[a]fter the 2005 legislation, an untimely return can not lead to a discharge— recall that the new language refers to 'applicable nonbankruptcy law (including applicable filing requirements).' ” 431 F.3d at 1060. Judge Easterbrook may have made this aside without fully considering the implications of his statement or the interplay between § 523(a)(l)(B)(i) and § 523(a)(l)(B)(ii). See p. 4-5, supra.
. Some courts, including the Bankruptcy Court in Wogoman, have reached the result sought by the United States not by defining "return” differently depending on when an assessment was made, but by deeming the debt at issue when returns are filed post-assessment a "debt based upon the IRS’s examination and assessment ... and not on any return filed by the [debtor].” 2011 WL 3652281, at *5. This court declines so to construe the statute’s language. In the case before the Court, the debt which is the subject of this dischargeability contest is agreed to be in the amount set forth in the Debtor’s post-assessment Forms 1040, not the amount contained in the IRS assessment. | 01-04-2023 | 11-22-2022 |
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